A Self-Directed IRA can invest in several types of real estate, including single-family homes, multifamily properties, commercial properties, rental properties, developed or undeveloped land, and certain international properties.
An IRA may purchase a property outright using available cash, use non-recourse financing, or partner with other investors to complete a purchase. Any partnership arrangement must be structured carefully to avoid prohibited transactions.
Some investors also establish an IRA-owned limited liability company to purchase and manage real estate. This structure creates additional administrative, recordkeeping, and compliance responsibilities.
A Self-Directed IRA can originate or purchase a mortgage note secured by real estate. The promissory note contains the borrower’s repayment obligation, while a mortgage or deed of trust provides the related security interest in the property.
The loan documents specify the principal amount, interest rate, repayment schedule, maturity date, collateral, and remedies available after a default. Payments must return to the IRA, and any enforcement or foreclosure action must be handled on behalf of the IRA.
A real estate investment trust, or REIT, owns or finances income-producing real estate. REITs may hold residential, commercial, or industrial properties, while mortgage REITs invest in mortgages and other real estate debt.
Publicly traded REITs can be bought and sold on a securities exchange. Private REITs are not exchange-traded and may have limited liquidity. A Self-Directed IRA may hold either type if the custodian supports the investment.
Private placements are generally offered by privately held companies, partnerships, and small businesses to a small audience of investors. This allows business owners to gain access to capital without going through the bank, and it allows you, as the investor, to diversify your portfolio with the added potential of seeing a high return on investment.
Note: Private placements are not registered with the Securities and Exchange Commission. As such, they come without some of the protections (disclosures, regular reports) that apply to investments registered with the SEC.
You can use your SDIRA to invest in private placements, such as:
Increase the speed and flexibility with which you make purchases. When you establish an LLC that is owned by your IRA, you get access to your IRA funds via an IRA-owned checking account.
IRAR Trust does not sell or create LLCs. The IRS still requires you to have a custodian in order to have a Checkbook IRA, but you do not have to tell your custodian to make the purchase on your behalf. For time-sensitive transactions like foreclosures and auctions, the time saved can make or break the deal.
With a Checkbook IRA, you stand to save on fees even further. Since the annual IRAR fee is charged per asset, your LLC is charged as one asset—regardless of the number of assets the LLC owns. You’ll also save on transaction fees because you’re taking on the record-keeping.
A promissory note is a promise to pay, making it a type of loan. If you find an individual or entity who wants to borrow money, you can be a private lender via a promissory note. You and the borrower have the flexibility to agree on the terms and how the payments will be made. Documentation is typically filed at a county recorder’s office.
There are two common types of promissory notes:
Mortgage notes are a popular type of secure note. As with other investment opportunities, you can include more than one lender on a promissory note. However, the first lender is the first to be paid back. If you are a subordinate lender, you are repaid after the first lender receives the full payoff.
Although you can lend funds directly from your IRA, you can also buy notes from brokers or private parties. All payments on the note go directly to your retirement account.
Not backed by collateral. These are riskier because you have no easy way of being repaid if your borrower doesn’t pay.
Beyond the asset types mentioned above, such as real estate and promissory notes, there are additional investments you may consider:
Empowering your success is what drives our team of Certified IRA Services Professionals (CISP). That’s why we share our latest investment tips, answer your calls, and keep our fees low, even as your account grows.
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