Education, Finance, Investment Advice

How to Invest in Real Estate Using Your IRA

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Many investors will set up a traditional or Roth IRA as a means of saving for retirement. Currently, investors under the age of 50 can contribute up to $6,000 per year into an IRA and those over the age of 50 can contribute up to $6,600 per year. Those who have been investing in an IRA for years, even decades, may find themselves with hundreds of thousands of dollars that are invested in a traditional portfolio of stocks, bonds and mutual funds.

Investors often do not realize that, by moving their IRA funds into a self-directed IRA, they can diversify their retirement portfolios by investing in alternative asset classes, including but not limited to real estate. Those who have been pumping cash into retirement accounts and therefore do not have cash on hand to invest in real estate deals will find this is an attractive way to invest in real estate. What is more, there are significant tax benefits associated with investing in real estate using your SDIRA.

Most financial institutions offer a self-directed IRA,
sometimes called a self-directed option. This usually allows
someone to self-direct into stocks, mutual funds, and ETFs.

Read on to learn more about how to invest in real estate using your IRA—an often overlooked vehicle for investing in real estate.

What is a Self-Directed IRA?

Unlike traditional and Roth IRAs, in which a financial advisor or wealth manager makes the allocation on investors’ behalf, an SDIRA gives investors total control of how to invest. The investments available to those using an SDIRA also tend to be more encompassing than those made available by traditional IRA custodians. Using an SDIRA, an investor can self-direct retirement funds into alternative investments such as real estate. Any income generated by investing in alternative investments is returned back to the SDIRA and continues to grow tax-deferred just as it would in a traditional or Roth IRA.

The Step-by-Step Process to Investing in Real Estate with Your IRA

Identify an SDIRA Custodian

Someone who wants to invest in real estate using their IRA will need to roll those funds into an SDIRA account with an SDIRA custodian. Some SDIRA custodians are specifically set up to manage investments in alternative assets. Some of these will have specific platforms in place to make investing in real estate especially easy. Identify various SDIRA custodians, compare them, and then determine which is right for your specific investment objectives.

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Facilitate Tratidional Account

Determine How SDIRA
Funds will be Allocated

There are a few ways to allocate funds when moving from a regular IRA to an SDIRA. Someone might choose to liquidate all assets prior to moving funds from one account to another, particularly if they plan to reinvest a substantial portion of those funds in real estate immediately after transfer.

Another option is to roll funds from one account into another, while maintaining the investments as-is (i.e., not liquidating but rather just moving, while maintaining existing positions). This strategy is best for someone who is interested in investing in real estate but who has not yet identified a specific opportunity and wants their funds to remain invested in the interim.

Once funds have been rolled over, the investor will then want to decide what portion, if any, of their funds to invest in alternative investments like real estate.

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Identify Real Estate Investment

Have the
Facilitate the

After deciding which real estate investment you want to make, the SDIRA will request copies of all pertinent paperwork including the subscription agreement, private placement memorandum and other legal documentation. The sponsor will have provided all of this to the investor. The investor then makes the request to the SDIRA custodian to invest cash from their SDIRA into that deal. The process usually takes less than a few hours for the transaction to be complete.

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Manage and Monitor
Identify an SDIRA custodian

Facilitate the
Roll-Over from
Account to

The step that has the longest lead time (usually 3-5 business days) is transferring funds from your existing IRA account to the custodian of your new SDIRA account. The SDIRA custodian will be able to help facilitate this process. Note: for someone pursuing a specific real estate investment, and who may need to move quickly, it is important to begin this step ASAP in order to ensure the funds have been moved and area available to invest by the real estate offering’s deadline.

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Determine SDIRA Funds

Identify Real

Once the funds have been transferred to an SDIRA, they are available to invest in real estate. If the investor has not done so already, this is the right time to start doing due diligence on sponsors and various deal opportunities.

