Education, Finance, Investment Advice
smartland-how-to-invest-in-real-estate-using-your-ira.mp3 Learn about how to invest in real estate using your IRA - an often overlooked vehicle for investing in real estate... Listen to this article

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. Whereas those over the age of 50 can contribute up to $6,600 per year. Investors who have been contributing to an IRA for years or even decades may find that they have accumulated hundreds of thousands of dollars invested in a traditional portfolio consisting 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. Individuals who have been pumping cash into retirement accounts, so therefore they do not have cash on hand to invest in real estate deals; often times will find this is an attractive way to invest in real estate. Furthermore, utilizing a self-directed IRA to invest in real estate offers significant tax benefits.

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. Especially compared to 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. It then 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

01 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

03 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

05 Have the SDIRA Custodian Facilitate the Transaction

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

02 Facilitate the Roll-Over from Traditional Account to SDIRA

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

04 Identify Real Estate Investment

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

06 Manage and Monitor Your Investment

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.

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. For example $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. This means that transferring the account into the SDIRA will keep its value intact, without penalty or taxation.

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

While SDIRAs remain attractive for those looking to invest in real estate. They are not for everyone. People can fully control their investments when they use a SDIRA. However, not all investors want to shoulder that responsibility.

Some investors would simply prefer to “set it and forget it” simply 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. With this they 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.

SDIRA is not an all-or-nothing approach

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. People might choose to transfer only a portion of their money into an SDIRA for investing in alternative assets. Additionally, 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.

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.

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.

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.

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.

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.

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.

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.

Last edited on May 17, 2024
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