Blog & Advice

Self-Directed IRA Real Estate: Finance Your Next Rental Property Purchase

As a rental property owner, you may be thinking of purchasing another rental property, but do not have the capital for another purchase. However, obtaining the funds for a rental property purchase can be easier than you might think. There are two key components to do this.

First, look to your Individual Retirement Account (IRA). A self-directed IRA can be invested in mutual funds, bonds, or real estate, or dozens of other possibilities. Self-directed IRA real estate investing provides a means to diversify your portfolio and have an investment that is unrelated to the price of stocks or bonds.

Second, you can buy real estate using leverage by taking out a mortgage.  You gain all the appreciation and long-term rental price increases from the property investment, but only invest 20% toward the property’s total cost. If the right property is purchased and managed properly, you could recover all your operating costs, including the mortgage, from the rent you receive from your tenant.

To do this, you need to set up an account with an IRA custodian such as Community National Bank, Equity Trust, IRA Services Trust Company, or dozens of others that can be found with a simple Google search. 

This new IRA account can be funded by your existing IRA or a rollover 401K without tax penalties.  When you find an investment property you want to buy, provide your custodian a direction of investment form, get an approval, and request the funds.  You’ll need to title the property in the name of your IRA so the custodian will hold title to assets and issue funds.

All expenses and revenue related to your investment must be made through and delivered to your IRA custodian account.  When you are ready to sell your property, proceeds from the sale remain in your IRA.  This means that taxes on profits and appreciation are deferred to the future when you start drawing funds from your IRA.

One limitation to using a self-directed IRA real estate purchase for a rental property is that you cannot manage the property yourself.  You will need to hire a professional such as Real Property Management to do so.  You will pay a fee to your IRA custodian which might involve up-front fees or on-going maintenance fees.  Depending on the value of your IRA portfolio, these fees can range from a couple hundred dollars a year to a couple thousand.  The marketplace is competitive, so you will want to compare multiple custodians for their credentials, fees, and service levels.

If you seek to build a real estate investment portfolio, your IRA might provide the funds you need to do so.  Check your balance and consider how self-directed real estate could fit within your entire investment portfolio.  If it makes sense, find the right IRA custodian, and make it happen.  You will thank yourself in retirement for investing in one of the most stable investments available – real estate. If you do purchase a new rental property, remember that your local Real Property Management office can assist you with aspects such as finding tenants, tenant screening, rent collection, property evaluations, maintenance, evictions, and other property management needs.