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Have the SDIRA Custodian Facilitate the Transaction

Manage and
Monitor Your

Most SDIRA custodians have an online portal that makes it easy for investors to log-in and track their investments – including real estate investments. This portal will allow you to see the value of your asset, payments coming back into the account (i.e., cash flow distributions), and metrics pertaining to rate of return. At this point, all an investor needs to do is manage and monitor their investment. The rest has already been done.

The Benefits of Investing in Real Estate through a Self-Directed IRA

There are many reasons why someone would want to roll their traditional or Roth IRA into a self-directed IRA with an alternative asset custodian. Namely, doing so allows the investor to take control over how their investments are directed, which in turn, allows them to invest in a range of alternative assets, including real estate.

Here is a more detailed look at the many benefits associated with investing in real estate through a self-directed IRA.

The Ability to Take Control of Your Investments

Typically, both traditional and Roth IRAs are managed by a company or plan provider who, with some investor input, decides which stocks, bonds and mutual funds to invest in on behalf of that investor. The investment options are generally limited to “traditional” investments, like publicly traded equities. Few offer the ability to invest in alternative investments, such as precious metals, oil and gas limited partnerships, intellectual property and real estate.

Self-directed IRAs are more flexible and provide investors with greater control over their investment portfolios. With a self-directed IRA, the investor can decide exactly how to allocate their capital which may include investments in traditional equities but can also include alternative investments like real estate. Rather than the IRA custodian dictating how investments are made, the investor guides the IRA custodian and indicates how he or she wants their portfolio invested.

For someone looking to invest in real estate, a self-directed IRA allows them to be as hands-on or hands-off as they choose. They can use their SDIRA to buy and renovate property with their retirement savings, and then rent or sell for a profit, in which the returns are then directed back into the IRA. Someone who wants to take a more passive approach to real estate investing can use their SDIRA to invest in a syndicate, real estate partnership or non-traded real estate investment trust (REIT). Using an SDIRA provides extreme flexibility for those looking to invest in real estate.

Diversifying Your Investment Portfolio

Investors have long been encouraged to diversify their retirement portfolios, but for most, this usually means diversifying into some allocation of stocks, bonds, and mutual funds. To achieve true diversification, an investor might consider using an SDIRA to move beyond traditional, publicly-traded equities by adding alternative investments to their portfolio. An SDIRA is generally the only way to use an IRA account to invest in alternative investments such as real estate.

Real estate, an otherwise illiquid asset class, does not experience the same dramatic ebbs and flows as the stock market and therefore provides investors with stability during period of market upheaval.

Any IRA-like Retirement Account can be Rolled Into an SDIRA

A common misconception is that only a traditional or Roth IRA can be rolled into a self-directed IRA. Other forms of retirement accounts can also be rolled into an SDIRA, including those who worked for the federal government and have a thrift savings plan (TSP), or who worked for a nonprofit and have a 403b or 457a plan. Most forms of deferred compensation plans are generally eligible for rolling into an SDIRA, making this option attractive to all investors regardless of their career or profession.

Income Generated in an SDIRA Grows Tax-Free

One of the primary benefits to investing in real estate through an SDIRA is that any income generated from that property, either cash flow or sales proceeds, is redirected back into the IRA and is considered tax-exempt. In an SDIRA that was rolled over from a traditional IRA, the income will continue to grow tax-deferred. If the SDIRA was rolled over from a Roth IRA, the income returning to that SDIRA will be one hundred percent tax-free upon withdrawal, assuming the investor waits until qualifying age (currently 59 years old).

Because income generated in an SDIRA grows tax-free, investors are able to compound interest faster than they would if investing in alternative assets outside of an SDIRA. This means that someone who invests wisely can hit their retirement goals in less time because they are paying less in taxes every year.

