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When it comes to investing in real estate, there are many ways to go about it. The common ways include purchasing REITs, property flipping, investing in rental & multi family properties, and others. The ways in which these properties and other investments are paid for are usually with an investors own capital, or through real estate syndication in specific circumstances.

However, there is one way that investors may overlook, and that is using their IRA account. 

What is an IRA?

First, an IRA is an individual retirement account that allows you to save money for retirement in a tax-advantaged way; it allows you to save for retirement with a tax-free growth or on a tax-deferred basis. 

In terms of real estate, a self-directed individual retirement account allows you to choose, invest in, buy, and sell different kinds of real estate and real estate related assets with your IRA account. In short, a self-directed IRA allows you to have complete control to take advantage of real estate assets and private equity.  Also, you can easily transfer funds from a dormant 401(k) account into a self-directed account. 

The Rules:

There are strict rules for using an IRA to buy real estate that you must follow. 

  1. Real estate owned in your IRA must be merely for investment purposes. For instance, as the property owner, you cannot live in it nor can you use it for a vacation home. It’s noteworthy to stress that the property becomes an asset of your IRA, meaning your IRA owns it and you do not. 
  1. You cannot use your self-directed IRA to buy property from yourself or a family member. 
  1. All expenses of the property must be paid through the IRA, not by you directly. Expenses incurred for your investment properties include: maintenance, repairs, improvements, insurance, property taxes, and so on. 
  1. You cannot use furniture you currently own in an IRA-owned rental property. 
  1. Any income generated by real estate held in your self-directed IRA must be paid to and returned to the IRA, not to you. In other words, any profits you earn must be used for your retirement. 

The Benefits: 

Using a self-directed IRA for real estate investments can be beneficial in the following ways: 

  1. Tax-Free or Tax-Deferred Earning. Owning properties through an IRA has great tax advantages. You will be able to reinvest all of your rental income without paying any taxes. Additionally, your capital gain will not be subjected to taxes allowing you to enjoy your profits freely. 
  1. High return on investment. In general, real estate can generate long-term returns. The average rate of return on investments can range from 10-15% or more. Unlike the contingency of the stock market–even through tough economic times–property values tend to remain relatively high and consistent. Understanding the real estate market and knowing how to reduce your exposure to risk, a self-directed IRA real estate strategy could allow you to earn a higher return on investment compared to traditional stocks, bonds, and securities. 
  1. Diversification.  Investing in real estate with an IRA enables your limitations to stocks, bonds, or mutual funds. It allows you to purchase real estate assets ranging from single and multi family homes, commercial and rental properties, mortgage notes, international property, raw land, mobile homes, and more. 
  1. Financial Security for you and your family. Given the tax advantages and potential profit from using an IRA to invest in real estate can allow you to have financial stability for you and your family. Also, a self-directed IRA allows you to leave your savings to your heirs, enabling a substantial inheritance for your children.  

The Potential Drawbacks to Consider 

There are a series of benefits of using an IRA to invest in real estate, however, this strategy may not be suited for everyone. Consider these drawbacks before investing with an IRA: 

  1. Third-Party Involved. Even though you are ultimately in complete control of your investments, you still need to seek approval from a directed IRA custodian.
  1. Conducting prohibited transactions. Even if you conduct a prohibited transaction on accident the IRS could consider the entire account as having been distributed to you; resulting in a tax bill and IRS penalties.  
  1. Risks in the real estate market. Considering the real estate market to have a generally higher ROI, it can still fluctuate. Thus, leaving results to be uncertain. Unlike selling stocks that can be done very quickly, investment properties can be more time consuming and challenging to sell. 
  1. Real Estate is an expensive investment. Investing in real estate requires a lot of money, and not just to purchase the property but to maintain it as well. Real estate entails a down payment, repairs, maintenance, taxes, mortgage, and homeowners insurance. 

What to Keep in Mind

Investing in real estate using an IRA is usually geared toward experienced investors due to it being a higher risk than other common investments. There are more rules to follow, and this kind of investment takes more time. 

However, this type of investment can create substantial growth for those that understand the landscape and know how to navigate the waters.

Back Bay Investment Group is a leading real estate investment company that focuses on syndication for commercial and multifamily asset classes. Our longstanding partnerships, relationships, and expertise allows us to generate superior returns on our clients investments. Check out our blog for more industry insights and contact us to get started with your real estate syndication efforts. 

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