What Self-Directed IRA Real Estate Investing Can Do

The value of assets held by self-directed IRAs has risen sharply in the recent past, as investors have become increasingly drawn to alternative investing options.Self-Directed IRAs

While most retirement accounts only provide you with the ability to purchase paper securities, such as stocks and bonds, using a self-directed retirement account will grant you the ability to buy a wide range of assets - including precious metals bullion, interests in LLCs, private placements of stock, energy interests and also real estate - which offers many opportunities.

Flight to Real Estate

The real estate markets drawing significant attention right now are located in California, Florida, Arizona, Nevada and Michigan, according to Bloomberg. Municipalities in most of these states experienced substantial housing price appreciation during the real estate bubble as a result of speculative buyers - and then suffered a crash afterwards.

Many individuals who are now selling homes bit off more than they could chew when the real estate market was hot, the media outlet reports. They are now renting in the same neighborhood where they bought a property or properties. A market with these dynamics will benefit from cheap housing prices and a rental market that experiences little fluctuation.

Tax Caveats

You can enjoy substantial tax benefits from the use of a self-directed IRA, but failure to use one of these self-directed, tax-advantaged savings accounts in the right way can result in harsh penalties from the IRS.

One major problem you need to avoid if you own real estate with a self-directed IRA is self-dealing, meaning that you must avoid renting the property owned by the IRA to yourself or your immediate family. If you do so, you could end up with a penalty equal to 10 percent of the account's value.

The funds contained in the IRA will need to be used for expenses related to property taxes, repairs and management. Therefore, you can either hold a cushion of capital to pay for these expenses or use the amount that you contribute annually.

Financing  

Other challenges you will need to overcome if you want to use a self-directed IRA to purchase property involve restrictions related to financing. If you want to obtain a loan to pay for real estate held inside one of these accounts, you will need to obtain a non-recourse loan.

A non-recourse loan is a form of credit where the lender's only recourse is to seize the property financed with the loan. These are frequently difficult to obtain, and often have high interest rates.  Also, you will be liable to pay taxes on any income generated by the fraction of the property that is not owned already by the IRA.

All-Cash Deals

As a result of these financing constraints, the majority of purchases of real estate by self-directed IRAs consist of all-cash transactions, Bloomberg reports. Since investors using these self-directed, tax-advantaged savings accounts do not usually have access to leverage, they frequently end up with a few properties.

Experts state that individuals in this situation consider multi-family real estate instead of single-family homes. Las Vegas realtor Kirby Scofield, of Cosmopolitan Real Estate, has been selling these multifamily properties at a cost between $20,000 to $30,000 per apartment, and they pay yields (after expenses) of between 12 percent and 25 percent annually, the news source reports.