Directly investing in real estate with an IRA is a tried-and-true strategy for many retirement investors. However, there are several different ways for an IRA to participate in real estate, apart from simply purchasing property.
Investing in real estate with an IRA can mean owning the title to the rental property, or acting as a tenant-in-common. The IRA owner and other disqualified persons can’t live in the IRA property (without incurring taxes and penalties) until the account holder reaches 59.5. In the meantime, rental income can help bring cashflow to the IRA and pay off a mortgage.
If an IRA doesn’t have the full purchase price of a property, it can apply for a non-recourse loan to cover the balance. The IRA pays the debt-service, while receiving cash-flow through rent. Debt-leverage can increase an IRA’s buying power, and is a way for an IRA to make money on cash that the IRA holder couldn’t personally contribute to the account.
A self-directed IRA can also originate a loan to a homeowner. An IRA can be both a lender and a borrower for real estate investments. IRAs can become involved in local real estate investing groups, or can fund a percentage of a venture through an online crowdfunding platform.
Another popular method for IRAs to invest in real estate is through fix-and-flip projects, or fix-and-holds. Real estate investors who already have experience in fixing and flipping can take advantage of the tax-benefits associated with their retirement account to fund future projects. Investors should be aware that the IRS does apply UBIT (unrelated business income tax) on projects that can be seen by the tax court as a continuous, on-going business. This includes repetitive fix-and-flips.
A self-directed IRA can also purchase an interest in a company that is engaged in real estate investing. The IRA can purchase private equity - i.e., an LLC that the investor creates, or a larger fund that your IRA buys into. Whatever type of asset, real estate can be the core value.
Feel free to contact a self-directed IRA provider like New Direction IRA today to learn more about the many ways an IRA can participate in real estate investing.