Why You May Want to Consider Using Your IRA to Purchase Property

IRA’s are a great way to save for your retirement, especially if your employer matches your contributions. But most IRA’s give people little control over their investment decisions. Most people get a slate of offerings from their IRA managers, usually limited to “high risk” or “low risk” equities.The common theme is that you must invest your money in either the stock or bond markets. Some might offer a commodity investment options, but many don’t.

The IRA market has been notably volatile since the 2008 financial crisis. Stock index levels have just recently returned to where they were before the financial markets bottomed in the fall of 2008 and spring of 2009. That means, on average, most of us haven’t seen much of a gain in value for three years.

Self-directed IRAs

You may fare well managing your IRA by yourself, meaning you choose what you invest in and for how long. This type of IRA is known as a self-directed IRA and it will allow someone to basically take their retirement funds and invest it in almost whatever they like. For many, that is a scary proposition, as one bad investment could see their entire nest egg wiped out. But for savvy investors, it could offer crucial capital at a time when bank lending is stringent.

It sounds simple, but there are a lot of rules and regulations you need to follow in order to take advantage of this investment opportunity.

First, you need to find a property that is undervalued and in a neighborhood which attracts renters. Freddie Mac and Fannie Mae, the government-backed mortgage depots, may have an answer to that problem. They are currently running a pilot program to sell some of their foreclosed properties to investors who plan on renting them out. The great thing is that many of the properties already have renters, so it eliminates the need for you to find someone to fill the space.

Second, you must find a custodian to manage your IRA. The government doesn’t totally trust you to manage your own retirement account, so they have designated a few custodians to make sure you are doing everything to code. A custodian is similar to the broker dealer that currently manages your IRA (such as Fidelity). But there are only a few custodians that will allow you to invest in real estate. They include firms like IRA Resources, Equity Trust, Guidant Financial Corp, Entrust and a few others. But this service does not come cheap, so expect to pay several times the amount of fees to them that you  dish out to your current IRA manager.

It should also be noted that all of the money used to buy and maintain the property must come from your IRA. That means that you need a lot of money to first buy the property  — and then a lot left over to maintain it. You can get a loan on your IRA, but it will have to be a special non-recourse loan that has some limitations. As for the property itself, it must be a rental- you cannot live or vacation in it. You cannot buy the property from people the IRS considered a “disqualified person,” i.e. a family member. And since an IRA is tax exempt, you won’t be able to claim depreciation on the asset.