Key Features of Investing in Real Estate Using an SDIRA

  • Investors must keep an “arms-length” distance from the investment. Investing in real estate using an SDIRA requires the investor to use a third-party custodian. The title of the property (or LP equity shares if investing in a syndication) will technically be held by the custodian of the SDIRA for the investor’s benefit. The rules also stipulate that the property is used solely as an investment—it cannot be used as a second home, vacation home, home for your children or foryour business, for example.  

  • Investors are responsible for conducting their own due diligence. Whereas a traditional IRA or Roth IRA custodian will have presumably done research on investments prior to investing their client’s money, someone who uses a self-directed IRA to invest is required to do their own due diligence on real estate sponsors and individual deal opportunities.

  • The alternative asset custodian does not need to have a pre-existing relationship with the sponsor. One common misconception is that the SDIRA custodian will limit you to investing with certain real estate sponsors—that is not the case. When investing through an SDIRA, an investor can decide exactly which real estate deals or funds to invest in. They provide guidance to the custodian and the custodian, assuming all paperwork is in place, will facilitate that transaction on the investor’s behalf. This is because the custodian is not acting in an advisory capacity; they are simply directing funds as requested by the investor.

  • Any and all income generated from the investment must flow back to the IRA. Unlike owning real estate directly, any income (cash flows, sales proceeds, etc.) from an investment made using an SDIRA must flow back to the SDIRA account in order to preserve the tax-deferred status of the income.

Related: 8 Mistakes to Avoid Before Investing in Commercial Real Estate

Working with a Third-Party SDIRA Custodian

Most financial institutions offer a self-directed IRA, sometimes called a self-directed option. This usually allows someone to self-direct into stocks, mutual funds, and ETFs. However, most financial institutions require investors to self-direct into traditional stock market-related investments. This is because financial institutions are generally compensated based on a percentage of the assets he or she is managing; if someone chooses to self-direct into non-publicly traded alternative assets, the financial advisor’s compensation decreases.

A self-directed IRA is an umbrella term used for a type of IRA
that allows investors to self-select how investments will be made.

Therefore, in order to invest in real estate using a self-directed IRA, you will need to move your IRA over to an alternative asset custodian. Through these providers, individuals can not only self-direct, but they can self-direct into alternative assets like real estate. An alternative asset custodian will generally charge a flat fee (e.g., $400-500 per year) for investors selecting to self-direct their own investments.

Will You Pay Taxes Upon Rolling into an SDIRA? (No!)

One of the biggest hesitations people have about moving money from a traditional or Roth IRA into an SDIRA is the fear that this will trigger some sort of tax event. This is an unfounded fear. People do not have to pay taxes when rolling funds from one IRA into an SDIRA. It is not considered a taxable event, so the value of the account being moved into the SDIRA will remain intact – penalty free and without taxation.

Is Investing in Real Estate through an SDIRA Right for You?

While SDIRAs are attractive for those looking to invest in real estate, they are certainly not for everyone. SDIRAs allow people to take full control over how their investments are made, but not all investors want to shoulder that responsibility. Some would simply prefer to “set it and forget it” by having a money manager steering their investments, in which case, an SDIRA is usually not the right option for them. These investors are usually aware that their portfolio is overwhelmingly invested in stock-market related equities and understand that there is inherent risk associated with the market’s volatility. For people who can stomach that risk, and who want to take a hands-off approach to their investments, working with a traditional financial advisor might be the right approach.

Using an SDIRA, an investor can self-direct retirement funds into alternative investments such as real estate.

On the other hand, those looking to take greater control over their retirement accounts, particularly for those looking to diversify into alternative asset classes like real estate, an SDIRA is certainly worth considering.

Remember: investing in an SDIRA does not need to be an all-or-nothing approach. Someone can keep a portion—even a majority—of their funds invested in traditional stocks, bonds and equities. They might decide to roll only a fraction of their money into an SDIRA to be invested in alternative assets. Moreover, they could choose to roll their entire account into an SDIRA, keeping most of their current holdings as-is, while liquidating just a fraction to invest in real estate. By moving funds into an SDIRA now, it provides the investor with the flexibility to invest in alternative assets if and when he or she feels comfortable doing so.

