Buy Real Estate Using IRA Funds

Contrary to popular believe it is possible to buy real estate using your IRA funds. One of the best ways to invest your retirement money is to use your IRA funds to buy real estate. Although the majority of the people invest in stock, bonds, and mutual funds, the reason for not to invest in real estate is a lack of knowledge or exposure to this hidden gem. The IRS allows the IRA funds to be invested in real estate as well just as stocks, and mutual funds investment. It is called self-directed IRA. Most companies don’t allow to use 401K for self-directed IRA conversion, however, there are always exceptions to the rule. It does not hurt to ask. In most cases when you move from one job to the next you have the option to move your money from the 401k plan to IRA.

IRS allows you to take that money and invest it to your liking. For that option to exercise you need to put your money in self-directed IRA through a custodian. The custodian like Provident Trust or UDirect and many more options are available to help you.

Unlike when you’ve 401 K you can only borrow against less than 50% of the total value of the funds, and you pay interest to yourself while the period you have borrowed the funds. With the self-directed IRA option, you can take the entire amount and invest into real estate or other investments. There are strict IRS guidelines to avoid commingling the self-directed IRA funds with your personal funds or to use these funds for your personal benefit. There is a heavy penalty if you do that.

Depending upon how much funds you’ve in your IRA, you can borrow the money to purchase the real estate. The banks like NASB in Midwest can loan you the money. These loans are called the non-recourse loan. The banks can loan up to 49% to the funds you’ve in IRA. This is to maintain the IRA shares majority. In other words, the ratio will be IRA 51% and bank non-recourse loan 49%. For example, if the IRA has $ 51,000 the bank can loan up to $ 49,000 of the total cost of $100,000 for the property. The property you’ll purchase will always be under the IRA name for which you will act as a manager. There are two flavors to go about. You can either have your custodian cut the check to purchase the real estate or opt to create a check book account. This option is the best option but you will need to open LLC account for this.

Once the LLC for your self directed IRA is created the IRA custodian will transfer the funds to your LLC account. This way you’ll control the LLC account check book and can make an offer on the property directly without involving the custodian each step along the way.

The LLC in California however is expensive to maintain. The California Franchise board annual fee to maintain the LLC is $ 800. Other states are much cheaper. However, if the property is bought in California you are expected to have LLC created in California not outside of California.

Once you purchase the property, IRS wants you to follow strict rules not to use it for your personal use. You or your family members can not live in this property. It is prohibited by the IRS. The rental income you’ll receive from the property will go back to your IRA account. You’ll not pay any taxes on the rental income, check with your accountant. You’ll pay taxes on the amount your borrowed from the bank. I’ll highly recommend to engage an attorney who knows how to open LLC for self directed IRA. This one area you don’t want to do it DIY. It is much cheaper to do it right the first time.

I purchased my first property using self directed IRA in 2009. It is much better to invest in real estate instead of stocks and bonds in my opinion. Should you need any help please feel free to reach out for complimentary consultation at 925-528-9093





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