5 Self-Directed IRA Real Estate Investing Strategies

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A Self-Directed IRA (SDIRA) offers more real estate investment methods and strategies than you could ever imagine, and real estate investors are some of the most creative when it comes to taking advantage of tax benefits. These investments in Individual Retirement Accounts (IRAs) grow tax-free or tax-deferred depending on the IRA (Traditional IRA or Roth IRA).

Though each of these methods has its separate processes, they can be mixed and matched in many, many ways. You aren’t limited to just one of them. You can combine your investment options to maximize your investment capital.

You could use an LLC IRA to make a direct purchase, find a partner AND get a non-recourse loan, and more. You aren’t limited to just one strategy. The same is true for different tax-advantaged accounts, you can invest with two different IRAs. Keep that in mind when reading about each method.

But regardless of the strategy that you use for your alternative investments, you need a self-directed IRA Custodian like IRAR Trust Company.


Real estate IRA strategies fall into five main categories:

  1. Direct Purchase
  2. Partnering
  3. LLC/Checkbook Control
  4. Non-Recourse Loan/Leveraging
  5. Mortgage notes


Making a Direct Purchase with Your IRA

The most common and straightforward method of buying real estate with a self-directed IRA is through direct purchase. This is when your IRA buys a property using only the money available in your account. Basically, your IRA is making an all-cash purchase of the real estate. This is the simplest and quickest way to fund a purchase. Like when you buy a mutual fund or indexed funds, or even invest in precious metals, you don't normally go out and get a loan, you simply purchase it directly.

A direct purchase is very similar to a traditional all-cash real estate purchase, except all contracts must be vested in the name of your IRA and signed by IRAR Trust on behalf of your IRA. You also need to be aware of the rules on prohibited transactions and avoid buying from or transacting with any disqualified persons.

It can be helpful to find a REALTOR familiar with the process. If your agent has any questions, feel free to send them our way. We’d be happy to answer their questions.

If you’re a real estate professional yourself, you are allowed to represent your IRA in a deal. However, you can’t receive any compensation. The same is true for any family member. Taking a commission is one of several transactions the IRS prohibits because it is a personal benefit to you.

To ensure your transaction goes off without a hitch, it’s a good idea to open and fund your account as soon as you have an investment in mind.

Download the ebook to get strategy chapters >

Partnering Your Self-Directed IRA (SDIRA)

If you don’t have enough funds in your IRA to buy a property outright, does that mean you’re out of luck? No! You’ve got more options for funding, one of which is partnering your IRA with one or more other investors.

When you partner your IRA, you’re combining retirement funds to make an investment, just like you would outside of an IRA. You can partner with another investor, another IRA, or even your own funds (on a new transaction only, more details about this in our partnering chapter). When partnering, your IRA can invest in real estate without the full purchase price in the IRA, and without taking on debt. Your IRA can even partner with disqualified persons on new transactions. That isn’t a prohibited transaction. So, you can combine your retirement savings with your personal funds, your spouse’s personal funds or IRA, or anyone else typically not allowed.

After you buy the property, partners need to divide expenses and income based on ownership. So, for example, if a husband and wife use their IRAs to partner on a condominium (with each party contributing 50%), then all future income and expenses must be split 50/50.

Using an IRA LLC to Gain Checkbook Control

Another method investors often use is called an IRA LLC (an LLC with no other members except the IRA). This is often called a single-member LLC or a checkbook IRA due to the increased control you get over directing IRA funds. This gives you what is known as “checkbook control”, meaning you, the IRA holder, have complete signing power over your retirement funds.

Your IRA LLC can operate on its own, with you directing investments, paying expenses, and doing all reporting and recordkeeping yourself. Though you have this added control, the LLC is still owned by the IRA and is still subject to all IRA rules and regulations.

You need to form an LLC owned by your IRA. IRAR doesn’t do this for you, but you can find many resources online that will (or will help you do it yourself). Once established, you’ll set up a business bank account in the name of the LLC. You’ll need a Tax ID Number (EIN), your Articles of Organization, and your Operating Agreement to do this. After the bank account is set up, you’ll direct your IRA custodian to send funds from your IRA to the LLC, where you will have direct control over the funds through the bank account or financial institution.

In an IRA LLC, you can hold many types of investments. You are not limited to rental property nor to just this strategy. However, that control also means there’s less oversight, and you’re responsible for any recording and reporting requirements, including tax filings.

Non-Recourse Loan & Leveraging

Another method for additional capital: Your IRA can get a loan. This is a different type of loan than you would get personally if you were buying a house. Your IRA needs a non-recourse loan.

The difference between a traditional mortgage and a non-recourse loan is that you aren’t personally guaranteeing the loan. This means that the lender doesn’t consider your income or credit score as part of the qualification process, and they don’t have any recourse against you. The IRA account holder is not personally liable for repayment of the loan.

With an IRA loan, the loan is in the name of the IRA (not you personally), with the property as the only collateral in event of default or nonpayment. So, for recourse, the lender can only seize the property. They can’t go after additional IRAs or personal assets. To make up for this generally, the loan-to-value (LTV) ratios are a little lower than most mortgages.

Investing in Mortgage Notes With an IRA

A mortgage note, also known as a real estate note, or deed of trust, is a promise to pay guaranteed by physical property. Essentially, it’s a loan, a way to extend credit with exact terms outlined in the note itself and real estate as the collateral. If the borrower doesn’t meet the terms of the note, there are consequences, as spelled out in the note (such as late fees, default, or seizure of collateral). Instead of borrowing through the bank, the borrower repays the lender directly.

Terms of the note vary, but they generally outline things like mortgage type (fixed or variable, for example), principal amount, repayment schedule, interest rates, and what happens in case of default.

Self-Directed IRA Real Estate Rules

There are several rules you need to pay attention to when you use an SDIRA for real estate. This will help you avoid significant tax penalties. Per IRS rules, you cannot live or vacation in your IRA property, and certain relatives cannot benefit either.

Taking personal benefit is a big No-No! For example, when buy rental property with your self-directed IRA, all rental income must go back to the IRA.

Also, you cannot sell, exchange, or lease property you already own to your IRA. This is an example of self-dealing in a real estate transaction and it's penalized by the IRS. Using your IRA to invest in real estate is supposed to benefit you in retirement, not now. Check out more rules on prohibited transactions.

In a Nutshell:

There are several strategies and ways to structure your IRA’s real estate investment, you just need to figure out what's the best strategy for your goals and follow the rules. Even if you don’t have the full purchase amount, you aren’t out of luck. You just need to consider your options. The investment decisions are all yours to make. Remember that using your IRA to buy rental properties should be a strategy to grow your IRA faster, not to benefit personally. So get started by opening a self-directed IRA to buy real estate today.


Popular Self-Directed IRA Questions

How do I purchase real estate with a self-directed IRA?

There are several ways you can do this. First, you need to open a self-directed IRA. Then, you need to decide on the investment strategy. This will ensure that you have enough funds to cover the purchase and how you will fund the IRA (put money in it) to make the purchase. Once your self-directed IRA has been funded, you instruct your self-directed IRA custodian to buy the real estate.

What is the best IRA investment strategy?

There are several strategies and ways to structure your IRA’s real estate investment. You just need to figure out what's the best one for your goals and follow the rules. Your options can include holding the property long-term or doing a quicker a fix and flip. The key to it all is having a knowledgeable IRA custodian that can help you understand the different approaches, plus the pros and cons of each one.

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