Are you ready to invest in real estate? Contact us today to learn how to use your retirement account to invest in one of Smartland’s latest offerings using an SDIRA.


What is a Self-Directed IRA?

From a legal standpoint, a self-directed Individual Retirement Account (IRA) is not different from any other IRA. The term “self-directed” simply indicates that you choose your IRA’s investments and that you don’t limit yourself to the packaged products available at traditional IRA custodians. Most brokerage houses and banks tend to offer self-directed IRAs that are within their own product/service portfolio, so you are somewhat limited if you do business with a specific bank or brokerage company.

Which products can a Self-Directed IRA be invested in?

The rules governing products in which an IRA can be invested in are exclusive—not inclusive. In other words, the rules only specify products in which you cannot invest. Therefore, there is a virtually unlimited array of possible investments that fall well within the permissible boundaries. The Internal Revenue Service only defines the following assets as excluded (prohibited):

  • Life insurance products (for example, a life insurance policy in the name of the IRA owner),
  • Collectibles (for example, antique rugs, cars, stamps, furniture, etc.)

Can I buy real estate using my IRA?

Yes, you can buy real estate within your IRA, Roth IRA, SEP IRA, and Solo(k) plans. Additionally, you may be able to use your other retirement plans—such as a 401(k) or 403(b) account—to fund a self-directed IRA or Solo(k) in order to buy real estate. Imagine not being confined to investing your hard-earned cash in the volatile stock market or limited-return certificates of deposit. You can diversify your retirement money in many creative and beneficial ways.

How do I buy real estate with my IRA?

The professionals at Smartland can assist you in transferring your existing retirement account to a bank that allows self-directed IRAs. Then we work with you to find a property that you would like as an investment. When you decide on a property, you make an offer and purchase it. Instead of mutual funds and stocks, you can have real estate as an investment and diversify your portfolio.

What type of return on investment (ROI ) can I expect?

There are no guaranteed returns, and there is risk involved in any type of investment. But generally, we don’t present an opportunity unless it projects at least a nine percent return per year.

What is the first step?

Education is always the first step. You can start reading the information we’ve posted on our website. If you decide to explore further, you can contact us for a free consultation. From there, we’ll help you determine what your best investment strategy should be.

Can I roll over my 401(k) into real estate?

The simple answer is “yes”. However, if you wish to maintain the 401k and have invest it in real estate, the 401k plan sponsor must allow the purchase of real estate. If the plan does not allow it, it may be possible to amend the plan. Otherwise, you can establish a self-directed retirement plan with a custodian (like a bank or trust company) that allows alternative investments such as real estate—and then rollover your funds to your new plan and invest in real estate. In any case, if you are contemplating changes to your retirement account, such as rolling over your 401k, you should call us to discuss your specific situation.

Can I roll over my IRA into real estate?

Yes. The IRS allows you to invest your IRA in real estate. However, if your present IRA custodian does not allow real estate investments in your IRA, you can set up a self-directed IRA with a custodian that does allow real estate investments. Then, simply transfer your IRA funds to your new self-directed IRA and begin investing in real estate.

Why should I take money out of the stock market and put it into real estate?

We’re not suggesting that you take all of your money out of the markets to invest in real estate. What we advocate is the diversification of assets, not just ownership of multiple types of mutual fund, but diversification into investments that are not directly correlated to the ups and downs of the stock market. For specific suggestions as to diversification and portfolio allocations for your situation, we suggest a consultation with a certified public accountant (CPA) or certified financial planner (CFP).

Can I use property that I purchase?

Property you purchase within your IRA cannot be used for a personal benefit while it is in your IRA. IRS Publication 590 specifically prohibits personal use of any IRA investment. However, you can purchase property now, manage it as a pure investment property within your IRA, and then convert it for personal use once you start taking distributions from your retirement account. For specific rules and guidelines, please consult a CPA who is knowledgeable on self-directed IRAs.

