San Luis Obispo Homes & Income Property by Realtor Mary McNally: How to Use Your IRA to Invest in Real Esate

Using Your IRA to Invest in Income Property

Individual Retirement Accounts have been around since Congress approved them in 1974, and though most people don't know this, investors are not limited to investing in the stock market.

Self-directed IRAs can be used to invest in a variety of investment options from real estate to precious metals, mortgage notes and business ventures.

With the downturn in real estate prices over the last several years, this could be an optimal time for investors to use their IRAs to invest in income property. In California, in particular, long-term costs are relatively fixed due to Proposition 13, which set property tax rates at 1.1 percent of the purchase price and, except for adjustments for inflation and local bond measures, are fixed for the duration of the time you own the property.

FREE SEMINAR:

Use Your IRA to Buy Investment Property

Designed for the non-professional, this seminar presents an overview of investment options for your retirement account; critical guidelines that will protect the tax-advantaged status of the investments; and basic steps to establish a self-directed IRA, fund the account, and complete a transaction.

When:

Wed., June 26, 6:30 p.m., in Arroyo Grande

Saturday, June 29, 12:30 p.m. in San Luis Obispo

Where:

Wednesday, June 26; 6:30 p.m. in AG

Equity Reach Mortgage Solutions

107 Nelson St.

Arroyo Grande, CA 93420

Saturday, June 29, 12:30 p.m. in SLO

San Luis Obispo County Library

995 Palm St., San Luis Obispo, 93401

Small Conference Room

Space is limited. RSVP to mary@IRAforRE.com or call 805-704-8041

Why Don't More People Know About Self-Directed IRAs

Custodians (basically, a fancy name for your stock broker or "wealth manaager") typically make commissions on the investments they sell or manage and most only offer stocks, bonds, mutual funds and other options available through the stock market. There are only a small number of custodians who truly offer self-directed IRAs, so the vast majority of marketing and news pertains to the stock market.

Self-directed IRAs can be used to invest in a variety of investment options from real estate to precious metals, mortgage notes and business ventures.

Man counting pennies in jar marked retirement

If you are tired of Wall Street executives receiving outrageous compensation that leaves little for distributions to the average investor, want more control over your investment, want to invest locally, or want to enjoy 100 percent of the profits, using your IRA to invest in real estate can be an attractive option.

If you have an IRA or Roth IRA held by a traditional custodian, those funds can be rolled over to a self-directed custodian to invest in property.

I have worked with a variety of self-directed IRA custodians and lenders and can help you determine the vendors who might be the best fit for your investment.

Leverage

One of the reasons people have invested in real estate is they have the benefit of leveraging OPM (Other People's Money) to buy a bigger investment than they could afford if limited to their own cash. The same is true for real estate purchased through an IRA.

Illustration of man leveraging a boulder

There are restrictions on the loans, though. They have to be non-recourse loans, which means that if the owner (in this case, the IRA is the owner of the property) stopped making payments on the mortgage, the lender can only use the subject property as collateral. The lender cannot attach your personal assets.

Since non-recourse loans are riskier for the lenders, interest rates are typically higher than market rates for most conventional loans, and they normally have lower loan-to-value ratios to reduce risk to the lender. The lenders also have different standards to qualify a prospective loan; interestingly, those can be easier and less complicated than conventional loans.

There are only a handful of lenders in the U.S. that offer non-recourse loans to purchase property using an IRA. I can guide you to several lenders, general lending guidelines, and share my experience with the benefits of various lending institutions.

Seller financing can also be used to finance real estate in an IRA.

You can also partner with someone or another IRA to purchase property -- though that's getting more technical than is the intention of this website. For that kind of conversation, let's have a cup of coffee together and talk about it.

It is important to note that property leveraged in an IRA may be subject to UBTI (Unrelated Business Tax Income), a tax against the portion of the property that is financed. It sounds scary, but most clients have found it to be relatively nominal -- and the good news is, generating that tax means the property is making a profit.

Technicalities

While this type of investment can be an attractive option, there are specific guidelines for how to purchase, use and manage the property. Little boy in a devil costume As the saying goes, the devil is in the details. It's important to work with an agent experienced with self-directed IRAs to help you avoid potential pitfalls.

As a real estate agent and an investor, I am experienced helping clients utilize self-directed IRAs to buy investment property. I can help you comply with IRS guidelines and generate maximum benefit of your investment. And I put my money where my mouth is: I am also a client, with property in my own IRA.