Many people assume IRA portfolios consist exclusively of stocks, bonds and comparable assets. They may not know they can diversify their IRA by investing in real estate.
Investing in real estate with your IRA isn’t for everyone, but many people find it a wise investment. If you’re interested in investing in and rehabbing one or more properties as part of your IRA, follow these tips.
Buying a Property
One interesting feature of IRA real estate law is that you can purchase your real estate investment without only using funds drawn from your IRA. You can even use undivided interest to make the purchase or partner with other investors. You may also be able to find a mortgage for a property you plan to add to your IRA, but the mortgage must be nonrecourse to your IRA
Not all properties can be purchased as part of your IRA. First, you can’t purchase a property from any “disqualified individual” — which includes most members of your family, your IRA’s manager and yourself. So if you own your own home, selling it to your IRA isn’t an option.
Likewise, you can’t personally “indirectly benefit” from your IRA-owned property. For instance, you can’t buy yourself a vacation home as IRA-owned property or an office building where you or your business works from.
Renting Your Property Out
If you’ve invested in real estate before, you may know that it’s a bad idea to buy a property and let it sit. It may appreciate in value, but if you’re not using it as a rental unit, that’s a lost revenue opportunity.
Understand that it is prohibited for the IRA owner to handle the monies of the IRA. There are property management companies that can help you in that regard. For a negotiated fee they’ll handle rent, screen potential renters, communicate with tenants, perform maintenance and do the other day-to-day work of handling your property. It is up to you to decide how much you want to be involved and let the management company do the rest.
You can’t personally pay your real property management company out of your personal assets. Any money you pay them (or that you pay for tenant screening, maintenance and other property management, if you handle it yourself) needs to come out of your IRA. All income and expenses for your IRA property must be deposited and debited from the IRA.
Improving Your Investment
It’s not wise to keep your property as it is when you buy it, either. Keeping your property updated and current is a great way to maximize rents and income. If you need to renovate the property whether you’re improving a house or an office building performing minor or major renovations, these too, need to be paid for out of your IRA. Because of this, it may be best to wait until your IRA has reached a certain size, or you’re making a healthy amount from renting out this or another property, before you start thinking seriously about renovating a rental property.
Wisely chosen real estate can be a good way to diversify your IRA. But it’s not for everyone, because it involves a significant infusion of money early on in the process, and all expenses after the initial purchase need to be paid for out of your IRA. But if you’re ready to lay down the initial money and have a property management company you trust, it can be a remarkably lucrative investment.
Patrick Rogers is the Principal Property Manager for Asurent Property Management in Eugene Oregon.