How to invest in Real Estate using your IRA!!!!!

Potential for Growth

There is over 3.5 trillion dollars currently tied up in investment and retirement accounts, and growing at 200 billion dollars per year. Real estate can be used as a vehicle for true portfolio diversification, while acting as a “contrarian asset” creating a hedge against the always volatile investments market. Over 44% of America’s per capita net worth is tied up in U.S. real estate, while only 2% of the total IRA’s assets are invested in real estate.

Benefits

The benefits of a Self-Directed IRA are that it allows the owner to take control of their investment strategies, while allowing the individual to choose how to invest inside the IRA. They were created to allow the individuals to select, either personally, or with the help of an accredited investment advisor their financial strategies.

Risk vs. Reward

Financing properties through your IRA has the potential for higher yields and greater returns by protecting you against any loss of principal, while generating a greater than market return through rental income and appreciation. If your investment property is not leveraged, all of the capital gains and passive income are rolled back into your IRA tax deferred. Depending on if it is a Roth IRA, it can be tax free.

Your IRA can purchase real estate through leveraging. However financing real estate through your IRA can be more difficult due to the reasons listed below:

  • Non recourse financing: the law states that you are not allowed to personally guarantee a loan through your IRA.
  • Most banks and financial institutions will not finance loans without a personal guarantee
  • Your IRA will have to pay on UDFI (Unrelated Debt Financed Income), which is the passive income and/or capital gains that are attributed to the financed portion of the property.

What is your IRA qualified to purchase?

Your IRA is qualified to buy raw land, residential property, commercial property, real estate options, as well as extended loans secured by real estate.

What Constitutes a Disqualified Person?

There are things you can’t do inside an IRA with real estate. You cannot purchase any property directly or indirectly from a disqualified person. Below you will find a list of what constitutes a disqualified person:

  • The IRA owner
  • The IRA owner’s spouse, descendant (i.e. son or daughter), or ascendant (mother or father)
  • Spouse of a descendant of the IRA holder
  • Trustee or custodian

The IRA is not allowed to enable an investment for yourself or a disqualified person. So, if the IRA’s investment is necessary to completing the transaction in which you and your IRA invest, then you would have a prohibited transaction. Lastly, your IRA cannot purchase real estate with the intent of a disqualified person occupying the property while it sits inside the IRA.

For more information please contact Geoffrey Russell

IRA Lending

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