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?