IRA Real Estate Investments

Back in 2003 my business partners and I looked into purchasing a commercial property and were going to finance the acquisition via self-directed IRA accounts.  The deal never went through, but the thought of acquiring real estate with funds from an IRA stuck with me.

A few months back a reasonably priced property, located a stones throw from my office, was brought to me by a Realtor that I am friends with.  Depending on how a minor renovation works out, I might hold the property as a 2 unit rental, or sell the property outright.  In either case, I didn’t want the tax implications of a gain and didn’t have a pressing need to generate taxable income from the property.  The thought of owning a property in an IRA appealed to me in this situation.  I decided to pursue and move forward.

The process of purchasing real estate in my IRA was incredibly straightforward.  Once your attorney is on board with the process, they should be able to take it from there.

I am sure that there are a number of companies offering Real Estate Investments via an IRA, but I explored two.  The companies that I looked into were:

• Equity Trust: http://www.trustetc.com/
• Guidant Financial: http://www.guidantfinancial.com/

I elected to move forward with Equity Trust Financial and did a partial roll of funds from an existing IRA.  The account was established and provided me with a simple back office interface to manage.  The one major drawback that I see with Equity trust is that their brokerage partnership charges $29 per trade when investing funds into equities. Not a big deal, but every little bit helps. Certainly not the type of account to become an active stock trader with.

When you are handling funds for your real estate investment, you can use a simple online interface to request the funds.  Your attorney and/or real estate agent should be able to assist with these.  The key thing to remember with this investment is that you CAN NOT use funds outside of the IRA. Even your earnest money deposit for the real estate purchase must be done with funds from within the IRA.   There are many rules to ensure that your real estate transaction remains qualified.  A list of the basic rules can be found here: http://www.trustetc.com/new/real-estate-ira/real-estate-ira-rules.html.

One interesting twist that I didn’t expect is that you can mortgage a property within your IRA real estate trust. This is strictly for investment property and probably not likely for a commercial property. However, when taking a mortgage on an investment property in your IRA, traditional lending rules will apply for the property, not the person.  Since this is a trust account the mortgage will be in the name of the trust and will be a non-recourse loan.  They won’t/can’t tie this property to your SS# or personal credit. The underwriting decision is based strictly on the property.  Expect your down payment amount to be about 30% (70% LTV).  You can see the power that your retirement funds could have for you if managed properly.   As with any property in your IRA, there are many rules.

When you hold real estate in your IRA, you will be paying any bills directly from the IRA account.  In my case, I have a simple interface with Equity Trust. Any bill due that falls below $1000 can be issued using an online form. There is no need for further paperwork. When you are above $1000, you will be required to fax a request for funds document.

When receiving income from the property, either rents or proceeds from a sale, all funds must go back into the IRA.  Your tenants will make their checks payable to the trust account.

Overall a very interesting way to invest for your future.  You can gain quite a bit of leverage within this account and if managed properly should be able to afford you a terrific return.