3 Things You Probably Didn’t Know About Your Real Estate IRA | Think Realty | A Real Estate of Mind
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3 Things You Probably Didn’t Know About Your Real Estate IRA

When it comes to real estate investing, you probably have a lot of options that haven’t even occurred to you yet. Bill Humphrey, co-founder and CEO of New Direction IRA, dove deep into these options at the Think Realty National Conference & Expo in Baltimore, Maryland, on June 24, 2017, during his company’s breakout training session. The key to expanding your options beyond your immediate investment capital lies in looking for funding in a place you might not have thought of: your own retirement savings.

“Almost anything and anywhere that you can buy property, your individual retirement account (IRA) can buy as well if you know how to do it,” he said. “Mentally separating your money from your IRA’s money is important, thus I introduce the self-directed IRA as ‘Uncle IRA,’” Humphrey went on to say. “Anything that you have done in real estate, Uncle IRA can invest in as well if he can afford it! Given that Americans have hundreds of millions of dollars, cumulatively, in their retirement accounts, there are a lot of things that Uncle IRA can afford.”

Know the Rules for IRA Investing, and Know Them Well

Of course, there are some important rules that real estate investors must follow when making real estate investments using their IRAs. Many investors are not aware of these rules and, as a result, commit prohibited transactions that can cause them to incur fines and penalties from the IRS. During the session, Humphrey dealt with three things most investors do not know about real estate and IRAs:

  1. Uncle IRA cannot invest to directly benefit you

    “It’s not the what, it’s the who that gets investors,” he said. Basically, an IRA investment cannot directly benefit you or most of your immediate family members, so you could not, for example, invest in a personally-managed rental property using IRA funds.

  2. You’ve got to get the title correct

    “All asset documents have to be titled in the name of the IRA,” said Humphrey, noting that an incorrectly titled document can not only be an issue when you sell your investment, but it can also result in a prohibited transaction of the sort mentioned above. He added that private loans, often private mortgage loans, are a popular way for Uncle IRA to invest in real estate that does not involve owning real property.

  3. Your IRA can borrow

    “Probably the biggest thing that most investors don’t know about Uncle IRA is that debt is allowed in IRAs,” said Humphrey. “Most lenders won’t lend on IRAs because no personal guarantee is available, but small banks often will. You also have to remember that a profit you make using borrowed money in your IRA is subject to income taxes.” He noted that this is also the case if your IRA buys an operating business like a McDonalds, but that the move can be worth it anyway if your IRA gives you investing power you would not have otherwise.

IRA Investing Gives You Serious Buying Power

It is vitally important to understand all of the rules that apply to real estate investing in your IRA and to seek expert legal counsel before you start using your IRA to invest. However, making the decision to leverage Uncle IRA can change the entire face of your investment portfolio. “Compare a stock IRA to a real estate IRA,” noted Humphrey. “Your buying power in a real estate IRA could be tripled, thanks to leverage, compared to the value of a stock IRA where you cannot borrow to buy more.”

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