Best kept investor secret: Self-directed IRA
Did you know you may already have funds to buy that investment property?
We recently met up with an investor who is looking to invest in real estate as he has been spooked by the stock market and the “pandemic uncertainty.” He was not sure how he was going to be able to get financing however as he recently changed employment. Familiar with common lending requirements, he is aware that traditional lending typically require 2 years of seasoning to secure a loan, especially investment property loans. After much discussion, he realized his change of employment put him in a position to buy 2 to 3 properties and pay for them with cash- in his now qualified IRA. Wow, was that a game changer for him.
We have witnessed many investors experience this same eureka moment when they learn they can trade in their paper investments managed by other people in a changing market, and instead invest in hard assets they have controls over- such as real estate.
Light bulb moments
Now investing in real estate using funds that you the owner of a qualified retirement account is not a new concept, it has been around since the creation of the IRA tax codes in the 1970’s. What the discovery is that most people who own an IRA do not know that they can self-direct where the IRA invest its funds. Yes, instead of your funds being invested in the latest unknown tech stock or companies that you do not know or perhaps do not believe in, you can actually dictate what the IRA invest in, pretty cool a-ha. I am thinking how can it be that such a powerful investment tool is such a secret to the majority of people who has them. Savvy investors have been doing this for years and making some huge profits for their IRA. So, let’s remove this secret and introduce to the masses where savvy investors are making bigger returns for their retirement funds.
How to utilize Your IRA for Real Estate Investing
Millions of people have been working over the years where your employers have been contributing money into your retirement account. Often you could place a percentage of your paycheck or a chosen dollar amount and contribute that money into a retirement account. Better yet many companies offered you a matching dollar amount to contribute into your retirement account. These retirement plans are controlled by your employer if you are employed with them. So, what happens when you are not yet at retirement age but you have left the company?
This is where the magic happens
As you leave a company that you have a retirement account with last thing the company wants to do is be responsible for your funds. So, they guide you in moving these funds into your own retirement account. Here you have a variety of options as to where you can send that money. There are rules that need to be followed to make sure that you do not personally take possession of this money (after all it is in place for your retirement). You can send the money into any number of retirement brokerage accounts to manage these funds for you and keep the money in compliance with IRS rules and regulations. One of these options is the Self Directed IRA, or SDIRA for short.
Self Directed IRA
When you move your funds into a self-directed IRA you are basically moving it into an account where you have a company playing the role of a custodian. They take care of handling all the paperwork to keep your IRA (Self Directed Retirement account) in legal compliance with IRA rules and procedures. You then can decide what you want to invest in. for the millions of people who want to invest in real Estate you indeed can do that. In fact, there are a number of investment vehicles that you can invest in. precious metals, real estate notes, mortgages, buy and hold real estate investments, wholesale real estate investments. Fix and flip investing as well as many others. The point is it you have some basic or perhaps thorough knowledge of real estate or maybe just a passion for real estate you can join the millions of savvy investors who control their own financial destiny be investing their retirement accounts into real estate.
Who loves your moneys growth more than you yourself?
Do you know that many people who invest in stock market are investing in real Estate? Yes, even wall street understand that real estate investing is one of the best and safest investment vehicles around. So, when you go to an investment broker, they take your money and often a large portion of your dollars ends up investing in real estate. So, by eliminating the middleman who wants to make part of the profits you may indeed put your investment dollars on steroids.
But first: A word of caution
As with any investment strategies, there are inherent risks. It is difficult to know what you don’t know before taking on a new endeavor, perhaps especially when it involves large investments and tax codes. It is imperative that you take the time to educate yourself on how to use a self-directed IRA as intended within legal perimeters, so please consult a professional accountant, attorney, and even attend as many information workshops as you can on this topic- before deciding this is an approach that works for you.
Example of a Self Directed IRA Investing work flow
Now for the purpose of this illustration we are going to keep this simple. The illustration is not listing every income and expense in owning a property but instead providing a basic outline of the concept:
Roll your retirement account into a self directed IRA account. Let’s assume you have 200,000 dollars in your account.
You find a house that you want to invest in. Let us say you buy a house for $100,000.
You buy the house by writing a contract in the name if the IRA. So the IRA is actually the entity that is buying and you are the owner of the entiity.
Assume you have $1000 per month in cash flow after expenses. Your property manager sends the $1000 back to the IRA company and this $1000 goes back into your Self-directed IRA. So, after 100 months of consistent deposits into your account you essentially now have $100,000 returned back to your account. Now you have the same as you started with and each additional deposit the funds grow beyond that point. Meanwhile the IRA still has the house which now has grown in value and is also an asset to your IRA.
When expenses arise, the bill gets sent to your Self Directed IRA custodians and they pay the bills from your account on your behalf after you approve the bill
When you sell this house the funds also go back into you IRA.
The nice thing is all the funds and accounting is done by the custodian of the IRA for fixed fees and often can be thousands or tens of thousands of dollars less than paying brokerage accounts for typical investment trades.
There are a series of rules of a self directed retirement investment you should know, including the most commonly asked question: Can I live in the property? That is a no. Unless you are prepared for a taxable event of potentially large consequence. Again, know the rules, learn from the professional bean counters on this one. And I am admittedly not one of those. What I can do, however, is to help you find properties for your portfolio.
Do you want to learn more about SDIRA investing in real estate? Contact us for a complimentary call.
Happy investing
The author’s opinion cannot be construed as tax or legal advice, and may not represent the views of HTBUSA or its stakeholders. HTBUSA is not a legal service or professional tax service. As with any investment, there is an inherent risk in investing in real estate..