The Pros And Cons Of Self-Directed IRAs For Real Estate

Schedule a Free Self-Directed IRA Consultation
Free Consultation

Investors who want to expand their portfolios outside the stock and bond market may consider opening a self-directed IRA for real estate (SDIRA). A self-directed IRA for real estate can hold real estate as an alternative investment that you or your investment advisor select. 

Investors may invest in single-family homes, apartment buildings and other commercial properties, mortgage notes, land, and more. If you’re considering opening an SDIRA, learn about the pros and cons below. Have questions? IRAR can help you with your real estate IRA investing today. 

What Are The Pros And Cons Of Self Directed IRA Real Estate? 

Before purchasing real estate with your IRA, you should carefully review the real estate IRA pros and cons listed below.


Investment Control

Unlike investing in the stock market, investing in houses or apartments provides you with complete control of your funds. Most investors put their money into mutual funds and only sometimes know what the investment managers will do with the money. 

If you want more control over what you own in your IRA, a self-directed IRA for real estate allows you to select the properties you want to invest in. But, of course, IRAR can help you, too, including providing information on how to obtain a non-recourse loan for your IRA

You are the SDIRA owner and decide the real estate you will buy and how to invest. For example, some real estate investors put money into flipping distressed homes. Others use their SDIRA to invest in single-family rental properties. Or, invest in an apartment building or other commercial property. 

More Diversification

Many investors today are worried about volatile equities markets and inflation. Investing in alternative options in a self-directed IRA means you can protect against market ups and downs. 

Investments Are Protected 

If you have financial difficulties and need bankruptcy protection, your SDIRA assets may be covered. The Bankruptcy Abuse Prevention and Consumer Protection Act offers an exemption of approximately $1 million of funds in your self-directed IRA. So, your creditors cannot touch funds in the SDIRA. 

However, every state is different, so you should speak to a SDIRA expert about the protections that may apply to you. 

High Potential ROI

If you do your due diligence, investing in real estate with a SDIRA may allow you to earn a higher return on investment. As a result, your real estate portfolio may do better than many stocks and bonds. 

However, just because you invest in real estate doesn't guarantee high, or even positive, returns on your investment. Working with experienced real estate advisors, contractors, realtors, IRA custodian, and other related professionals is essential to ensure your investment is good. 

Tax-Deferred Or Tax-Free Growth 

SDIRAs are quite different from regular individual retirement accounts (IRAs), but they offer the same tax benefits. You can invest in properties like always, but as long as the funds and assets are inside the SDIRA, your investments grow tax free in a Roth IRA, or are tax deferred in a Traditional IRA.

This means that if you select a Roth SDIRA, it uses only after-tax money. You cannot deduct the money contributed to the IRA in the year. So, when you take money out in retirement, you've paid taxes on the funds already.

However, a Traditional SDIRA lets you deduct your contributions for the year you made them. Your earnings grow tax deferred. The distributions you take when you retire will be taxed as income.

Use An LLC If You Like 

When you use a self-directed IRA, you can have the IRA custodian do all the transactions on your behalf or you can establish an IRA LLC. Once, you establish the LLC, you open a bank account to give you checkbook control. This means that the checking account is funded with IRA account monies.

With this IRA LLC you control your funds directly. You can make an offer on a property you want whenever you want. Also, there may be fewer fees to pay to the SDIRA custodian. 

Bigger Investments, Greater Returns

Your self-directed IRA can partner with others as long as they are not disqualified people. This allows for a larger pool of funds to invest in larger properties. As your IRA grows from the income generated from larger investment, you have the potential to reinvest more into more real estate.

More On Self-Directed IRA Rules


Fees And Paperwork

You need to deal with fees and paperwork. However, IRAR can help you make this process go smoothly because we make self-directed retirement easy!

Complex Regulations

Follow all IRS rules to avoid the SDIRA from having problems with its tax-advantaged status. Fortunately, your SDIRA custodian will help ensure your SDIRA follows the rules

Some real estate investments in your self-directed IRA may require you to perform administrative and maintenance work, such as collecting rent or doing repairs. However, some of these duties are not allowed to be performed by the SDIRA owner because they may be seen as sweat equity which is considered a prohibited transaction.

Traditional investments don’t require these things but you can hire a property manager to collect rental income and manage other day-to-day operations.

Debt-Financing Income May Be Taxable

You do not usually pay taxes on the funds in a self-directed IRA for real estate. But there are exceptions. For example, if you have financed property in the IRA, it is an unrelated debt financing income and may be taxed. 

Investments May Require A Lot Of Capital

Investing in real estate can be lucrative but may require a lot of capital. If you are managing rentals, there may be repair and maintenance expenses. This means that you must keep cash in the IRA in case repairs need to be made. Unfortunately, you cannot claim these expenses on your income taxes.

What Else Can You Own In A Self-Directed IRA? 

Investments in real estate are the most common assets, but other options are: 

  • Tax liens
  • Certain Precious metals *
  • Cryptocurrency *
  • Foreign currency *

Let IRAR Help 

If you want to invest in a self-directed IRA for real estate and take advantage of the same tax free or tax deferred benefits of regular IRAs, the SDIRA experts at IRAR can assist you.

We want you to increase your retirement wealth at a lower cost. IRAR charges only a flat annual fee and can save money when investing in an SDIRA.


Disclaimer: IRAR Trust Company is custodian for self-directed retirement plans with expertise in real estate, private placements, LLCs, and other alternative assets. *We do not provide custodian services for precious metals, crypto currency, coins, gold, and metals-related assets. IRAR does not offer investment, tax, financial, or legal advice to clients. Individuals who believe they need advice should consult with the appropriate professional(s) licensed in that area.


Comments (0)