Is it legal to own real estate in your IRA?

Yes! Since IRAs were created in 1974, the IRS has excluded only three types of investments in an IRA: collectibles, life insurance, and capital stock in an S corporation. The IRS allows real estate investments within retirement plans. To get to the heart of the issue, go to, the Internal Revenue Service’s own website. Once there, perform a search for Publication 590, which is the 100-page booklet that defines everything the IRS wants you to know about IRAs. On pages 44 through 49, you will see the explanation of what you can’t do within an IRA. You will see, as previously mentioned, that you cannot purchase collectibles or life-insurance contracts. You will not see that you cannot purchase sub-chapter “S” corporation stock because, in this case, it is not the IRA that is prohibited from investing with a sub – “S” corporation, but rather the sub – “S” corporation that is prohibited from having an IRA as a shareholder.

How can I take funds out of my IRA to buy real estate without paying taxes and penalties?

That’s simple. You don’t take funds out. You buy real estate just like you would buy a stock or mutual fund in your IRA. Buying real estate is just a purchase of a different type of investment. The mechanics of execution are also different because the completion of a real estate transaction takes place in many steps. This process may take 30 to 60 days to complete. Through Smartland, you will have access to professionals who will make the process simple.

Can I purchase stocks or certificates of deposit in my self-directed IRA?

Yes. You can continue to invest in the same types of investments as you have in the past. The self-directed IRA simply gives you the option to diversify your investments into real estate.

Why haven’t I heard of this before?

The primary reason is that most people hold their IRAs with financial institutions whose business models imply making money from stocks, bond, mutual funds and insurance products that they can package and sell to the masses. Recommending alternative investments, such as real estate or business acquisitions, requires a more tailored approach.

Does the establishment of a self-directed IRA replace my current 401(k) and will I lose my employer match?

No. The self-directed IRA you set up can be an addition to your 401(k); it does not have to replace your 401(k). You can still contribute as much as you can. Or you can simply contribute as much as you need to get the full company match and then transfer funds into your new self-directed account when the time is right.

What kind of real estate can I own in my IRA?

Your IRA can buy raw land, commercial property, residential rental property, and options on real estate. You can also make loans, such as first and second mortgages secured by real estate.

Are smaller investments possible?

Yes. There are several ways to invest in larger projects with a relatively small amount. The easiest way is to join forces with other investors and to own property through an LLC or a TIC (tenants in common). Your IRA can also borrow money to purchase real estate. Each situation should be evaluated carefully to determine the best strategy.

What is the minimum investment?

There is no minimum required. It all depends on the real estate you are considering. And opportunities also exist to group funds with other investors or buy shares in a real estate partnership or fund, with as little as $1000.`

Can I co-invest with my friends and relatives?

Yes. You can combine your IRA and personal funds with your wife’s or husband’s savings, her or his IRA, funds from your friends, children or other relatives (or any other combination) in order to enter into the transaction together as tenants-in-common. Each investor appears on the grant deed (the legal document giving title to the property) as a percentage owner, based on the amount of each investor’s contribution towards the full purchase price. For example, if your IRA contributed 10,000 dollars towards the purchase of a 100,000 dollar parcel of land, the grant deed would specify that your IRA was a ten percent owner. There are also other ways, such as setting up an LLC. Again, these options should be explored thoroughly with a qualified professional.

If I combine with some friends and still don’t have enough to make an all-cash offer, is there a way to get a loan for the balance?

Yes. You could also combine with other parties, where one who is unrelated to you or any other IRA owner (e.g. a friend) takes out a loan to finance a portion of the transaction.

Can I use my IRA for a down payment?

Yes, in many cases you can use your IRA as down payment on a real estate purchase. However, there are important considerations when borrowing money within your IRA, so you should discuss this issue further with a qualified professional.

