Selecting Your First Real Estate Investment For Your Self-Directed IRA

Estimated reading time: 3 minutes(Last Updated On: August 12, 2019)

Let’s say that like many individuals who are setting up their first self-directed IRA, perhaps drawn to the offerings of custodians such as Quest Trust Company because of the investment flexibility that such an account gives, you’re interested in using your new account to invest in real estate.

What are the next steps? How do you go about choosing your first real estate investment for your self-directed IRA?
What’s Your Prior Experience? When it comes to any new investment, there’s always some degree of learning as you go. But if you have very little or no experience with owning or managing real estate, then you may want to consider a more straightforward property for your first self-directed IRA investment.

What’s Your Investment Budget? Another key consideration is going to be the size of the investment budget for your first property. The more money you have available, the more options you’ll have.

As you formulate your budget, be sure to take into account the fact that any expenses for maintaining the property you buy must also come from within your self-directed IRA. This might be new contributions you are able to make each tax year, but these are subject to the annual contribution limits. Plan to either have your real estate generate enough income to pay for these expenses, or to incorporate other assets into your account in order to cover the real estate carrying costs.

What’s Your Current Portfolio Composition? Regardless of your preferred investment type, you always need to take care to avoid having too much of your portfolio committed to a single asset class. If you already have exposure to real estate in your portfolio (perhaps through banking stocks or REITs), then you want to factor that into your new investment considerations.

What’s the Purpose of the Real Estate Investment? Are you considering this real estate investment solely for potential gains, or do you have other goals in mind? For example, some people use their self-directed IRAs to purchase vacation or other properties that they intend to use themselves once they reach retirement age.

As you consider these types of investments, remember that the IRS regulations prohibiting self-dealing, meaning that you cannot use (nor can anyone in your family use) the property you buy until you take a distribution of it from your account during retirement (or face significant penalties if you take that distribution prior to retirement).

Start Small. Many first-time investors find that the best way to become more familiar with investing in real estate is to start small. This might be a single-family home, or even a condominium. Having a small investment in real estate can give you the opportunity to learn more first-hand, without over-committing your retirement portfolio to this type of asset.

Even though real estate is a fairly unique investment asset, it’s still subject to traditional financial analysis. Make sure you familiarize yourself with the local and broader real estate environment before making your first investment with your self-directed IRA.

8 thoughts on “Selecting Your First Real Estate Investment For Your Self-Directed IRA

  1. I would like to have my first real estate investment . My biggest problem is where to find a better deal? Any resources ?

    1. Anita, we cannot help you with specific investing advice. But we can certainly help you set up your retirement account so you can invest in real estate from your IRA. Contact a Quest Trust Company specialist for more information: 855-FUN-IRAS (855-386-4727).

  2. If I buy real estate to flip, do I need to pull the amount for repairs or upgrades out as part of the purchase price, or pull money out as needed?

    1. Kim, Your question has been noted and forwarded to the executive staff at Quest Trust Company, Inc. We will get back to you shortly with an answer from one of our certified IRA specialists. You can also reach us directly at 855-FUN-IRAS (855-386-4727).

  3. Can you please explain what it means to ‘take a distribution of it from your account during retirement’ from the paragraph below. We are thinking about purchasing a vacation property for investment, but would also like to use it once in a while for family vacations if it is not being rented that week. Could we do that without penalty.

    1. Judy, you should talk to a Quest Trust Company specialist about this specific issue: 855-FUN-IRAS (855-386-4727). Under the current regulations you would not be able to purchase the investment property as part of your IRA portfolio if you also intend to use it personally – even if just occasionally. A Quest Trust Company specialist can help you more with this and ensure that whatever you do is fully within the regulations so you don’t risk your future.

  4. I am thinking of buying vacant land for a real estate investment in the hope that it may increase in value and possibly make money from selling the timber on it. Is this something I can do using money in my IRA?

    1. Dennis, you would want to talk to an IRA specialist just to confirm you are setting it up correctly, but this sounds like something you could do. The earnings from your lumber would have to go back in to the IRA though. You would not be able to benefit directly while it’s in your self-directed IRA. But definitely discuss with one of our specialists and they will make sure you are set up correctly: 855-FUN-IRAS (855-386-4727).

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