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Discover how to grow your retirement with real estate property. Learn the steps to get started.

Real Estate IRA Investing: What It Is & How to Start

Disclaimer: This website and its content are for informational purposes only and is not financial advice.

What is Real Estate IRA Investing?

At its core, real estate IRA investing refers to using the funds within your Individual Retirement Account (IRA) to acquire real estate properties.

When you engage in real estate IRA investing, it is crucial to understand that your IRA, not you personally, is the legal owner of the property. All legal documents related to the real estate must be in the name of your IRA.

This distinction is vital because it determines how income and expenses are handled and ensures the tax-advantaged status of your retirement funds.

Any income generated from the property, such as rental payments or profits from a sale, must flow directly back into your Self-Directed IRA. Similarly, all expenses related to the property, including maintenance, property taxes, and insurance, must be paid directly from your IRA funds.

Mortgage rates are of prime importance. Even if your investing in real estate through your IRA. It is essential to carefully look at the current housing market to gauge your decisions.

The Benefits of Real Estate IRA Investing

There are several compelling reasons why individuals consider real estate IRA investing as a viable option for their retirement savings. One of the primary advantages is the potential for tax-deferred or even tax-free growth, depending on the type of Self-Directed IRA you choose.

With a traditional Self-Directed IRA, your contributions and earnings grow on a tax-deferred basis, meaning you generally won't pay taxes until you begin taking distributions in retirement.

If you opt for a Roth Self-Directed IRA, your earnings can grow entirely tax-free, allowing for tax-free withdrawals in retirement, provided certain conditions are met.

Beyond the tax advantages, real estate IRA investing offers significant diversification for your retirement portfolio. Real estate often behaves differently than the stock market, providing a potential hedge against market volatility and inflation.

Having tangible assets like real estate within your IRA can add a layer of stability and another dimension to your overall investment strategy. Furthermore, real estate can generate consistent income through rental properties, contributing to steady growth within your retirement account.

How to Begin Real Estate IRA Investing

Starting with real estate IRA investing involves a few essential steps, beginning with setting up the right account.

1. Open a Self-Directed IRA: Establish a Self-Directed IRA with a qualified custodian specializing in alternative assets like real estate.

2. Fund Your Account: Transfer funds from existing IRAs, rollovers from 401(k)s, or direct contributions to your new SDIRA. Ensure enough cash to cover the property purchase and ongoing expenses.

3. Identify and Perform Due Diligence on Your Investment: Research and analyze potential properties, conducting inspections, appraisals, and understanding projected cash flow. The property must be for investment purposes only.

4. Purchase the Property Through Your IRA: Your SDIRA custodian will facilitate the purchase, with all funds coming directly from your IRA. The property title will be held in your IRA's name.

5. Manage the Property within IRS Guidelines: Adhere strictly to IRS rules to prevent "self-dealing."

   This means:

   • You and "disqualified persons" (spouse, ancestors, lineal descendants) cannot personally use the property.

   • All maintenance, repairs, and management must be handled by independent third parties paid for by your IRA.

   • All income generated must go back into your IRA, and all expenses must be paid from your IRA.

Updated May 28th, 2025

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Important Considerations and Potential Pitfalls

While real estate IRA investing offers appealing benefits, it also comes with its own set of rules and potential challenges that warrant careful consideration.

• Prohibited Transactions: Avoid activities like borrowing from your IRA, selling personal property to your IRA, or using IRA assets as collateral for personal loans, as these can lead to severe penalties.

• Liquidity: Real estate is not as liquid as stocks. Ensure you maintain a cash cushion within your IRA for ongoing expenses, as you cannot use personal funds.

• Concentration Risk: Investing a large portion of your IRA funds into a single real estate asset can introduce concentration risk.

• Professional Advice: It's highly advisable to consult with an investment professional, a tax advisor, and a legal expert experienced in real estate IRA investing to ensure compliance and make informed decisions.

Real estate IRA investing can be a powerful tool for growing your retirement savings and diversifying your portfolio. By understanding the fundamentals, adhering to IRS regulations, and working with experienced professionals, you can confidently explore the world of real estate IRA investing and potentially unlock its significant long-term benefits for your financial future.

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By Jordan McCaleb, Investment Researcher