A “Self-Directed IRA” FAQ for Real Estate Investors

[Editor’s note: You may not be aware that you can invest in real estate using your IRA or other retirement funds. If your retirement fund is “self-directed,” you can use your funds for “non-traditional” investments (as opposed to stocks, bonds, etc.), as long as all proceeds from your investments are put back into the retirement fund.

I asked Chris Reed, co-founder of IRAvest, Inc. to give our visitors a brief overview of investing in real estate with self-directed IRAs.]

Q: What are the advantages of using a self-directed IRA for investing in real estate and real estate notes–as opposed to stocks and bonds?

  • Secured: Your investment is a secured investment backed by real estate.

  • Control: Success or failure of the investment relies upon you, rather than the whims of other investors or fund managers.

  • Diversification: SDIRAs can help balance your retirement portfolio by diversifying your retirement investments.

  • Leverage: You can leverage your SDIRA with a non-recourse loan. This combines the power of leverage with tax-deferred gains.

  • Return: The right investment can provide stable returns.

So, unlike traditional IRAs, which limit your investments to stocks, bonds, mutual funds, annuities, and CDs, the self-directed IRA allows investors to be more proactive and more creative in their investments. You are in charge. You can choose your specific investments: real estate, real estate notes, mobile home parks, tax lien certificates, joint ventures, etc., with a few exceptions.

Q: What kinds of transactions are prohibited?

Prohibited transactions include any (direct or indirect):

  • Selling, exchanging, or leasing, any property between a plan and a disqualified person.

  • Lending money or other extension of credit between a plan and a disqualified person.

  • Furnishing goods, services, or facilities between a plan and a disqualified person.

  • Transferring or using by or for the benefit of, a disqualified person the income or assets of a plan.

  • Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account.

  • Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

Your retirement account custodian can tell you if a particular investment would be considered “prohibited” within these guidelines.

Q: Okay, so who is a “disqualified person”?

A disqualified person would be:

  • The IRA owner

  • The IRA owner’s spouse

  • Ancestors

  • Lineal descendents

  • Spouses of lineal descendents

  • Investment advisors

  • Fiduciaries

  • Any business entity (LLC, Corporation, Partnership, Trust) in which any of the disqualified persons previously mentioned has a 50% or greater interest.

Q: How big is the self-directed IRA market?

According to PENSCO Trust Company, “Self-directed IRAs are an enormous, overlooked source of capital for new business start-ups, hard money lending, real estate investing and more. This emerging $4.2 trillion IRA market is growing at $200+ billion per year, mostly from pension plan rollovers and 401(k)s into IRAs as ‘baby boomers’ retire.

“This under served market craves more retirement investment options beyond the stock market, and investors are actively seeking help from their advisors for new ways to allocate their assets for optimum diversification.”

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By CREOnline Contributor

A content contributor to the original CREOnline.com.