What if I want to invest in a large commercial property and I need support from other parties? Are there ways to simplify the purchase and management of the property?

Yes. A popular approach is for a group of investors to combine forces and invest in an entity, such as a limited liability company (e.g. LLC). The LLC can purchase the property. This may be done for a variety of reasons, but this approach will also allow the LLC to take out a loan. Also, if you have a large group of investors, LLCs simplify the purchase and management of real estate property by reducing the number of parties in the execution process. The LLC gives you the opportunity to be a completely passive investor, if you wish. Again, you should always consult with a qualified professional regarding this or any legal, tax, or financial issue.

If I buy rental property with my IRA, can I manage it?

Yes and no. You can perform managerial functions for your property, much the same way you would for any other asset (e.g. making decisions to buy and sell, acquiring legal advice, etc.). This could include making decisions as to whom to rent, what plumber to contract with, or what builder to choose when you add a porch. However, you should not build a porch yourself, or put on a new roof, etc., or, in general, add any material value to your property through your interaction with it. If discovered, the IRS would consider such “sweat equity” activities illegal contributions to your IRA.

Can I collect the rent checks for my IRA rental property?

Yes and no. You can have the renters forward rent checks to you, but made payable to your IRA. They cannot be made payable to you, nor can you deposit them, even if you issue your IRA the equivalent amount in a new check. Rather, simply make a notation in your register that the tenants made their payments, and forward the payment to the bank acting as your IRA custodian. Of course, you can always use a non-related party (e.g. friend) or a property manager or property management company to assume these and other responsibilities.

Can my IRA get a mortgage on the property?

Yes. An IRA can enter into a non-recourse loan with a financial institution or the seller of a property.

Are the gains on income taxable from IRA real estate investments?

No, in most cases. If an IRA buys investment real estate and then sells it at a profit, all income generated while it was held in the IRA, and all the gains resulting from the sale, will be either tax-deferred (regular IRA or tax-free [Roth IRA]), if the purchases were all cash with IRA funds. If the IRA borrows to finance the purchase, the portion financed may be subject to income and capital gains taxes. A discussion with a tax professional is highly recommended in these situations.

What is a Solo(k)?

The Solo(k) is a tax-qualified retirement plan that enables contributions up to the maximum annual amount on a tax-favored basis for solo business owners. In 2013, the maximum was 51,000 dollars for someone under age 55.

Am I eligible for a Solo(k)?

If you are a solo business owner, with no other employees, you are eligible. If you and your spouse own a business with no other employees, you are also eligible. Other businesses may also be eligible. As with any tax, legal, or financial issue, it is important to seek the expertise of a professional who is adept at those areas and who can evaluate your specific situation and have a clear discussion with you—so that you have a clear understanding of the options.

What are the benefits of a Solo(k) vs. a SEP IRA?

Solo(k) contributions consist of two parts: Employee and Employer, and this allows most solo business owners to contribute significantly more than a SEP IRA. Both are capped at 51,000 dollars per year in 2013. You can make that contribution with 163,000 dollars in business income in a Solo(k) and need 245,000 dollars of business income with a SEP IRA. Also, the Solo(k) has a Roth component that has no income limitations. That allows you to contribute to a Roth using after-tax funds and any earnings may be withdrawn tax-free at retirement. You may also take a loan from a Solo(k), but cannot from a SEP. Lastly, financed real estate investments in a Solo(k) can qualify for an exception to the tax on unrelated-debt financed income (UDFI), but the same cannot be said for SEPs. A SEP may trigger taxes if you take a loan.

Why should I self-direct my Solo(k)?

Limiting your options to stock market investments may be unwise. You should take advantage of the opportunity to truly diversify your retirement portfolio by opening a Solo(k) account with a reputable, experienced custodian that allows you to direct your investments. Then, take a look at one of the best investments you can make today: real estate!

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