Real estate investors, including individuals who are using their self-directed IRAs to invest in real estate, have many different choices available to them. Not only can they invest in different types of properties (including residential, commercial, and industrial), but they can also make their investments through different investing channels. For example, most investors will choose to buy their properties through a fully negotiated, arms-length transaction with the property owner.
But there are also opportunities to profit from real estate that has gone through, or is currently in, the foreclosure process. Because buying foreclosed real estate is conceptually different from many other properties, here are some factors for you to consider if you’re interested in making these investments with your self-directed IRA.
How Well Do You Understand the Foreclosure Process? Before you begin using your self-directed IRA to invest in foreclosed real estate, it’s important to be sure that you understand the foreclosure process completely. Foreclosures are a matter of state law, so you need to follow the process that applies in your state (or the state in which the property is located),,,. Particular issues to be on the lookout for include any residual rights that the debtor/prior property owner may have throughout the foreclosure process.
It’s also essential to understand any timing issues that may exist as part of the purchase process. Buying foreclosed properties often requires that certain waiting periods be met, and you need to be comfortable that the timeframe of the transaction process is consistent with your investing goals.
Consider Professional Help. You’ll likely face your biggest challenges when going through the foreclosure purchase process the very first time. If you’ve never bought a foreclosed property before, consider enlisting the assistance of a real estate agent or other professional who can walk you through the process. As you begin purchasing foreclosed properties on a more regular basis, you’ll be able to handle more of the process on your own.
How Do You Plan to Profit? You may also find that the best way to achieve the greatest investment returns in real estate foreclosures is to have a plan for each property before you buy. Depending on the property you’re interested in, you might have a goal of renting the property as-is, renovating it for rental at a higher rate, or renovating it and then trying to sell it at a higher price.
In some cases the best approach may even be to knock the house down and build a new one, thereby leveraging the underlying value of the land to the greatest extent possible. Even though your plan may change after you buy a particular property, it’s still advisable to have a plan going into the purchase.
Depending on the size of your self-directed IRA and the purchase price of the property, you may be able to pay cash for it. If not, you’ll need to finance the purchase, and understand all the implications that come from borrowing money for this purpose. Contact Quest Trust Company with any questions you may have about the process.
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