​​Top 7 Steps of Investing in Real Estate with a Self-Directed IRA

Many investors look to real estate to diversify and strengthen their retirement portfolio. But can you invest an IRA in real estate? The answer depends on the structure of your account.

Traditional brokerage IRAs typically limit you to publicly traded assets such as stocks, bonds, and mutual funds. They do not allow direct ownership of rental property, raw land, private placements, or other alternative assets.

A self-directed IRA (SDIRA), however, allows you to hold real estate inside your retirement account. With the proper custodian, you can purchase investment property, tax liens, private real estate funds, and other qualifying assets. The account remains subject to IRS rules, including prohibited transaction restrictions and disqualified person rules.

Real estate investing within an IRA requires strict compliance. The IRA must purchase the property, all expenses must be paid from the IRA, and all income must return to the IRA. You cannot personally use the property or provide services to it.

Below are seven structured steps to help you evaluate and execute a real estate investment inside a self-directed IRA while maintaining compliance and protecting tax-advantaged status.

1. Talk with a Financial Advisor or Tax Professional

Start by consulting with a financial advisor who understands self-directed IRAs and real estate investing. These accounts are governed by IRS rules, including those that outline prohibited transactions and how earnings and expenses must flow in and out of the account.  

Real estate investing inside a retirement account isn’t the same as buying property in your personal name. Personal use or missteps can trigger IRS penalties. Proper guidance up front can help you avoid costly mistakes. 

2. Open and Fund Your Self-directed IRA

To open a self-directed IRA, you’ll need to find a qualified custodian that allows alternative assets like real estate. Standard IRAs through brokerage firms typically don’t permit direct ownership of property.

Opening an account is easy, and once your account is established, you can fund it by:

• Contributing new cash (up to the annual contribution limit) 
• Rolling over funds from an existing IRA or employer-sponsored plan
• Transferring money from another retirement account

3. Find an Investment Property

Once your self-directed IRA is funded, the next step is identifying a property that aligns with your retirement goals. Real estate held inside an IRA must be structured strictly as an investment, but you have flexibility in the types of assets it can pursue.

The type of property you select influences how income is generated, how long capital may be tied up, and how the investment fits within your broader retirement portfolio.

Common options include:

• Long-term residential rentals, such as single-family or multi-unit properties
• Commercial real estate, including office, retail, or industrial space
• Raw land held for appreciation
• Real estate partnerships or syndications
• Fix-and-flip investments, where the property is improved and resold within the IRA

Each property type carries different risks, income potential, and time horizons. Your choice should reflect your overall retirement strategy and liquidity needs.

4. Complete Due Diligence and Prepare an Offer

Before submitting an offer, take time to evaluate the property’s financial and market fundamentals. 

Real estate within a self-directed IRA should be approached with the same level of analysis as any other investment—focus on long-term performance rather than personal preference.

Key areas to review include:

• Comparable property values in the area
• Rental demand and projected income (if applicable)
• Property condition and inspection findings
• Estimated operating costs
• Local market trends and economic stability
  
  

You’ll need to confirm that the purchase structure complies with IRS requirements. Any contracts or agreements should reflect that the IRA is the buyer.

Once your analysis is complete, you can prepare an offer and coordinate with your custodian to ensure the transaction is handled properly.

5. Purchase the Property

The process for completing the transaction depends on how your self-directed IRA is structured.

• Custodian-directed purchase. You submit a direction of investment form to your IRA custodian. The custodian reviews the documentation, transfers funds directly from the IRA, and ensures the property is titled in the IRA’s name.
• Checkbook control purchase.  In this arrangement, your self-directed IRA forms a limited liability company (LLC) and owns it. The IRA provides the capital to the LLC, and you typically serve as the manager of that IRA-owned entity. This allows you to write checks directly from the LLC’s bank account to complete investments, rather than submitting each transaction to the custodian for approval. The property must be titled in the name of the IRA-owned LLC.

In both cases, all funds used for related costs, such as closing and down payments, must come from the IRA. 

6. Pay Expenses and Collect Income Through the IRA

After the property is purchased, all financial activity must run through the IRA structure. Ongoing expenses must be paid from the IRA (or from the IRA-owned LLC if using checkbook control), and any income must be returned directly to the IRA.

