3 Ways to Invest in Real Estate with IRA/401k Funds

There are several ways to invest your IRA in real estate. Your IRA can hold direct title, create a partnership, loan money or invest in a company that owns real estate. Here are some details explanations on the most common three strategies.

Hold direct title to real estate

The most common approach to owning real estate with an IRA is to purchase it directly.

The process by which an IRA acquires real estate is relatively straightforward: a real estate contract is written between the IRA (Custodian FBO ‘Client Name’ IRA) and the seller. Funds are then sent to closing for the purchase and the IRA takes title to the property directly.

An IRA is constructed with built-in liability protection so you will be protected from creditors in the case of bankruptcy. Originally, only 401(k) plans were protected if the holder filed for bankruptcy, but recent legislation protects IRAs from being pillaged by creditors should your personal finances run out.

Another benefit of purchasing directly is that there is no need for an LLC or a third-party to serve as the vehicle through which to operate your IRA’s property. Your IRA will be the sole owner of the property, which means all paperwork must be in its name, not yours, and all expenses, bills and revenue must be in the IRA’s name.

Lastly, you’ll be able to easily manage the allocation of funds in your IRA since earnest money and closing funds are sent directly from the IRA cash balance. There are no hoops to jump through or partnerships to make; the IRA owns the property with an outright purchase.

Tenants-in-Common. This is the same structure as holding title to real estate, except you bring in partners to share the costs.

The contract that will be written for a tenants-in-common agreement lists your IRA as a partial owner in an undivided interest. Your partners will be listed as the co-owners. Fortunately, you can partner your IRA with another IRA, individual or entity, including disqualified persons. However, all expenses and revenue must be split according to the partnership agreements through the life of the contract.

You still will not have to create entities or an LLC to purchase the property, even though there are multiple partners. This greatly reduces paperwork and liability.

Loan money to a borrower and use real estate as collateral

Your IRA can invest in real estate without directly owning the property. By becoming a mortgage lender, of sorts, you can benefit from a good investment without holding title to the property.

Your IRA essentially becomes a bank and lends money to a non-disqualified person. You create the terms and conditions of your loan, so that you can ensure the best investment for your individual needs. This process includes deciding interest and total funding.

Your loan to the borrower can also be secured or unsecured, it’s up to you. If you choose a secured loan, you can secure it with a title to real estate or other assets if you so choose.

Invest in an entity that owns real estate

This option removes you and your IRA from the potential hassles of owning property. By investing in an entity that owns real estate, only your funds will be required and you won’t have to worry about finding tenants, maintaining the property or properties or buying and selling the property or properties.

The entity that you invest your IRA in must be arms-length from the control or majority ownership of disqualified persons. That is, you can’t invest your IRA in an entity that you own. This would constitute self-dealing.

Investing your IRA in such an entity may also subject it to Unrelated Business Income Tax (UBIT). Any income generated by the entity that is distributed to your IRA on a pre-tax basis may incur a tax. Review my other blogs for more UBIT information.