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Investing in Real Estate Using Your Retirement Funds

July 26, 2016

Since 1974, Americans have had the ability to use IRA assets to buy investment property. Yet the means to do that -- called a self-directed IRA -- remains one of the least known investment vehicles in the financial marketplace. With properties selling at ridiculously low prices, real estate is a bargain for investors holding cash. If they can put 30% down, IRA investors will find specialty lenders eager to help them leverage their retirement savings with mortgages on rental properties.

 

Keep in mind that homes purchased with IRA funds cannot be used as personal residences. Doing so puts you at risk of the IRS declaring the assets withdrawn and demanding immediate payment of income taxes and penalties on the entire account value. However, purchasing an investment property that can produce annual income of 10% or better is a low-risk strategy for uncertain times -- especially for retirees whose fixed-income investments are paying paltry yields right now.

 

Income from a rental property bought with a self-directed IRA flows back into the retirement account. The IRA holds title to the property and the income it produces can be directed into all manner of investments typically held within an IRA, be it stocks, bonds, mutual funds or money market accounts. On a percentage basis, that income can be two to three times higher than today's fixed-income offerings even after paying expenses such as property taxes and insurance. Meanwhile, the account holder can eventually reap the potential appreciation of the underlying asset (the property that the IRA owns).

 

It’s also a safer means to play the stock market. For those who don't want to abandon potential stock-market returns, a rental property owned in an IRA still affords them the ability to invest in stocks. Rental income funneled into stocks or stock mutual funds today can be buying shares at sharply reduced prices. Directing the proceeds of each monthly rent check into stocks or mutual-fund shares accomplishes the same "dollar-cost averaging" strategy that occurs when employees steer a fixed amount of every paycheck into their 401(k) or 457 account.

 

If you’re into Flipping Houses then this strategy can be extremely lucrative for you. Proceeds from selling an IRA-owned home roll back into the IRA without facing capital-gains taxes. To the contrary, an investor who buys and resells a property within a year with non-retirement funds faces a capital-gains levy. Many foreclosed homes today are "distressed," vandalized by angry departing owners who may have deferred maintenance due to tough times. They often ransack anything and everything not nailed down and many things that are, from lighting fixtures and kitchen appliances to furnaces and central-air conditioners, toilets and bathroom vanities. Such properties -- which can be found at most all price points -- are among the cheapest on the market on a per-square-foot basis because the Federal Housing Administration (FHA) and most private mortgage lenders won't loan on homes deemed "uninhabitable." That drastically reduces the potential buyer pool to just cash buyers and reduces the property values as a result. Even homes needing only cosmetic fixes sell at a discount today because there are countless others available in move-in condition. If an IRA home buyer has enough in the account post-purchase to refit a home's interior, whether it's laying carpet and laminate flooring or upgrading a kitchen or bathroom, going the rehab route can be a rewarding approach.

 

The bottom line with buying properties with IRA Funds is a strategy that can be used by many people that thought that real estate investing was out of their reach.

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