Pointers for Buying Real Estate with a Self-Directed IRA

Self-directed IRAs are a great way to explore the full range of investment options within your retirement accounts. With a custodian such as Quest Trust Company you’ll no longer be limited to stocks, bonds and mutual funds within your IRAs.

One investment opportunity which excites a lot of retirement savers is real estate. Despite the recent ups and downs in most real estate markets, many investors have a high degree of confidence in the long-term investment value of real estate. Here are some pointers for how to be as successful as possible in buying real estate with a self-directed IRA.

Have a Plan. Perhaps the most important piece of advice for buying real estate is to have a plan. Holding real estate, even within a self-directed IRA, raises a host of issues that you don’t have to worry about when you invest in stocks, bonds and the like.

For example, when you hold investment real estate you need to be sure that you’re going to be able to pay for all of the carrying costs associated with the property. These will include annual property taxes, repairs, management fees, and perhaps HOA or monthly maintenance fees if the property is a residential condominium.

Make sure your plan doesn’t include any personal use of the property (or use by any member of your immediate family) before you go through the distribution process when you retire. Personal use of real estate within your self-directed IRA could lead to a “constructive distribution,” which could subject you to substantial penalties and a hefty immediate tax bill.

Be Flexible. Of course, as with any type of investment, it pays to be flexible even if you have a great plan when you first bought the investment. For example, there’s not always a perfect connection between a single-family home’s resale value and what you could charge each month if it’s on the rental market. If your local real estate market undergoes some significant changes, and it becomes a better financial proposition for you to sell the property (rather than continue renting it out) and reinvest the proceeds elsewhere, then it’s important to stay open to that possibility.

Plan Your Exit. When you invest in traditional assets such as stocks or mutual funds, it’s easy to close out your positions when it’s time to do so. You simply submit yourself order to your custodian, and your holdings are sold by the end of the day. When you invest in real estate, particularly when that real estate is a single-family rental property or even in apartment building, you need to do a bit more planning in advance of selling that asset.

For example, sometimes it might be difficult to sell a single-family home if it’s occupied by a renter who still has a year or two left on a long-term lease. Try to anticipate when you’ll want to sell your property, and do everything necessary to facilitate an easy transaction.