Investing Your Retirement Funds into Real Estate

Investing in real estate has long been a relatively reliable way to increase your overall wealth, as real estate is historically likely to appreciate. An unusual place to look for the funding to make this investment could be your retirement funds. 

Rather than take out a mortgage, a less conventional option for increasing the value of your IRA is to hold real estate in it. When it comes to an IRA is more common to invest in things like stocks, bonds, mutual funds, or exchange-traded funds. However, investing your IRA in something less liquid, like real estate, is possible under certain conditions.

Investment Property

How To Invest In Real Estate Through Your IRA

While investing in more traditional ways can be as simple as buying a handful of stocks, purchasing real estate with your IRA is more complicated, and there are a lot of rules you should be familiar with before making a decision.

You Need A Self-Directed IRA

Firstly, you will need a self-directed IRA to invest with, and any real estate must be purchased strictly for investment, meaning you or your family may not use the property. You will likely have to pay with cash when purchasing the property, and the IRA must pay all ownership expenses.

How Investment Properties Can Fund Your IRA

Real estate investments can be a variety of properties, including single-family homes, apartment buildings, commercial properties, land, and more. The property you purchase will also determine the type of work that property will require to remain maintained. 

If you buy a residential property such as a home or apartment complex, it is commonly understood that you will have tenants. It is important to remember that tenants come with commercial real estate investing as well. If you buy a retail store, the store owner will then become your tenant.

The rental income that your property may earn will all go back into your IRA. However, the IRA pays all the maintenance and associated costs of owning the property; these costs and gains do not come out of your pocket. This can be beneficial but also dangerous; if you purchase a property that requires a lot of maintenance but does not bring in much income, you risk draining your IRA cash.

IRS Stipulations For Investing In Commercial and Residential Properties With Your IRA

When it comes to using your property, the IRS disqualifies certain people from using it, meaning the purpose of your property must be for someone who is not a member of this group. Disqualified persons include you as well as the following:

  • Your parents, grandparents, or great-grandparents
  • Your spouse, children, children’s spouses, grandchildren, or great-grandchildren
  • Any person or entity that owns more than 50% of the property
  • Any services providers of your IRA

You also cannot purchase any property you already own with your IRA or for any disqualified people. The property must be new to you, and its purpose has to be investment only.

Selling the IRA Investment Property

If you decide to sell the property, you will work out the logistics like with any real estate investment. After a price and terms are determined by you and the seller, you must request the custodian of your account to sell the property on behalf of your IRA. Depending on the makeup of your IRA, the money from the sale will be returned either tax-deferred or tax-free.

The Take-Away

Investing in real estate property with your IRA has several pros and cons. Positives include the historical appreciation of real estate over time, rents and income providing steady cash flow to your IRA, and the diversification of your overall investment portfolio. 

The downfalls to this investment method are that you will need a self-directed IRA with a custodian, the IRA is responsible for all upkeep costs, and you and your relatives cannot utilize the property.

Overall, investing in real estate with your IRA can be lucrative.However, it is a precarious choice for your retirement funds. Before deciding to invest, weigh the cost risk and the time and knowledge required to manage a real estate investment.

Bio: Roni Davis is a writer, blogger, and legal assistant operating out of the greater Philadelphia area.