Investing in Real Estate Through Retirement Accounts

[Randy Smith]

After spending a few years investing out of state in long term rentals, I realized that I would have to accumulate up to 100+ houses at the infamous “$100/door” target to completely decrease my dependance on my W-2 income. The path to five doors was an arduous one, and I couldn’t imagine the time, energy, and effort it would take to hit my new target. Like many others, I decided that investing in multi-family would be the best route to get there, and my research showed that the best way to do that would be as a limited partner in a syndication. Unfortunately, I had spent all our capital on buying and renovating our other “passive investments.” So, where would the capital come from to test my new theory?

Introducing Self-Directed IRAs

A self-directed IRA is an individual retirement account that allows you to take advantage of all the same tax benefits of a traditional IRA, but it also allows you to have more control of your funds AND you can invest in alternative investments like real estate and real estate syndications. While there are a few hoops you must jump through to leverage a self-directed IRA, this option opens real estate investing to anyone that already has an IRA or an old 401k from a previous employer.

So How Does It Work?

At a high level, you'll need to transfer your funds from your existing IRA, 401k, or other retirement account to a self-directed IRA custodian. Your funds will then be available to invest in real estate transactions or any other type of alternative investments. I suggest finding a self-directed IRA custodian that will assign a dedicated account manager to handle your account as you will likely want to have someone holding your hand as you do your first few transactions.

It's not the goal of this article to tell you all the details of this type investing, but it's more to inform you that this is an option for you to consider. I would encourage you to research a self-directed IRA custodian and be sure to do your due diligence before moving forward.

By leveraging my funds from a former employer 401k plan, I was able to invest in three different syndicators across multiple markets which gave me the confidence to invest in many more opportunities over the past two years. While I won’t be able to have these funds deposited into my regular checking account until I reach retirement age, I do have more control of the funds, and I get to continue my education and experience in various real estate opportunities I wouldn’t have access to without this strategy.

[Greg Scott]

It should be noted that if you have a traditional self-directed IRA, you may end up paying more tax via this strategy than if you paid the penalty and then invested in real estate. If you invest successfully, UBIT during the investment plus ordinary income taxes when you pull the funds out can result in lower total returns than taking the up-front hit and getting your money out.

A Roth SDIRA is a different animal.