Investing with a Self-Directed IRA: A Wealth Building Strategy: How to buy a property with your self-directed IRA
Learning to buy real estate with a self-directed IRA takes some time to understand the process and paperwork needed to complete the transaction correctly.
The types of IRA’s that you can use to buy property:
- HAS (Health Savings Account)
- ESA – Cloverdell (Educational IRA)
- Checkbook IRA
In order to invest with a self-directed IRA, your IRA needs to be with a custodial company that allows you to direct how your funds are invested, what type of asset – you can use a self-directed IRA to invest in other assets, but what this article will focus on is buying real estate.
I am not a CPA, Financial Advisor or attorney. What I teach and write about is my own real-life experience of using my self-directed IRA to buy real estate OR be a private money lender.
Always consult your financial advisor, CPA or tax attorney, prior to investing with your IRA, conduct your own due diligence on every property, borrower and investing opportunity.
When buying a property with a self-directed IRA, there are three things to consider:
1. Location – where is the property located
a. Can you put your eyes on the property
b. Do you have “trusted boots” on the ground in the area
c. Is the property in an appreciating area
d. What are the exit strategies
2. What is the value/ARV
a. After Repair Value
b. Purchase Price
c. Cost of Repairs
3. Exit Strategy
a. Buy and hold, short term rental, wholesale, flip
b. Multiple exit strategies
c. All Income and expenses will flow through your IRA
As in any transaction there is always paperwork, and when buying with a self-directed IRA you will still use the same contract and Addendums, close at a title company that understands the right paperwork
In addition, through the custodial company, you will use the:
Direction of Investment Form
This tells the custodial company how you are using your funds in the IRA – the IRA will own the property. The property will be titled in your IRA’s name account.
Because the income and expenses “flow” through the IRA – this is not reported at this time, he income that the IRA is earning is deferred, until you take a distribution from the account.
This strategy works if you want to increase your retirement accounts. You can continue to contribute to your IRA while the IRA earns income from the property.
Once the property is under contract and the Direction of Investment has been submitted and approved, both by the custodial company and the title company, funds will be wired directly from the IRA account – this is not considered a distribution – and the IRA account is the owner of the property.
At closing a Settlement Statement will be prepared. The other additions to this transaction are:
- Direction of Investment
- Deed of Trust – will have the name of the account holder’s IRA,
When using this investment strategy – there are some rules/considerations that may affect when and what property you will use your self-directed IRA:
When making a decision to use your self-directed IRA there are some rules that may that you need to know about:
- Purchase price of the property. The SDIRA must own the property in whole (you can also combine qualified IRA’s)
- Hands off Transaction – all income and expenses must go through the SDIRA
- Required Documents, custodial company signs on behalf of SDIRA
- Close at either a title company or attorney office that understands the process, documents
Decide the strategy of when to use your Self-Directed IRA:
2. Purchase Price
3. Availability of current inventory – rental vs. owner finance vs. short term
4. Best use of self-directed IRA funds to grow tax deferred
5. Ability to combine qualified accounts to buy – each with a percent of ownership on property
Case Study: Using three separate qualified self-directed IRAs to buy one property
- Purchase price: $60,000
- Used these types of SDIRA
o SEP - $50,000
o Traditional IRA - $5,000
o Roth IRA - $5,000
Each SDIRA owns a percent of the property. An example of the verbiage on the Deed of Trust:
Name of custodial company FBO (for the benefit of) Account holder name and account holder number with an undivided interest of (percent of ownership from each SDIRA)
The Exit Strategy: Owner Finance
Sold property for $95,000
o Ten percent down payment
o 15 years at 9.5% interest
o SDIRA is the holds the note for property
o Loan servicing company in place to receive payments
o Loan servicing company distributes money to the SDIRA’s
Here are the numbers:
The total value of the three SDIRA’s increased by $35,000 ($60,000Purchase price, Sold Price $95,000)
Each SDIRA will receive payments based on the undivided interest of ownership.
The monies received into the SDIRA is not taxed until such time the funds are withdrawn. In the meantime, the value of the SDIRA increases.
Additionally, the SDIRA’s can own multiple properties. Remember the rules and documents needed to complete the transactions so no penalties or adverse fees are attached to the transaction and the self-directed IRA accounts.
This is just one way to buy a property using a self-directed IRA. If this is a wealth building strategy you would like to learn, please download for free by E-BOOK: How to Grow Your Self-Directed IRA. This eBook will give you the fundamentals of investing with a self-directed IRA.
Not only can you buy properties, but you can also learn how to be a private money lender – which is another blogpost!
This wealth building strategy is a great way to scale your real estate business and grow your account tax free/deferred. Over the years, I have used my self-directed IRA:
- Buy Real Estate
- Become a Private Money Lender
- Learn how to use an Option Agreement and with as little as $100 from my SEP account flip a property and net over $46,000 for the SDIRA account tax deferred
If you are looking for a way to grow your retirement funds, scale your real estate investing or become a private money lender, get your free E-book today!.
It's a great start to learn this wealth building strategy!
If you've always wanted to find out how to invest with a self-directed IRA, today's your day. Thanks so much. Get your copy today!