Five years ago, everyone wanted to know how to buy real estate with IRA money. Now, nobody asks me. It’s no longer an IRA FAQ. But from time to time, it comes up. In case you’re interested, here’s how it works:
1. Find a custodian.
You need to find an IRA custodian that allows you to hold real estate. You must know that most don’t. That’s because it’s cumbersome and expensive. There are also some special problems with owning real estate in your IRA, which we’ll get to in a bit.
Do a search on “real estate IRA custodian” and you’ll find a few custodians. Call a few and ask what they charge to set up the IRA and maintain it. Then open a self-directed IRA.
2. Transfer your assets.
Once you decide on the custodian you’re going to use, they will send you a transfer form. Complete the form and return it. This authorizes the new custodian to move money from your existing IRA to the IRA they just set up for you. You’ll probably have to sell all the holdings before you transfer the money, but that will depend on the new custodian. Ask what they want you to do with regard to your existing assets.
3. Identify the property.
Tell the custodian to buy the property you want and they’ll prepare all the necessary paperwork.
4. Sit back and watch the river flow.
Is it really that easy? Yes and no.
From a technical standpoint, it’s very easy and straightforward. From a practical standpoint, buying the property is easy, but maintaining the real estate is another story.
Remember, real estate is hard to predict. You never know when a tenant won’t pay or your property will require a major repair. When there are unexpected outlays, you can’t use money from outside your IRA. You can only use IRA money to maintain property that you bought with IRA money. That’s the biggest problem with owning real estate within your IRA. What if you decide that you want to do some home construction remodeling? What happens if you need to come up with some extra cash? Think about it before you dive in. Also, do you really want a second job? Real estate can be very demanding.
In addition, your IRA can’t take out a mortgage, so you’ll have to buy the property for all cash. And the tax deductions normally associated with real estate are no good to you if you buy the property in an IRA.
And RMDs are another problem. Your RMD is a fixed amount. You must take that out as a distribution or face a 50% penalty. If the property doesn’t generate cash, where is the money going to come from? If you have other IRAs, you can use those to satisfy the RMD, but if you don’t you’re looking at trouble. Another can of worms is the issue of IRA beneficiary rules and how to comply with them if you pass away. My sense is that such an event would force a sale of the property.
Have you purchased real estate in your IRA? How did it work out? What other pitfalls should we be aware of? If you are interested in saving money for retirement, is real estate the best option in your opinion? Is this a good idea and just a bad time, or is it just a bad idea all around?
photo by Flikr, J Devaun
Ty Frost says
I am considering buying into a partnership LLC new build 36 unit apartment complex in North Dakota. I would be purchasing it in a IRA. The bank is requiring a personal gauarntee. The property would have a loan against it for 70% of the property. I would be one of several investors???
thoughts??
thanks,
Ty
Neal Frankle says
For the reasons stated in the post, I think this is a very risky move. The partnership, the mortgage, the money coming from your IRA – all come together to make me uncomfortable.
Kirt Donaldson says
I want to go to the courthouse steps to buy a piece of property. I understand that I can borrow against my ira as long as I pay it back within 60 days. How many times can I borrow against my ira as long as I pay it back with 50 days. My idea is to buy foreclosed property, fix it up and resell it within 60 days–I know that is tough, but what if a seller lets you do the work during the escrow thereby holding off the 60 days you need the money–of course something would have to be written up with the seller to reimburse you for work you do if something happens and you don’t close. I know this is “outside the box”. Thanks!
Kirt
Neal Frankle says
Kurt, you get an “A” for effort but I think you’re game plan is a bit high the risk level. Have you considered other small business ideas?
Steve says
I am considering buying a lot near the beach, within my IRA. This would sit in the IRA until I sold it (no improvements). This appears to be the simplest way to deal with, reduce and/or eliminate the pittfalls in owning “real estate within an IRA.” That said, are property taxes and insurance needed for the property paid for from within the IRA? Or can it be done outside the IRA? This could kill the idea, if payments for these items come from within the IRA.
Neal Frankle says
My understanding is that if an investment is owned by the IRA, all associated expenses must be paid by the IRA as well. I’d check w/your tax person. But this is the reason why it’s difficult to buy real estate with retirement money.
MJ says
Other bugaboos: you can’t live in or use the property yourself and you can’t manage it yourself. There went my idea of buying an apartment building with my IRA and paying myself to manage it!
It does look like an IRA can be a partner in a RE purchase. The other purchasers need not use their own IRA funds, they can use taxable funds. So, I’ve wondered, what if I (or my LLC) were to be a partner in a property along with my IRA?
Well, there are probably rules against that, but I’ve often thought that the original idea might be useful for RE deals that get a small number of investors together. It could broaden the pool of available investors, and allow folks to use a prudent amount of IRA money to invest in real estate.
Neal@Wealth Pilgrim says
Thanks for those insights. I don’t believe you can joint partner with yourself (IRA plus non-retirement money). That might be “self dealing” but I’m not sure of all the ins and outs. I believe that you could mix an IRA with non-IRA investors as you suggest. Might get messy though.
Evan says
I have ZERO experience with a self directed IRA, but for the RMDs could you take back a piece of the actual property? Quitclaim Deed a piece of the property back?
Neal@Wealth Pilgrim says
I don’t think so Evan. I believe the RMD calls for a cash or cash equivalent distribution.