Purchasing an Investment Property through a Self-Directed IRA

Right now, many people are looking for ways to take advantage of our favorable real estate market. With interest rates at all-time historic lows, purchasing rental properties as a means of investment is a great opportunity for many to attain additional financial security. If this is something you have thought about doing, consider the option of purchasing a property through a “self-directed IRA.”

What is a self-directed IRA? The IRS allows both traditional and Roth IRAs to be “self-directed” by transferring the funds to a self-directed IRA administrator. The owner of the funds in the IRA still makes all the decisions regarding the funds, but it is the job of the qualified trustee or custodian to hold and maintain the assets of the IRA. The custodian also takes care of all IRS recordkeeping and reporting. After IRA funds have been deposited into a self-directed account such as this, the owner of the funds is able to make various investments, such as a real estate purchase. In this scenario, the purchase is made in the name of the IRA account, not the IRA owner.

How does that work? As stated above, IRA funds are transferred into a self-directed account. An individual can either transfer funds to cover an entire purchase, or just enough to cover a down payment and closing costs. If a mortgage loan is needed, the IRA is the one who obtains the mortgage, not the IRA owner. This is not a traditional mortgage loan, instead it is typically a loan obtained through a bank or trust company. Compared to a traditional mortgage loan, the application and loan process are relatively simple as it is the IRA qualifying for the loan, not the IRA owner. These loans can usually be obtained within one to two weeks’ time.

What happens once the property is purchased? With the help of a management company, you find a renter for the property. Once the renter is in place, all rent payments are payable to the IRA account. The rent payments may not go to the owner of the IRA. In addition, all property expenses are paid out of the IRA. Again, this is because the IRA owns the property, not the owner of the IRA. All positive cash flow goes right back in the IRA account, giving the owner a return on the investment. The property may be sold at any time, and all proceeds from the sale are deposited back into the IRA account. Any appreciation or gained equity is income or growth of the IRA fund.

What’s the advantage? Through this sort of transaction, you are able to purchase a property without making a change to your lifestyle or using funds out of your income or savings. You can grow your wealth, diversify your investments, and build a real estate portfolio without ever putting a dent in your personal day-to-day finances. In addition, with the right purchase, you have the opportunity to get a better rate of return on the IRA than through traditional investments.

Is it right for me? To determine if this may be something to add to your portfolio, please give us a call. The Steller Group is ready and available to sit down with you to review your individual situation and develop a strategy that is right for you. 720.593.9355.