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Real Estate

A Lesser-Known Source of Funding for Real Estate Investments

April 16, 2019
To my surprise, I discovered there were many non-traditional assets such as real estate, tax liens and promissory notes that our retirement dollars could invest in using a self-directed IRA
Sue, New York Investor

Self-directed accounts include the Individual Retirement Account (IRA), Roth IRA, 401(k), Simplified Employee Plan (SEP), and Savings Incentive Match Plan for Employees (SIMPLE), as well as Health Savings Account (HSA) and Coverdell Education Savings Account (CESA).

In a self-directed investment, money from an IRA or other account is used to invest in an asset, and all profits and expenses flow through the retirement account. Tax advantages include tax-free or tax-deferred growth within the account.

Though David just recently learned about the concept, self-directed investing is nothing new. Since IRAs were introduced in 1974, the IRS has only listed a handful of items that are not permitted in an IRA (the entire list can be found in IRS Publication 590).

15-Minute Guide to Real Estate Investing with a Self-Directed IRA

Self-directed investing gains favor

Like David, other real estate investors are becoming aware of the possibility of self-directed investing. After years of investing in real estate, Lowell of California learned about the concept in 2013 and decided to transfer his 403(b) account into a self-directed IRA. He then acquired a bank-owned property for just over $85,000.

Lowell rented the property for two years, providing consistent cash flow and growth back to his IRA, until the property sold in December 2015. Between the rental income and the sale price, the property generated nearly a 77-percent return on investment (ROI).

An experienced real estate investor, Lowell prefers the idea of using his IRA over borrowing to fund his investments.

“Since my IRA now owns each property, I know that even if a property sits vacant, I am not losing money other than the necessary costs of insurance and taxes,” he says.

Laurie of Colorado learned about self-directed investing from her father, who is a real estate agent. She opened a self-directed IRA, and partnered with others, funding her LLC to buy a condo. Her husband’s IRA partnered with her LLC to buy another condo. As soon as she has enough saved in her IRA, Laurie plans to invest in a property 100 percent in her IRA.

“I wish I could do more of these self-directed investments,” she says.

View Laurie’s case study to learn more.

Real estate investing indirectly with retirement accounts

For those who prefer not to directly invest in real estate or other assets, a self-directed IRA’s versatility allows for other possibilities. For example, some investors boost their retirement savings by loaning IRA money to other investors.

Susan from New York recently partnered with family members’ IRAs (three total) to loan a real estate investor money to rehab a house. She used a third-party servicer to structure the promissory note. During a 14-month term, the note yielded a return of over $42,000, a 25-percent ROI.

Susan recalls being delighted to learn about the possibility of investing in alternative investments with her retirement account.

“To my surprise, I discovered there were many non-traditional assets such as real estate, tax liens and promissory notes that our retirement dollars could invest in using a self-directed IRA,” she says.

Self-directed investors aren’t limited to only investing with other self-directed investors. Christine from California is one of a group investing in a hotel being rehabbed in Ohio. She is funding her portion of the investment from her IRA. The IRA receives monthly income from room rentals, and Christine expects her IRA to receive a profit of about 25 percent once the hotel is sold.

How to get started with self-directed investing

As with any investment, your due diligence is key. Before making an investment decision consult with a tax, legal or financial professional.

In addition to the list of investments not permitted in an IRA, the IRS provides information in IRS Publication 590 regarding:

  • Disqualified individuals
  • Indirect benefits
  • Unqualified Business Income Tax (UBIT)

Only certain custodians offer self-directed accounts because the required reporting and recordkeeping is unique. Equity Trust Company is one such custodian. Through its predecessor company, Equity Trust began offering self-directed accounts in 1983.

More about self-directed investing – free case study guide

Read more real-life examples of investors using their retirement accounts to fund real estate and other investments – download this digest of real-life examples.

Rental payments are sent to Equity Trust for the benefit of (FBO) your IRA. The checks or money order should be made payable to: “Equity Trust Company Custodian FBO [Your Name] IRA.” Once received, the checks or money orders are deposited into your IRA. All checks must be sent to Equity Trust with a payment coupon.

Stories of Investor Success: Self-Directed Investment Case Study Guide
11 SDIRA Investor Case Studies: Real Stories of How Investors Are Building Wealth with Self-Directed IRAs

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