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Types of Real Estate Investments with a Self-Directed IRA

If you have a self-directed IRA, there are many types of real estate investments available to you. Here is a summary of the main ones to help you decide where best to put your funds. Let’s start by defining what is a self-directed IRA.

What is a Self-Directed IRA?

Firstly, it is not the same as a regular IRA. Ok, let’s take a step back a bit with definitions. IRA stands for individual retirement account. It provides a way to save money for retirement in a way that benefits you tax-wise. There are three types of self-directed IRAs: Roth, Traditional, and Rollover.

A self-directed IRA can be a Roth or Traditional IRA. Thus, rather than holding a regular IRA, if you are a savvy investor, then you can use a self-directed type to invest in asset areas that you might not otherwise have available to you.

A self-directed IRA means, in its most basic sense, that you self-direct your IRA investments. The opportunity here is to invest in less common areas, such as real estate. Thus, you’re not investing in the usual things like mutual funds or stocks.

The word “self” here is vital. This retirement account provides a sense of autonomy for you as you are in charge of your financial management, rather than leaving that up to a bank.

It requires a lot of due diligence on your part as the account holder, although you do have a love of flexibility. Below are the five areas where you can invest in real estate using a self-directed IRA:

1. Residential

Probably the most common type of investment in the real estate market with a self-directed IRA is residential. That includes single-family homes, as well as apartment and condo buildings. With this type, tenants make payments that help you with savings. Earning profits with rental income is a great way to make a side income in addition to your regular job.

Another option is to buy homes and fix them up, then sell them and earn from the profit. Of course, you must maintain a budget for the upgrade and ensure that the home, apartment, or condo sells for more than what you’ve invested in it (purchase price plus reno costs).

When you use a self-directed IRA, you are not able to be a property manager, and you cannot maintain the property yourself. The IRA, rather than you as the IRA holder, is the owner of the real estate, which means maintenance and property purchase are paid by the IRA.

2. Commercial

Another great idea is investing in commercial property. There are countless types, such as office buildings, warehouses, and sports venues. Getting rental income from this type of property can be valuable. If you are considering delving into the residential or commercial property market, read this real estate ira guide to learn rules and regulations, answers to common questions, and more.

For example, did you know that you cannot transfer a property you own already into your self-directed IRA? Also, you’re not allowed to buy a property and rent it to a family member.

Property assessments differ between commercial and residential real estate, with the commercial type being more subjective. Thus, make sure you read all documents relating to the property, verify the value of it, and more, before signing anything.

3. Mortgage Notes

An indirect way to invest in real estate is funding mortgage notes. This means becoming a real estate lender that helps others buy their homes while earning a personal profit during the process.

Some people prefer this option because they do not have to be hands-on with maintenance activities or filling rentals. When you are a real estate lender, you set the details for the loan, such as how long it will last and interest rates. Two types of notes are available; they are secured and unsecured notes.

4. Real Estate Owned Properties

This one might be new to you. Real estate owned properties are ones that have gone through foreclosure, or the bank has taken back. With a self-directed IRA, you can buy these properties from the bank or an auction, depending on the scenario. Doing so provides you with the ability to earn a profit.

When buying a property, you must do your due diligence for it, just as was advised above with the commercial type. For example, check if there are any liens on the property that require payment before it sells. Have a professional inspection done, as well, so you know exactly what the condition of the property is, so there is no shocking news later.

5. Offshore Real Estate

You’ve likely also heard of offshore real estate. An investment in this type of property using a self-directed IRA provides you a lot of opportunities. You can invest overseas in real estate markets and earn from specific tax benefits.

With this type of investing activity, you must take it upon yourself to learn the tax laws and processes not only in the U.S. but also in the country where you are investing. Also, consider whether there are any societal, political, or environmental worries in the other country.

Why do People Use Self-Directed IRAs?

Firstly, there are built-in tax benefits. Secondly, you can build a very diverse profile. That is advantageous as you can then potentially reduce risks; if a market downfall negatively impacts one industry, then you will not see all your investments suffer.

As well, with a diverse portfolio that includes real estate properties, you will find that you have different investments with different amounts of potential. If a certain industry improves, then the value of your investment is likely to increase with it, and that benefits you.

If you are already involved in the real estate industry, then investing with a self-directed IRA can also be beneficial. A big reason why is that a lot of the research is on you as the account holder. You will have a lot of industry knowledge already, which gives you an edge as an investor.

Perhaps the biggest benefit of using self-directed IRAs is to increase your retirement fund. The money earned can help you have a comfortable life after you finish working, whether that includes going on trips, buying a sports car, moving homes, or something else.

There is a lot of return potential on investment properties when you make the right choices. Plus, rental property accounting is easier than ever as it’s all done within the IRA; you won’t have to keep track of rental income separately.

Just be sure to follow the rules, or you might receive a notice of IRA disqualification. If that happens then you might have to pay a lot of tax. So, make sure that you know the rules going into it, and that you abide by them all the time.

Final Words on Real Estate Investments with a Self-Directed IRA

Now you have a good idea of the basics surrounding a self-directed IRA. Of course, there is a lot more to it, from taxes to rules.

A financial advisor can help you to understand what due diligence involves and how best to manage investment deals. They have the experience with it that you may be lacking.

As you get to know more about the process, you will decide what suits your interests and comfort level. The number of options available to you for types of real estate is many, which is exciting.

There are homes, apartment buildings, condos, commercial property, foreclosures, mortgage deeds, offshore property, and more. We wish you all the best with your alternative assets, including real estate.


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About the Author

Kaya Wittenburg

Blog Author and CEO

Kaya Wittenburg is the Founder and CEO of Sky Five Properties. Since the age of 10, real estate has been deeply ingrained into his thoughts. With world-class negotiation and deal-making skills, he brings a highly impactful presence into every transaction that he touches.

He is here to help you use real estate as a vehicle to develop your own personal empire and feel deeply satisfied along the way. If you have an interest in buying, selling or renting property in South Florida, contact Kaya today.

Feel free to call me at: (305) 357-0635
or contact via email: