Investing in Real Estate with the Self-Directed IRA

For investors who feel that their portfolios are too concentrated in financial securities, the IRS allows the investor to use funds from his or her IRA to buy real estate investments, which benefit from the tax advantages of contributing to the IRA in the first place. In theory, real estate is a hedge against inflation (particularly for asset types whose leases re-start on an annual basis, read: multifamily and self storage) and it also offers the dual benefit of deriving regular income while appreciating in value. The set-up process is cumbersome, but the results can be worthwhile. Here is the basic chronology on how to get set up or contact us and we would be happy to help.

1. Set up the self-directed IRA with a custodian who can monitor the account.
2. Move funds from your IRA to the self-directed IRA.
3. You may set up an operating company, typically an LLC, whose sole member is the self-directed IRA, to purchase the real estate. The custodian may require an attorney opinion letter acknowledging that the self-directed IRA is considered a high risk venture by the IRS and that this process has been correctly executed.
4. Open the LLC's bank account and move funds from the custodian to the bank account.
5. If you would like to finance the acquisition, connect with a lender who offers loans for self-directed IRA real estate acquisitions. Because your IRA is the borrower, the loan must be non-recourse.
6. Conduct the real estate search. All pursuit costs must be paid for by the IRA only.
7. Acquire the real estate. All income therefrom must stay with the IRA until you reach the age of required minimum distributions.
8. Engage a property manager where applicable or required.
9. Hold or trade the real estate as you otherwise would, subject to IRS requirements. If you eventually decide to get out of real estate, you may move the sale proceeds back into the original IRA account, essentially starting where you left off.