Many people would like to diversify a portion their investments into real estate; but think they can’t because the bulk of their assets are in their individual retirement account (IRA). Actually, direct real estate investments can be made via a self-directed IRA that focuses on real estate investments. With a Self-Directed Real Estate IRA you can invest in all kinds of real estate and real estate-related assets with your retirement funds.

Typically, most IRA providers only allow you to invest in approved stocks, bonds, mutual funds and CDs. Self-Directed IRA management companies allow you to invest in any type of real estate. Single-family homes and multi-family units (such as apartments or condo complexes) are the most common type of real estate found in self-directed IRAs. Investors can fix and flip homes or hold on to rental properties for a flow of passive income with a Real Estate IRA. Cash flow and capital gains from sales flow back into the self-directed IRA account which provides tax benefits.

Self-directed IRA investing offers great tax advantages to real estate investors, though the exact benefit will depend on the type of account used. If you invest using a self-directed or traditional IRA, you will not have to pay taxes on contributions or earnings until you start taking distributions during retirement. With a self-directed Roth IRA your earnings will appreciate tax-free, allowing you to enjoy your profits without hassle from the IRS. Be sure to pay close attention to the rules regarding disqualified persons and prohibited transactions to avoid real estate IRA penalties.

There are very important factors to consider when purchasing residential real estate in an IRA. As the IRA holder, you cannot be the property manager, nor can you perform the maintenance on the property. If you are financing the purchase, non-recourse financing is required, which means that you are not personally liable for the loan. In the event of foreclosure, the lender recovery is limited to the proceeds from the sale of the property. There are a number of lenders who can provide financing that meets the self-directed IRA guidelines; however, the rates and terms are different than normal real estate loans with personal borrower liability.

When you invest in real estate using a self-directed IRA, the IRA is the owner of the real estate, not you, the IRA holder. All purchase and maintenance costs are paid by the IRA and all income (e.g., rent) goes back to the IRA. You must use IRA funds to address any maintenance costs or other expenses related to the property. 

Investing in real estate is very different than buying a residence that will be occupied. The main focus is on the numbers, not the aesthetics. It’s important that you work with an agent who has owned investment real estate and has extensive experience representing investors.