Expenses typically include:

• Property taxes
• Insurance premiums
• Repairs and maintenance
• Property management fees
• Rental income or sale proceeds

You cannot pay property expenses personally or deposit rental income into a personal account. Keeping funds fully separate is necessary to maintain the IRA’s tax-advantaged status.

7. Stay Compliant and Plan Your Exit

Real estate held inside a self-directed IRA requires ongoing oversight throughout the holding period. You’ll need to ensure that:

• The property continues to meet IRS requirements
• Title remains properly structured
• All income and expenses flow through the IRA

Beyond compliance, it’s important to plan for your long-term strategy. Investors typically pursue one of two approaches:

• Income-focused. Holding the property for recurring rental income
• Appreciation-focused. Selling once asset value targets are met

When the property is sold, the IRA (not you personally) executes the transaction, and the proceeds return to the account.

As retirement approaches, you’ll also need to factor in distribution rules and evaluate how the property fits into your broader withdrawal strategy.

Key Tax and Compliance Points to Remember

Investing in real estate through a self-directed IRA offers flexibility, but it also requires strict adherence to IRS rules. The following compliance principles are especially important to understand:

• No personal use. You and other disqualified persons cannot live in, vacation in, or otherwise personally benefit from the property.
• Avoid prohibited transactions. The IRA must operate as a separate investment entity. Commingling personal funds with IRA funds or providing personal services to the property can jeopardize the account’s tax-advantaged status.
• Use proper financing structures. If leverage is used, it typically must be structured as a non-recourse loan. In some cases, debt-financed income may create unrelated business taxable income (UBTI).
• Maintain proper titling and documentation. The property must be owned by the IRA (or IRA-owned LLC), and records should reflect that structure consistently.

Understanding these guardrails before investing can help reduce avoidable risk and protect the long-term integrity of your retirement account.

Is Real Estate Investing with a Self-directed IRA Right for You?

Using a self-directed IRA to invest in real estate can offer diversification and tax-advantaged growth, but it is not the right fit for every investor. Before moving forward, consider whether the structure aligns with your financial goals, risk tolerance, and level of involvement.

This approach may be a good fit if you:

• Want exposure to tangible assets beyond publicly traded securities
• Are comfortable managing or overseeing real estate investments
• Understand IRS compliance requirements
• Have sufficient liquidity inside the IRA to cover expenses

It may require additional planning if you prefer passive, fully hands-off investments, need short-term liquidity, or are unfamiliar with prohibited transaction rules. 

Real estate inside an IRA involves ongoing oversight and a long-term perspective, so the structure should align with your broader retirement strategy.

FAQs

Can you invest an IRA in real estate?

Yes, but only certain types of IRAs allow it. A self-directed IRA permits direct ownership of real estate, while most standard brokerage IRAs restrict investments to publicly traded securities like stocks, bonds, and mutual funds.

What types of real estate can a self-directed IRA own?

A self-directed IRA can own a wide range of property types, including residential rentals, commercial buildings, raw land, tax liens, private placements, and real estate syndications. The key requirement is that the property must be held strictly for investment purposes.

Can I live in or vacation at a property owned by my IRA?

No. Personal use of the property by you or other disqualified persons is prohibited. This includes living in the home, using it as a vacation property, or allowing certain family members to use it. Violating this rule may result in IRS penalties and potential disqualification of the IRA.

Who are considered disqualified persons?

Disqualified persons generally include you, your spouse, your parents, grandparents, children, grandchildren, and certain related entities. Transactions between your IRA and these parties are prohibited.

How are expenses paid for an IRA-owned property?

All expenses must be paid directly from the IRA (or from the IRA-owned LLC if using checkbook control). This includes taxes, insurance, repairs, and maintenance. You cannot pay expenses personally and reimburse yourself later.

Where does rental income go?

All income generated by the property must flow back into the IRA. Rental checks should be made payable to the IRA or IRA-owned LLC and deposited into the appropriate account.

Can I use financing to buy property inside my self-directed IRA?

Yes, but the loan must typically be non-recourse, meaning the lender’s only collateral is the property itself. You cannot personally guarantee the loan. Debt-financed property may trigger unrelated business taxable income (UBTI), which should be reviewed with a tax professional.