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Investor Insights Blog|Real Estate Investors’ Secret Weapon: How a Self-Directed IRA Can Help You Beat the Competition

Real Estate

Real Estate Investors’ Secret Weapon: How a Self-Directed IRA Can Help You Beat the Competition

Real estate investors seeking a leg up on other investors in a competitive market may find an advantage from an unlikely source.

We’re not talking about direct mail or marketing hacks, “proven systems” from a guru, or any magic negotiating methods.

So what is it?

3 Advantages Self-Directed IRAs Can Provide Real Estate Investors

Investors are finding they can beat the competition and win at auction or closing simply by using their retirement funds.

1. All-cash offers are king

As most real estate investors know, making an all-cash offer is often preferred. Real estate investors, and specifically sellers, like cash offers for a few reasons:

  • It allows the seller to offload the property with a fast and easy exit strategy.
  • It’s a sure thing. There are no concerns they will be paid in full.
  • It allows them to easily move into another investment.
  • It typically allows for a more seamless, less cumbersome sale.
  • It doesn’t require an extensive qualification process for credit history and other processes.

One of the benefits of an IRA is the ability to use cash in the account to purchase the property. Josh, an Equity Trust client from Indiana, discovered this on a raw land investment he made with his IRA.

After searching for raw land opportunities and working with land brokers for over a year, Josh identified a 111-acre lot listed at $4,500 an acre. During negotiations, Josh learned the seller was considering a few different offers he had received six months ago.

The competing offers were between $2,900 and $3,000/acre but were using financing.

Josh knew his self-directed IRA provided him an advantage his competition didn’t have, giving him better odds of winning the bidding war.

“I told my broker, ‘Tell them this isn’t going to be a finance deal but all cash with check-in-hand,’” Josh says.

Josh’s IRA won out and purchased all 111 acres for $249,000 with cash from his IRA. His final offer came out to approximately $2,243/acre, significantly less than the nearly $500,000 asking price.

Furthermore, Josh was able to “outbid” his competition by using his self-directed IRA, despite undercutting their offer by more than $70,000.

“The only reason they took the deal is that I was a cash buyer,” Josh says. “Without having the ability to do a self-directed IRA investment on raw land, I would have never had the opportunity to have this much cash available for the purchase, thus forgoing the possible return.”

Josh is eyeing a significant return for his IRA investment. Two weeks after his IRA acquired the land he was offered $440,000 for all 111 acres ($1,720/acre over his original purchase of $2,243/acre).

Despite the opportunity to turn his $249,000 investment into $440,000 in just two weeks, Josh declined the offer. He explained the property was timbered two years before his IRA purchased it and, if he holds it for another three to five years, he expects to sell the land for more than $5,000 an acre once the next round of timber is ready for harvest.

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

“The only reason they took the deal is that I was a cash buyer. Without having the ability to do a self-directed IRA investment…I would have never had the opportunity to have this much cash available for the purchase.”

Josh, Real Estate Investor, Indiana

2. “Outbid” the competition because of tax savings

Investors using tax-advantaged funds from their retirement accounts can enjoy an additional 10-40 percent of flexibility than their competition that invests with taxable funds.

Where does the 10-40 percent come from? It refers to ordinary income and capital gains tax rates and the advantage IRA investors have to defer or eliminate taxes from the equation.

When the competition is running projections on their potential real estate investment, they have to factor in short- or long-term capital gains and any income tax consequences from the eventual rent or sale of the property.

Self-directed IRA investors, on the other hand, go into each investment knowing all income is returned directly to their account without being taxed. They aren’t concerned with losing up to 40-percent of their profits on the sale to capital gains.

“Before I was paying 33 percent of my ROI to the IRS. Now I keep all my profit!” says Karen, an Equity Trust client and real estate investor from Ohio.

Instead of losing out on an investment property they really want, self-directed IRA investors have the option to increase their bid and potentially “overpay” an amount investors with taxable money may not be willing to do.

As private lenders, some self-directed IRA investors report a similar benefit when competing with hard money lenders or bank financing. They can negotiate interest rates with more flexibility because of the tax-saving benefits of their retirement accounts.

Video: Investing in Promissory Notes with Your Retirement Account

3. One-day earnest money and proof of funds – an Equity Trust advantage

Through our online platform, myEQUITY, clients can request earnest money to be sent directly from their account by check, wire, or ACH, and the earnest money is processed and sent within one business day.

Equity Trust clients can also auto-generate a “Proof of Funds” letter indicating their account’s cash balance through myEQUITY. A Proof of Funds letter is often requested by the seller during the offer.

With these features, along with a dedicated Real Estate Investment Liaison to serve as your single-point-of-contact throughout the transaction, Equity Trust clients are positioned to act quickly on real estate investment opportunities as they arise.

As competition in the real estate market increases, more investors may look to self-directed IRAs to gain an advantage.

Dive deeper: 5 Benefits Savvy Investors are Getting from Investing in Real Estate with Retirement Accounts



Should I wait to open an account if I don’t have an investment ready right now?

There are several reasons to open your self-directed account at Equity Trust Company, even before you have selected an alternative investment.

  1. If you are transferring cash/assets to your account from another custodian, you should allow time for the resigning custodian to process your request and deliver the account holdings to Equity Trust.
  2. You have the ability to invest in traditional assets while you are researching other opportunities.
  3. Once you have selected an alternative investment, you will not have other actions in process that may delay the funding processing.

Can my IRA purchase real estate that I currently own?

No. This is considered a prohibited transaction (see IRC 4975). You may not purchase a property, or interest in a property, that’s currently owned by a disqualified person, which includes yourself.

This post refers generally to federal income tax brackets and short- or long-term capital gains tax rates. Every situation will vary. Please consult with a tax professional regarding your specific situation.

Case studies provided are for illustrative and educational purposes only. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. Quotes and information included in the case studies and testimonials were provided by the investors and included with permission. Equity Trust Company does not independently verify all information provided by third parties.

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