How to Invest in Real Estate With an IRA

It’s tricky – there are many rules and a lot of capital – but investing in real estate through an IRA can be a good way to diversify your investments, especially if you feel like you are currently investing too many stocks.

How real estate investment through an IRA works

First, it will be a pure investment: you and your family cannot live or use the property, although you can rent or lease it to make money. To do this, you will also need a so-called “self-governing IRA” which requires a third-party custodian of the IRA – a financial institution that always monitors your investments in accordance with IRS and government regulations. The custodian is not an advisor, but he will make sure that the documents are up to date. Otherwise, all investment decisions are made only by you (a self-sufficient IRA also allows you to directly invest in cryptocurrencies, precious metals, LLCs and REITs).

Actually what you are doing is holding the property while you have the IRA, as technically the property is owned by the IRA itself. Since you do not own it exactly, you cannot sell the property to yourself when cashing in the IRA, nor can you repair the property yourself, otherwise known as “sweating capital.”

What is the benefit then?

Historically, real estate has had high returns comparable to that of the stock market , and this can be a good way to diversify your portfolio if you’re worried about too much money being tied to stocks. There are also tax benefits, as you can do both a regular IRA (income is deferred from taxes until you are older and ready to retire) or a Roth IRA (your contributions are taxed upfront, but you can keep whatever the IRA earns).

Self-directed IRAs also give you direct control over your investments. It can be bad if you don’t know what you are doing, but this flexibility attracts DIY investors. For this reason, a self-directed IRA is probably best for people who already have some experience in real estate management or investing. For more information on standalone IRA accounts and how to open one, check out this post by Nerdwallet .


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