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What Is The Minimum Amount to Invest in Real Estate with a Self-Directed IRA?

Minimum-Amount
Key Points
  • Real estate investing is the most popular one for Self-Directed IRAs
  • Knowing how much you need makes for easier decisions
  • IRA Financial will handle your Real Estate IRA

What Is The Minimum Amount to Invest in Real Estate with a Self-Directed IRA? The answer is, it depends. Real estate is the most popular investment for Self-Directed IRA investors. The Internal Revenue Code does not describe what a Self-Directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits the IRA holder and his or her lineal descendants (“disqualified persons”) from engaging in certain type of transactions that would directly or indirectly personally benefit a “disqualified person”. In other words, a Self-Directed IRA can, generally, make any investment except for collectibles, insurance, or any transaction that does not exclusively benefit the IRA. Below is a partial list of domestic or foreign real estate-related investments that you can make with a Self-Directed IRA:

  • Raw land
  • Residential homes
  • Commercial property
  • Apartments
  • Duplexes
  • Condos/townhomes
  • Mobile homes
  • Real estate notes
  • Real estate purchase options
  • Tax liens certificates
  • Tax deeds

How Much do you need In An IRA or 401(k) to invest in Real Estate?

There is generally no minimum requirement to make real estate investments with a self-directed IRA.  The key factor in how much is needed to buy real estate is the cost of the real estate asset. The median existing-home price in 2021 rose to a record $346,900, up 16.9% from 2020, according to the National Association of Realtors.  According to Zillow.com, the typical value of U.S. homes is $269,039 as of January 2021, a 9.1% increase from January 2020. Between 1999 and 2021, the median price has more than doubled from $111,000 to $269,039.

The price of real estate is heavily dependent on the state where the real estate will be located. For example, below are the states with the lowest median home prices according to Zillow.

  1. West Virginia ($107,927)
  2. Mississippi ($127,206)
  3. Arkansas ($129,484)
  4. Oklahoma ($131,080)
  5. Alabama ($140,991)
  6. Kentucky ($148,662)
  7. Ohio ($151,382)
  8. Kansas ($151,970)
  9. Iowa ($153,802)
  10. Indiana ($156,543)

Whereas, the states with the highest median home price according to Zillow.com are:

  1. Hawaii ($615,300)
  2. California ($505,000)
  3. Massachusetts ($381,600)
  4. Colorado ($343,300)
  5. Washington ($339,000)
  6. New Jersey ($335,600)
  7. Maryland ($314,800)
  8. New York ($313,700)
  9. Oregon ($312,200)
  10. Utah ($279,100)

Most Self-Directed IRA investors use cash to make a real estate investment.  With a Self-Directed IRA, all real estate income and gains would flow back to the IRA without tax.  This is known as tax deferral.  However, if a Self-Directed IRA investor does not have enough cash to make the investment, the IRA investor has a number of options:

  1. Partner with a non-disqualified person: IRC 4975 does not allow an IRA investor to transact with a disqualified person.  Hence, a Self-Directed IRA should not partner in a real estate transaction with themselves personally or any lineal descendant or entity controlled by such persons.
  2. Acquire a nonrecourse loan from a non-disqualified person: IRC 4975 does not allow one to personally guaranty an obligation of their IRA.  Hence, one cannot use a traditional mortgage in connection with a Self-Directed IRA investment.  However, a Self-Directed IRA investor can get  nonrecourse loan, which is a loan not personally guaranteed by the IRA owner.  Nevertheless, the use of a nonrecourse loan associated with an IRA real estate investment could trigger a tax called the unrelated business taxable income tax or UBTI/UBIT.  The UBTI tax will apply on the debt financed portion of the real estate investment, taking into account a pro rata share of deductions.  The maximum UBTI tax rate is 37% in 2022.

Final Thoughts

The ability to purchase real estate with a Self-Directed IRA is not subject to a minimum requirement or even a set-amount.  In general, Self-Directed IRA investors have different real estate investment options based on the type of real estate and its location.  Thus, a Self-Directed IRA investor has a multitude of investing options when looking to use their IRA or 401(k) plan to invest in real estate.

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