Invest in Real Estate using your IRA (or 401k)
I am continually amazed how few people know about this. I thought it too.
By default, I thought retirment investing meant: Mutual Funds or other stock products.
Which is fine. If you’re into that sort of thing.
But I like real estate. I find it easier to understand. I like the tangible nature and the illusion of control.
So it turns out you can invest in (almost) anything with your retirement funds. Sure, there are restrictions. You can’t buy the handmade jewelry that your neighbor makes unless this will increase the value of your retirement account.
And you can’t invest in rare coins, which is a restriction I don’t personally find overly burdensome.
But in fact most things you could dream up are things you can rightfully invest in. And that includes real estate.
For people like me, who have always found the world of stocks and bonds to be an overwhelming mystery box of “I-wonder-what-the-world-will-decide-to-do-my-fate,” this can be a real relief.
So then how does this actually work?
It’s pretty straight forward. I have broken into 3 steps that include one Google search.
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STEP 1 Choose your Self-directed intermediary. What is that? It’s just a company that will handle the investing and transfer funds on your behalf. The cost is relatively inexpensive and is usually based on the size of your investment account. Here are some example intermediaries (of which I have no affiliation).
- Advanta
- Equity Trust
- Udirect
For your own research, just Google “Self directed IRA or 401k”
STEP 2. Transfer some, or all, of the retirement funds out of your traditional account and into the self-directed account(s) of your choosing.
Note: While you look for real estate opportunities you can still invest in the adventures of the stock market through your self-directed Intermediary.
STEP 3. Invest in real estate, lend your funds to real estate deals, or select other “alternative” investments.
This is a whole separate and involved topic for another article, but for the sake of illustration:
Let’s say you find out that your daughter’s neighbor wants to sell her house for $190,000.00. You buy the house using retirement funds. You hire someone to fix up the house using retirement funds. The income grows cash flow into your IRA / 401k as the property appreciates. When it is sold one day the proceeds will go into your Retirement Account where at age 59 1/2 you can start taking them out.
But What About….
So what if you don’t have the full $290,000 + Closing Costs + fix-up costs?
You have options there too. You — or really your Retirement account — could partner with a non-disqualified party, such as your friend Torri, to buy the property together.
Alternatively your retirement account could get a loan for a portion of the purchase. And while this would subject you to a tax on a portion of the profits (called UBIT), you might find it’s still worth doing.
And those are the essentials.
Happy (Real Estate) Investing!
