When it comes to building your diversified retirement portfolio, it’s good to have a variety. One of the most common alternative assets self-directed investors consider is real estate. While it may seem as simple as buying up some property and allowing it to build up nice, steady cash flow for your retirement, there is much more to it.

Real estate investment can be rewarding if you are vigilant, involved and you perform your due diligence. If you are interested in investing in real estate, here at the top 15 things you should know.


15. You cannot use your IRA to buy personal property.


When purchasing property with your IRA, you must be careful who you buy from., and that includes yourself. You cannot use your IRA to buy anything you own. This is considered self-dealing. You cannot benefit from your IRA until you reach retirement age.

14. You cannot use your IRA to purchase property owned by disqualified individuals.


In the same vein and the first tip, you cannot buy a house for or rent to anyone considered a “disqualified individual.” This group includes spouses, children, grandchildren, grandparents, parents, and anyone directly involved with your IRA. No one who stands to benefit from your IRA can use the property.


13. The property is owned by your IRA.


When you purchase property using your self-directed account, your IRA owns that property. When you buy up your asset, it will be placed under your IRA. All the documentation should be in the IRA’s name. Everything for that property going forward should be handled through your custodian.


12. You cannot personally use your IRA own property.


Purchasing real estate for your retirement fund is not as simple as buying your vacation home and renting it out when you aren’t kicking back. In fact, account holders are not allowed to use any property owned by their IRA. Just like when you cannot buy your own property, you cannot use it. Whether you purchase an office building, a rental, or a vacation home, you cannot use your IRA-owned property.


11. All funding for the property should be through your IRA.


In addition to not being able to use your IRA-owned property, you cannot use your personal funds for upkeep. All maintenance, alterations, and fees should be paid through your IRA.

Likewise, all funds accrued by your property should go back into your IRA. The cash should flow through your self-directed account.


10. You don’t need 100% of your funds through your IRA to buy property.


If you are interested in buying property for your retirement fund but don’t have enough stored away in your IRA, you can take a non-recourse loan to foot the bill. You can also partner with others, but it must be done correctly. Consult a financial advisor if you are considering this option to make sure everything is in order.


9. Taking out a loan may result in UBIT.


If you don’t have the funds to purchase property with your IRA, it is possible to use a non-recourse loan to buy it. However, should you plan to go this route, using a non-recourse loan will result in unrelated business income tax – or UBIT. This tax will be paid from the IRA, significantly lowering your income.


8. You can’t do any improvements to the IRA-owned property.


Like everything else with your IRA-owned property, it must remain separate from your personal touch. You cannot use, pay for, or make improvements on the house. To properly fix up your IRA-owned structure, you need to contract out the work if you want to fix-up. Not doing so could end up disqualifying your account.



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7. You can’t mortgage the property.


If you want to purchase real estate for your IRA, you have to buy it outright. You cannot use a mortgage to buy the property. While there are other avenues to consider to afford this alternative asset, you can’t go the normal route.


6. Tax breaks are dependent on the property.


One of the downsides of real estate investment is that the tax breaks are dependent on the property. You cannot claim tax breaks if the property is operating at a loss; you can’t claim depreciation. Be cautious when selecting your real estate before throwing all your hard-earned money into a “money pit.”


5. The market value fluctuates.


The real estate market can be finicky. Before making a purchase, it’s important to watch the market values, research different vacant areas, and really think about the property you select. Consider the taxes, neighborhood, parking and the economy. While you can’t be 100% certain about your research, you should have a grasp of the market value of what you’re buying.


4. You should have an SDIRA custodian with real estate experience.


With any self-directed account, the IRS demands that a certified IRA custodian oversees your retirement fund. As you search for the best fit for you, consider choosing a custodian with real estate experience. The same is true for any alternative asset; it is better to select a specialist to help your investments grow.


3. You don’t have to hold on to your real estate.


Though real estate is not the most liquid asset, that doesn’t mean you have to hold onto your purchase. You can flip a home to turn a profit using your IRA. Of course, this can be quite expensive, but it can also have a sizable payout.


2. You can manage properties with an LLC.


If you want to avoid the middleman and truly be in charge of your IRA assets, you can open an LLC to purchase your assets. By using your IRA to open the LLC, you can give yourself checkbook control and skip the multiple visits to the custodian. Remember, you are still required to have a certified custodian oversee the account. This allows you easier access to your funds along with a few other benefits.


1. It can be very expensive.


Purchasing real estate can be very expensive. While this asset can bring in a good amount of money for your retirement, buying the property is half the battle. After you do purchase real estate with your IRA, there are many other costs: upkeep, upgrades, taxes, and utilities. Without steady cash-flow or deep pockets, it can be costly.


Performing Due Diligence


There are many pros and cons concerning real estate investing, but what it boils down to is whether it is right for you. When done correctly, investing in real estate can be very rewarding. With careful planning, research and some expert advice, you can build a healthy nest egg with this alternative asset.

Of course, it’s crucial to perform your due diligence and seek out your financial advisor before making any final decisions. Contact one of our financial experts today and find out if real estate investment is the best way for you to round out your portfolio.