Real estate is definitely one of the more lucrative, and sought-after investment types. The reason it’s so sought-after is that the possibility of return on real estate investment is higher than other types. Plus it’s familiar, right? The question though is whether or not it’s right for you, and your IRA.
First thing’s first
You first need an IRA that’s held by the custodian and administrator of your choice. The custodian reports to the IRS on deposits, withdrawals, and year-end balances. Custodians hold your real estate IRA funds like a bank, so that your investments are IRS-compliant; because one of the easiest ways to get your IRA disqualified by the IRS is if it’s found to be in violation of IRS rules. So, to avoid that, choose a custodian wisely.
Speaking of rules, here are some more:
- The IRA owner isn’t allowed to work on the investment themselves. Say you bought a fixer-upper through your IRA, it will need lots of work, right? You’re actually not allowed to do the work yourself, you will need to hire a contractor to take care of that for you.
- All costs associated with the property must come from your IRA, and any income earned from that same property must also funnel back into your IRA.
- You cannot live on the property that’s funded by your real estate IRA. It must be used as an investment property only.
Direct benefits and use
To expound upon what we mean by you’re only allowed to use your new property only as an investment property, and not for personal use, is simple. Since the property is legally owned by your IRA, it cannot be used as a vacation home for you or your family. Period. You also cannot use it as a rental home for your family. So no vacations, and no renting to your own family.
It may not be for you
There are a lot of technical and legal loopholes to jump through when you own real estate. It only gets more complicated when it’s an investment property. And even more so when it’s an investment property through your IRA. For those reasons, a seasoned real estate investor will catch on quickly, while a novice will have not only the real estate biz to study but also the real estate IRA world.
By no means is this suppose to discourage anyone from seeking real estate as an investment, you just have to know what you’re getting yourself into. It may be hard work at times, but the promise of rewards makes it worth it.