Real Estate is a Popular Investment Choice
Many investors feel comfortable investing retirement funds in real estate. Many have owned land or a home and are familiar with details of the purchase transaction. Retirement savings plans have always been allowed to own real estate, but few custodians offered the service.
Your CamaPlan self-directed account can invest in any type of real estate, including single- and multi-family homes, apartment buildings, co-ops, condominiums, commercial property, and unimproved land. The investment can seek to generate monthly income or be held for appreciation. There are no limits on how long your account owns the property; it can be flipped immediately to lock in a quick profit or held long term as it appreciates in value. You may improve or rehabilitate property to increase its value.
Quick View Advantages
Benefits from investing in real estate through your CamaPlan account include:
- Compound interest – The power of compound interest is multiplied in tax-advantage accounts, such as IRAs.
- Reduction of taxable income – Income or earnings from the investment flow back to the tax-deferred account.
- Asset protection – Cama self-directed accounts and assets owned by an account are protected by statute from seizure by most creditors.
- Estate planning – Benefit your family’s financial future with estate planning that leaves valuable IRA assets to loved ones without the burden of taxes.
Additional reading on Investment Options is available in The Resource Center.
Your IRA may invest in:
- Single-family residences and vacation homes
- Condominiums and duplexes
- Commercial properties (retail/office/warehouse)
- International properties
Real Estate Partnerships
Your account can purchase property in partnership with other parties, including yourself (using funds outside your retirement accounts), another person (including disqualified persons), and/or another person’s retirement accounts. In such an arrangement, your account would only purchase and hold title to that portion or percentage of the property paid for or financed. The other entities would hold title to the remaining portion. All profits and expenses of the property must be allocated to the parties according to the ownership percentages. If you obtain a personal loan to partner with your account, that loan cannot be secured by the property.
The IRS does not specify the type of private placements that can be made by tax-advantaged savings accounts; it only specifies investments you cannot make. Refer to IRS rules and regulations for complete information on prohibited transactions, including its definition of disqualified persons. The structure and form of your private placement can also vary depending on the type of Cama account you open (see Plan Types). Here are general limitations regarding real estate investments:
- Your account may not purchase property from, or sell or rent property to, yourself or any disqualified person.
- You may not use the purchased property for personal benefit or the benefit of a disqualified person (for examples, as an office or vacation home).
- Property expenses, including taxes, insurance, and any repairs made, must be paid from funds in your account or income generated by the property.
- “Sweat equity” (personal labor to improve the property) is also not allowed; repairs must be performed by a non-disqualified person and paid for from funds in the IRA.
Finance the Purchase
While paying 100% of the purchase price and transaction costs with funds from your CamaPlan account is the easiest way to purchase real estate, the IRS does allow the purchase to be financed. Here are the guidelines:
Any financing received must be extended as a non-recourse loan – i.e., the lender must agree to seek no other assets or monies from the Cama account in the event of default except title to the purchased property. The financed debt, like other property expenses, must be paid with funds from the account or income generated by the property. The loan should also meet these requirements:
- The amount may not exceed 70% of the property’s value.
- The term cannot exceed 30 years.
- Adjustable rate mortgages are allowed.
- The property must have a minimum Income/Expense Ratio of +1.25.
- The account must contain three to six months of cash reserves equal to finance payments and anticipated expenses.
To execute the financed property purchase, you must provide the following transaction documentation:
- A completed loan application
- The sales and purchase contracts
- The account’s financial statement
- A certified appraisal of the property
- A 12-month income statement for the property
Financed purchases are generally not allowed for:
- Mobile Homes
- Time Shares/Condo Hotels
- Certain Restaurants
- Residences w/5+ acres