What is your IRA Doing?
As you know, most people get a job and invest money into a 401k and then eventually roll it over into an IRA when they leave that job. The IRA continues to sit in the stock market and goes up and down with the market.
The stock market can crash overnight and erase 10%, 20% and 30% gains in a matter of days. Typically these gains take years to accrue. For some its exciting and they ride out the volatility. For others, it’s an emotional roller coaster especially for those nearing retirement. There is a way for you to at least diversify…
Before we dive into the good stuff, remember, we are not financial advisors and by no means should this guide be meant to act as financial, tax, or legal advice. It’s for informational purposes only. Consult your own professional advisors before you make any financial choices like this.
Self-Directed IRAs for Real Estate
There’s something called a Self-Directed IRA. They’ve been around for a while, and in the past several years lots of people have realized that their IRAs are not performing as they should and are too volatile. In some cases, they’re even losing money! These people (maybe this is you) have started to look for other ways to earn better returns with that same IRA and minimize their risk. With this IRA you can invest in real estate with your IRA!
Here is an excellent write up from Investopedia on Self Directed IRAs and how you can invest in real estate with your IRA.
What is a Self Directed IRA?
A self-directed IRA is simple. It’s a retirement account that has the same tax benefits as a normal IRA. However, you have more flexibility in deciding what you want your IRA to be invested in. A lot of people choose to invest in real estate with their IRA, but it’s not limited to only real estate.
What can you invest in?
- Real estate (commercial, income generating rental property, rehabs, etc.)
- Promissory Notes secured by mortgages (i.e. – private lending)
- Tax lien certificates
- Limited partnerships
- LLC’s
- Sub-C corporations
- Real estate options
- Some types of precious metals
- Stocks
Are There Restrictions?
Yes, definitely, and you should be aware of them so that you don’t violate the tax rules . There are restrictions on the types of transactions you can do, who you can partner with (family restrictions) and the types of assets you can hold. Your IRA custodian can explain it to you in better detail when you open up or transfer your IRA with them.
Self-Directed IRA Custodians
The US Government created the SD-IRA loophole to help investors take more control over their investments while at the same time still getting the tax benefits. But, at the same time the IRS don’t want people setting up these SD-IRAs and just doing whatever they want.
So there is a barrier that they have to have in place and thats the custodian. The custodian is usually the Self-Directed IRA company who you have your IRA with. They act as the “go between” when you’re going to make an investment. Many custodians have guidelines on what you can invest in, they make sure your investment is properly following the rules and etc.
You should do your homework and find the custodian that’s right for you.
We’ve done business with and continue to do business with a local IRA Custodian located in Houston, TX. If you have any questions about them, feel free to contact us or visit their website. If you’re in Houston, DFW, San Antonio or Austin area; you can attend some of their live events.
- Quest Trust Company – https://www.questtrustcompany.com/
Here are a few more IRA Custodians. We have not worked with them before and cannot positively or negatively endorse them.
- Equity Trust – http://www.trustetc.com/
- Entrust – http://www.theentrustgroup.com/
Do some research to find the right fit for you. Some have more expensive fees than others and some give more flexibility than others.
What To Ask A Self-Directed IRA Company Before You Work With Them
Before you sign on with a SD-IRA company, ask them a few key questions.
- What are your fees? – Fees can vary wildly. Some charge an annual fee based on the value of the account, some charge an annual fee, some charge large setup fees, etc. Find out what works for you. But, the idea is that by being able to invest in real estate with your IRA… you’ll more than make up for the fees you’re paying with your higher returns.
- What’s the process for approving an investment? – Some companies can take up to 30 days+ to fund an investment after you send it in for approval. Some SD-IRA’s give you what’s called “true checkbook control”, where you actually get a checkbook where you can write checks from your IRA account… which gives you immediate access to the funds (i.e. – to close a deal quickly). Checkbook control usually is a tad more expensive to set up than an IRA account that requires all investments to go through the sometimes lengthy custodian approval process, but again… find out what’s best for you.
- Are there any restrictions on what I can invest in? I want to invest in real estate and make private loans. – Some SD-IRAs with larger more traditional companies like Schwab and SmithBarney put restrictions on what your account can invest in. Some don’t allow real estate… while others do. Just ask.
- Is my retirement account eligible to “roll over” into a SD-IRA? – Not all retirement accounts can be rolled over into a self-directed IRA. Most IRAs can be… and even some 401(k)s can be. Just ask your financial advisor and ask the representative at the SD-IRA company you’re working with.
- How long will it take for my account to be up and running and have funds available for investment? – Some people wait way too long to get this process rolling. If you know you want to use your IRA to invest in real estate… get the ball rolling on getting it rolled over into a SD-IRA account asap. Some companies may take weeks or even over a month to have your account setup complete and ready to invest. So, don’t wait until you’ve found a great real estate deal to get started… get started today so your funds are ready to invest when you need them.
Getting Off The Sidelines And Getting Your Money Working For You
If you think you may want to invest in real estate with your IRA, then consider investing a portion of your retirement in things you know (rather than the unpredictable stock market) and give it a try! Take some time to educate yourself on the pros and cons of a SD-IRA (the websites above are a great place to start).
If you have any questions on how you can work with us as an investor, connect with us through our contact form, call anytime at: (713) 322-6645 or visit the Investors Page.