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Step by Step Guide to Buying Homes with your IRA

Posted by Michael Collins, CDPE, SFR on June 7, 2013 at 3:13am

How to Buy Investment Properties with an IRA - Step by Step (Part 4 of 4)

Using a self-directed IRA to buy real estate is a sound investment strategy for many people. The ability to buy assets that can provide strong returns is appealing to a wide range of people. Listed below are the basic steps necessary to buy a property in compliance with the IRS rules governing the use of an IRA account.

photo credit: roberthuffstutter via photopin cc
photo credit: roberthuffstutter via photopin cc

1. Contact a financial firm that has experience with self-directed IRA’s. Working with a firm that is familiar with these accounts and the real estate transactions is the most important step.

2. Understand the IRS rules. A property bought via the IRA must be an investment home. Second homes, vacation homes and primary residences are strictly prohibited. Furthermore, distributions from the account are not allowed until the owner of the IRA is at least 59 ½

3. Deposit funds into the account. One of the important rules about buying property with an IRA is that all funds for the purchase as well as any other expenses has to come directly from the IRA. The owner cannot chip in extra money to help cover property tax or replacing the roof, in example.

4. All revenue received on the property must be deposited to the IRA account. The revenue cannot be given to the IRA owner or relatives.

5. Take time to preview multiple properties. It is wise to enlist the assistance of a real estate agent who has knowledge with these types of transactions. An agent can recommend properties in areas that have strong rental history. Furthermore, the agent can help calculate the return on investment based on average rent payments for the area.

6. Once you have picked out an investment property it is time to put down an offer. Contact the custodian for your IRA account and tell them you want to buy a property. The custodian will then fill out the necessary forms and sign all real estate documents on the behalf of your IRA account.

7. It is a wise idea to get a contract with a property manager to handle the finances of the property. This will prevent you from collecting the rent payments and making any necessary repairs yourself. A property manager can keep all the transactions clean and legal and free you from the headache of property management.

It is important to understand the rules concerning using an IRA to buy and manage real estate investments. Failing to follow the rules can lead to penalties and possibly loss of the tax advantages associated with an IRA account. When in doubt consult a tax professional before making any decision or transaction with the IRA funds.

This is Part 4 of a 4 Part Series.

Part 1: How a Realtor® can help you invest in your IRA

Part 2: Purchasing Investment Properties for your IRA

Part 3: How to invest in real estate using an IRA

Part 4: Step by Step Guide to Buying Homes with your IRA

Read more…

How to invest in real estate using an IRA

Posted by Michael Collins, CDPE, SFR on June 6, 2013 at 4:13am
How to invest in real estate using an Individual Retirement Account, IRA (Part 3 of 4)
Traditional retirement accounts, like a 401(k) or an IRA, can be powerful when the economy is strong and businesses are experiencing growth. This is due to the stocks and bonds that are typically bought and sold through these typical investment strategies. However, what happens when the economy is not so strong and stocks are struggling? This is when a self-directed IRA can come into play.
More Flexibility
photo credit: Neil Kremer via photopin cc
photo credit: Neil Kremer via photopin cc
A self-directed IRA gives individuals a chance to buy other assets such as gold and even real estate. These accounts charge an annual fee that can reach up to $300 per year. The ability to buy and sell real estate has led to the growth in popularity of these accounts in the past few years.
The real estate decline from the last several years has led to many homes being rented out instead of selling at top prices as the owners had hoped. This is a great environment for investors to come in and make a fair offer on a property and add the home to their portfolio.
Ignorance of Tax Law Can Be Costly
This is not to say that a self-directed IRA is just a large checking account to be used to buy assets. The complexity of these accounts makes any financial mistake quite costly in the form of penalties assessed by the IRS.
A person cannot receive any type of benefit from the account prior to age 59 ½. This sounds vague, and it actually covers quite a bit of territory.
For instance, the owner of the self-directed IRA cannot live in a property owned by the account nor can they receive rent payments from the property. If the rental property is in need of a repair or property tax payment that money must come from the IRA.
Self-directed IRA’s also prevent the use of a mortgage to purchase a home.
Cash is King
Because of these restrictions most transactions that occur through a self-directed IRA are handled with cash. The majority of individuals will have a small number of properties in their portfolio. It is quite common for people to purchase either a duplex or a four-plex in order to maximize the rent payments coming to the account.
This is advantageous in two ways. First, a cash deal makes the whole process much quicker. There is no waiting on a mortgage approval from a lender. The person buying the home can choose the appraiser and title company and make their own decision based on the information provided. Secondly, buyers are in a very strong position when they can offer all-cash payment, right now, to an interested seller. Many sellers are willing to offer a discount for the promise of cash.
This is Part 3 of a 4 Part Series.
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