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The Best IRA Investment Options for Self-Directed IRAs

The Best IRA Investment Options for Self-Directed IRAs

6 min read
Dave Van Horn

Dave Van Horn is a veteran real estate investor and CEO of PPR Note Co., a $15...

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Have you have been stressed about finding good strategies for your retirement plan? Well, stress no longer.

In this article, we have compiled several types of detailed self-directed IRAs in real estate you’ll want to take advantage of. By investing in an IRA, you’ll be safeguarding your financial future for you and your family.

First, let’s define and look at types of IRAs.

What is an IRA?

“IRA” stands for individual retirement account, which is an account that offers tax advantages for individuals looking to invest income for their retirement.

There are several types of IRA investment options such as:

  • Traditional IRAs
  • Roth IRAs
  • SEP IRAs
  • SIMPLE IRAs

An individual’s IRA investment ranges from exchange-traded funds (ETFs) to stocks to bonds and to mutual funds.

However, the best IRA investment option is called a self-directed IRA. Let’s discuss what a self-directed IRA investment option is and why you should consider this investment.

Why invest in a self-directed IRA?

A self-directed IRA can be either a Roth IRA or a Traditional IRA, and it is considered a strong choice because it includes a broad selection of investment options, such as real estate, commodities, and private placements. Investors in self-directed IRAs have the freedom and flexibility to decide their own investment objectives and make all the decisions for themselves.

Self-directed IRAs require a qualified custodian to process transactions, hold the assets and keep records for the Internal Revenue Service. The types of assets that individuals can invest in vary from custodian to custodian, in addition to being governed by the IRS, so it’s important to understand what you want as an investor before setting up a self-directed IRA and in choosing a qualified trustee.

While one or more fees associated with self-directed IRAs may be slightly higher than other investments, being able to invest your money in real estate and other creative outlets far outweighs the minimal costs associated with this type of account.

Now, let’s dive deeper into specific self-directed IRA options in real estate.


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IRA investment options in real estate

Here is a short but detailed list of some of the best self-directed IRA investment options in real estate:

1. Business equity

Owning a business in your IRA is a great way to build your net worth. Although you may need to pay UBIT (unrelated business income tax), it still allows you to put more money into the qualified plan.

Remember though, that you can’t “self-deal” in your IRA, so the business your IRA owns needs to be separate from you and prohibited family members.

Additionally, your personal involvement in the business needs to be minimal. A good business to own in your IRA might be an out-of-state franchise—or, in the real estate world, a business like a title company that you don’t personally use for your transactions.

2. Performing notes

It honestly doesn’t get much easier than using performing notes as the vehicle for your investment. The paperwork is quick and simple, there’s no transfer tax (frequently there is no income tax, especially in a Roth IRA) and it can be done with small amounts of money.

Investing in performing notes is passive, especially if you hire a licensed mortgage servicer to do all the accounting and management for you. For example, utilizing a licensed servicer makes investing in a secured residential mortgage backed by hard real estate much easier.

Hiring a licensed mortgage servicer for your note is similar to hiring a property manager for your rental property, except it can be more affordable and scalable, because you don’t need to deal with physical properties. The servicer helps you stay out of trouble by maintaining compliance with federal regulations and keeping your IRA account safe; you don’t want to become a disqualified retirement account entity because you were deemed too active in your note management or collections role.

This is the type of portfolio investment you really don’t want to miss out on.

3. Private lending or hard money

Another investment option is to lend money out of your IRA. To stay in the real estate realm, your IRA money can step into the hard money role and fund rehabbers on acquisitions and repair costs. Thinking outside of real estate, there are many local business owners with operations who can use more capital for equipment, inventory or even operating expenses who would be interested in a loan from your IRA. The key, of course, is to make sure your IRA is covered in the event of default.

Private money is great way to obtain funding for your real estate deals, too. It pays to become well-versed in IRA account investing, so you can teach others how they can invest in real estate with you. By demonstrating the advantages of IRA investing, and after others realize all the options self-directed IRA accounts allow, you’ll soon have more money than deals.

