5 Self-Directed IRA Real Estate Investing Strategies

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There are more methods and strategies to invest with a self-directed IRA 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 IRAs grow tax-free or tax-deferred depending on the IRA (Traditional IRA Vs. Roth IRA).

Though each of these methods have their own 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 an 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 a 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 real estate. This is the simplest and quickest way to fund a purchase.

A direct purchase is when your IRA buys an investment property using only the money available in your IRA.

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 complete ebook chapter >


Partnering Your Self-Directed IRA

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 (like you would outside of any IRA). You can partner with another investor, another IRA, or even your own personal 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). 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 establish 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 IRAR 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 mot limited to rental property. 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.


In a Nutshell:

There are a number of strategies and ways to structure your IRA’s real estate investment. Even if you don’t have the full purchase amount, you aren’t out of luck. You just need to consider your options and the investment decision is all yours to make.


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