Are You Taking Advantage of the Benefits of Investing in Real Estate Through Your Self-Directed IRA?

As April 15 approaches each year, most real estate investors spend some quality time with their accountants or financial advisers. It can be a bittersweet time as they look over their real estate earnings and realize how much of it goes to the Internal Revenue Service.

It has always struck me as odd that so many otherwise-savvy real estate investors aren’t taking advantage of every opportunity to invest in real estate on a tax-deferred or tax-free basis. Most of them have an IRA, 401(k) or some other type of retirement plan that’s invested in mutual funds or another stock market-based investment.

While it’s a little-known fact, you have a much broader scope of investment options inside a self-directed IRA or an individual 401(k). If you’re not excited yet, consider the fact that by virtue of being self-employed as an individual real estate investor, you may qualify for a retirement plan that allows you to sock away up to $53,000 on a partially tax-deferred, partially tax-free basis. That sure beats the $5,500 contribution limit for traditional and Roth IRAs.

The self-directed retirement industry is growing rapidly. As an increasing number of Baby Boomers approach and enter retirement, they’re not enthused about living on a fixed income and watching their principal balance fluctuate with the volatility of the stock market. Historically, they would move into more conservative fixed-income investments, but with interest rates where they are, bonds and other interest-bearing investments are offering paltry returns.

These Boomers feel as though they’re trapped between a rock and a hard place. Should they assume more risk than they’re comfortable with in equities for some chance of a decent return? Or should they flock to the safe haven of interest-bearing investments and watch their principal erode due to inflation?

The good news is that there’s a third option.

I meet with thousands of real estate investors every year, and it always amazes them when they learn that they can leverage their knowledge base in real estate to invest in something that excites them. In short, self-directed retirement accounts offer more choices and more control.

Self-directed IRAs and 401(k)s allow for almost any type of investment, provided it’s passive and at arm’s length. Whether it’s for real estate—residential, commercial or agricultural—for cash flow or for capital appreciation, this strategy is possible with the assistance of an IRA administrator that allows alternative investments.

Many real estate investors are more interested in lending money than owning physical property, and I can personally attest to their popularity at local REIA meetings. I have found they’re often easier to deal with than private money lenders. Whether you’re considering using your own IRA to invest in real estate or borrowing from somebody else’s, here are some tips and tricks of the trade you should know.

1. Choose the Right Administrator

An increasing number of companies offer self-directed IRAs. Make sure you spend some time doing your due diligence. Check online reviews and make a few test phone calls to get a feel for how long it takes to get in touch with a person directly. Call with a few questions and see how willing the person on the other end of the phone is to spend the time making sure you feel confident in making a well-informed decision. Also, ask for a few references; quality service and speed of processing vary significantly across the industry. Some companies run a call-center-like environment, while others offer a more personalized experience.

2. Be Familiar with the Rules

One of the major differences between a self-directed IRA company and your typical brokerage company (Fidelity, Schwab, Vanguard, etc.) is that self-directed IRA companies don’t provide investment advice or guidance. While they should be comfortable explaining what is and what isn’t allowable behavior in an IRA, it’s not their job to find or endorse any particular investment offering. Make sure you speak with an IRA expert to ensure your idea follows the rules in Section 4975 of the IRS code.

3. Be Prepared to Strike While the Iron’s Hot

I field many phone calls every week from real estate investors who are excited to take advantage of the tax-deferred or tax-free growth of an IRA. However, all too often, they’re shopping around for property while their IRA money is still tied up in mutual funds at another institution. There are times when a property is sold right out from under a prospective self-directed IRA investor because he or she didn’t have an account established with funds available for a good-faith deposit.

4. Become an Expert

Attend as many educational events related to self-directed IRAs as possible. More than $5 trillion in retirement plans is eligible to be self-directed. When you’ve established yourself as a savvy real estate investor and an IRA expert, people will flock to you with deal flow.

Since you’re reading this magazine, I’m already confident that you’re interested in real estate as an investment. While there are a number of trainers touting their expertise in seller financing, creative deal structuring or deed-in-lieu investing, self-directed retirement accounts are the Swiss Army knife of real estate investing. I encourage you to review your retirement portfolio and then contact an expert to answer any questions about using tax-advantaged accounts to invest into whatever sort of real estate investment appeals to you.

  • Tyler Carter

    Tyler Carter lives in Orlando, Fla., and works for NuView IRA. He has 10 years’ experience in the financial services industry, holds Series 7 and 66 licenses and is passionate about alternative investments of all types. Contact him at or 407-716-3636.

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