Believe it or not, lending private money to others is a great way to get others to lend money to you.

Some people struggle with how to reinvest their returns but remember that you can combine IRA accounts or combine them with non-IRA money to make larger investments. Just be sure to title the assets in the correct proportions.


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Are you ready to invest?

One of the most frequently asked questions in the BiggerPockets forums is “How can I start investing in real estate with no money and bad credit?” The answer? You shouldn’t. You need to fix your situation and invest from a position of financial strength.


4. Shares of an LLC

There are many opportunities to passively invest in fund offerings, like purchasing shares of LLCs or real estate investment trusts (REITs). This is true “mailbox” money, as you are not actively involved in a business’s day-to-day operations (i.e., you have no liability), and yet you still benefit from the business’s success.

Think of it this way: Instead of owning a business (like in No. 1 above), your IRA becomes a fractional owner of a business or entity. If you go this route, all the rights and responsibilities of ownership should be spelled out in the operating agreement, so have your attorney review it.

The point here is to buy an interest in a business that spins off cash and/or is likely to increase in value, so that your IRA benefits from the upside when the shares are sold.

5. Options

Options, particularly lease options, appeal to most investors because they require very little capital, yet the earnings can still build tax-free in your Roth IRA.

The main point of options is that your IRA can buy the right (i.e., the “option”) to do certain things, like purchase real estate for what is usually a fairly small amount of money. That option may gain in value when another buyer steps in and wants to buy the property. It’s similar to a lien that has to be paid off before a buyer can acquire the property from you.

You can also put an option on a property titled in your IRA, and then sell the option to a rehabber who pays a premium to your IRA for the right to buy it, rehab it and either keep it as a long-term buy and hold or sell it retail.

Why would you give away your good deal? Because that person might return the favor to you or another party in your circle of rehab friends, allowing you to build your retirement accounts together through the use of options.

6. Wholesale and flip real estate

When purchasing property wholesale and selling to a retail buyer, or even to another investor, you can make a nice spread while playing a more passive role in the deal.

This is much more favorable to do within your IRA, because it’s highly taxed as a short-term capital gain outside of a qualified account. The key here is structuring the deal so that the IRA’s ownership is truly independent of your personal actions.

Maybe a “financial friend” sells your IRA a fixer-upper house for $50K, and then the IRA immediately resells the house to a rehabber for $60K. Think about ways your IRA can be used for deals like this, and you’ll soon realize that the possibilities are unlimited.

Now that we’ve discussed some of the self-directed real estate investment options in detail, let’s take a look at a few extra things to keep in mind when choosing investments for your IRA.

Choosing investments for your IRA

The investments mentioned above usually come with less management headaches and aggravation than investments like buy and hold real estate, for example, which often require more work to own inside one’s IRA.

As an example, with buy and hold property, in most cases (checkbook IRAs aside), it’s your IRA custodian who has to issue checks to pay contractors for repairs, pay municipalities for taxes due and so on. And if you have any experience with typical custodians, you know that even seemingly simple requests often involve lots of paperwork and lots of time monitoring the custodian.

WARNING: If a prohibited transaction occurs, the IRS could disqualify your IRA, essentially changing its tax-exempt status and making it a nonexempt trust. You would then be taxed on the entirety of your account. For example, even if you only invested $10,000 into the deal, but your account was worth $1,000,000, your whole account would be taxed. Ouch. To avoid penalties, be sure to keep up to date with the IRS rules and regulations.

Where to find companies that offer self-directed IRAs

Fortunately for investors, there is a long list of companies that provide experienced custodians and administrators for your self-directed IRA investment options.

Some of the best companies include:

However, if you would like an all-encompassing list of companies that include the experts and advisors that you need for your self-directed IRAs, check out our BiggerPockets Ultimate List section here.

To conclude, several options exist for your IRA investment accounts: Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. However, self-directed IRAs (in Roth and Traditional) are the safest option because of the flexibility to make your own decisions about investments for your retirement.