Investing in Rental Property

Using a Self Directed IRA for Real Estate Investment

IRA Real Estate Investing

You can use money from your self directed IRA (or someone else's) for real estate investment. Self-directed IRA investment from someone else's IRA is often called private money lending..



Most people that have an IRA or old 401k invest their money in either low yielding money market funds, bonds or stocks. Few people know of something called a Self-Directed IRA from which you can invest in a wide variety of instruments such as mortgages, real estate, tax liens and franchises in addition to traditional stocks. Every financial adviser is telling you to diversify your portfolio but to them, it is usually limited to the realm of stocks and bonds.

With a Self Directed IRA investment you are prohibited from buying real estate that you live in or collectibles, but there are many ways to invest that can be quite profitable. My brother took an old 401k when he left his job and put it into a real estate investment IRA and has been investing in ocean front property. Since one of the mega-trends in real estate is the growth in the value of ocean front, he has made a small fortune, all accumulating in a Roth IRA which he will not have to pay taxes on.

Another method of making money with IRA real estate investing is to become a bank. Everyone who has paid interest in a credit card or other loan and then looked at the measly interest rate in their savings account knows that banks can make a lot of money. Many real estate investors are looking for funds and are willing to pay a higher interest rate than normal - 10%, 12% or more. This is a much more secure use of IRA funds then investing in peer to peer loans.

When I have used private money lenders, I pay 10% interest with the loan secured by a Deed, Promissory Note, Title Insurance and Hazard Insurance. Loans will never exceed 75% of the after-repaired value of the house, so even should a lender have to foreclose, he or she should be able to recover their equity. Choosing an established investor should reduce that risk. This creates a relatively safe investment compared to stocks. A good place to find real estate investors is a local Real Estate Investment Club which usually has meetings advertised in the real estate section of the paper every month.

There are many companies that will convert your existing IRA or an old 401K into a self directed IRA:

  • Equity Trust
  • Pensco - very highly recommended to me by others
  • Guidant - Expensive but seems like the most flexible
  • Sterling

I've put my IRA into Equity Trust. You can't lend money to yourself, but you can purchase real estate using the IRA. Should you decide to do this, investigate it carefully and do your due diligence. You cannot loan money to your business. However, you can purchase a portion of a piece of real estate as long as you adhere to something called "undivided interest".

So if I buy a property for $20K using $10k from my IRA I have 50% interest. When I sell the property 50% of the sale price must go back to the IRA.

Real estate investment in an IRA is an excellent way to buy real estate with 100% financing in investment property. Use a self directed IRA for real estate.



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