One of the most powerful aspects of an IRA is that its structure permits you to grow your investments on a tax-deferred (in the case of traditional IRA) or tax-free (in the case of a Roth IRA) basis. With a long-term investment focus, you have the potential to grow your account balance for decades.
But even if the scope of your account is long-term, that doesn’t mean that the time frame for the individual investments within your self-directed IRA necessarily have to be long term. One potentially lucrative investment type with a relatively short-term outlook is flipping houses. And yes, you can make these types of investments with a self-directed IRA.
What is a Real Estate “Flip?” Some investors may not be familiar with the concept of flipping, so let’s first talk a briefly about what exactly that is. Flipping a piece of real estate refers to the process of buying a home and then quickly putting that property back on the market for sale. Between purchase and sale the investor (the “flipper”) may or may not do renovations or other improvements to boost the resale value. But in many cases the opportunity arises simply because the investor believes the property is being sold for less than its true value.
Using Your IRA For Real Estate Investing. Unfortunately, there is a lot of misinformation in the marketplace, and many retirement savers don’t realize that they can use their IRA funds to engage in flipping houses or other real estate investment activities. Federal law explicitly authorizes the use of IRA funds for these investments – any inability to use an IRA to do so is a limitation that’s imposed by many IRA custodians in order to make their job easier. A custodian such as Quest Trust Company will let you make every type of IRA investment that’s permitted by law.
A Few Words About Leverage. Depending on the balance in your self-directed IRA, you may be able to flip real estate as an investment strategy by using cash for all of your purchase transactions. Doing so would certainly make the process go more quickly, thereby potentially allowing you to engage in more transactions and boost your returns.
But if you choose to use leverage by borrowing money to purchase real estate for flipping, it’s important to understand that you may be incurring a current year tax liability because of that borrowing. Using leverage to make investments within an IRA can generate what’s known as “unrelated business taxable income.” And unlike other types of income you generate with your IRA, unrelated business taxable income is not tax exempt
Finally, if you’re considering flipping houses with your self-directed IRA, make sure to go into each transaction well educated and well prepared. Real estate investing (and flipping in particular) might be fun and exciting, but it’s still investing. So if you’re not already experienced with this type of investment, start with smaller transactions and proceed cautiously until you learn more.