As you may know, real estate is at a 30 year low right now in many markets. Recently all over Wall Street Journal, New York Times, and countless other publications have been stories about big Wall Street companies jumping in and buying real estate rather than stock because they know they can get a better return. So, why are most Americans still trusting their retirements, IRAs, 401ks with the stock market? The answer is, they don’t know any better. While most people understand that real estate is an investment, many take advantage of qualified retirement accounts to purchase real estate as an appreciating or revenue-generating instrument like IRAs. So, it’s imperative to understand the tax implications, legal ramifications, and various other intricacies of purchasing Philadelphia real estate within your IRA. Before we dive into the good stuff, remember, we are not financial advisors (we’re qualified buyers), and by no means should this guide be meant to act as financial, tax, or legal advice. It’s for informational purposes only. Consult your professional advisors before you make any financial choices like this. (Learn how to acquire investment properties in Philadelphia by redirecting your IRA.) “We’re Buying Property 215, local qualified buyers who specialize in investment properties in Philadelphia.”
The Self-Directed IRA for Real Estate
If you don’t have a self-directed type IRA, you’ll need to connect with your trusted financial advisor to find a reputable and low fee self-directed IRA. Or, connect with us, and we can direct you to some excellent self-directed IRA companies we’ve worked with in the past.
There’s something called a Self-Directed IRA. They’ve been around for a while, and in the past several years, many people have realized that their IRAs aren’t earning them a darn thing (sometimes even losing money). So, those people (maybe this is you) have started to look for other ways to earn better returns with that same IRA.
Enter the “self-directed IRA.”
The first step for purchasing investment properties in Philadelphia within your IRA is to open a “self-directed” IRA. You can do this by visiting a qualified financial advisor or other trusted fiduciary to act as the IRA custodian. A fee-only financial advisor can help you set up this account with minimal hassle. In contrast, a commission-based financial advisor may attempt to steer you clear of purchasing tangible assets within your IRA (they won’t earn much on the investment).
A self-directed IRA is simple. It’s a retirement account with the same tax benefits as a regular IRA; but, you have more flexibility in deciding what you want your IRA to be invested in.
You can invest in…
- Real estate (commercial, income-generating rental property, rehabs, etc.)
- Promissory Notes secured by mortgages (i.e., private lending)
- Tax lien certificates
- Limited partnerships
- Sub-C corporations
- Real estate options
- Some types of precious metals
- The standard investments like stocks that your regular IRA can invest in
This opens it up to buy investment real estate with your IRA or be a private lender in real estate.
Types of Properties You Can Buy With Your IRA and Rules!
You can own a wide variety of properties within your IRA, including residential, commercial, and industrial structures, as well as unused land. Many savvy investors choose to purchase parking lots, storage unit facilities, and other types of property that require little maintenance but generate steady income.
Are There Restrictions?
Yes, there are. There are restrictions on what you do with the real estate if you buy and hold, what types of precious metals, and often the “custodian” of the SDIRA has restrictions on what they think you can and should invest in.
Your IRA cannot own any home where you live or vacation. Legally, you aren’t even allowed to spend one night on the property. Unfortunately, you cannot avoid this restriction by “renting” the parcel from your IRA or renting it to your spouse, children, grandchildren, parents, or grandparents, nor can you use an IRA to purchase a property from a close family. You could, however, rent property to a sibling, cousin, or friend. Many investors implement a solution to purchase a home for their IRA, rent it out for income until retirement, then assume residence upon retirement.
Self-Directed IRA Custodians
The US Government created the SD-IRA loophole to help investors take more control over their investments while at the same time still getting the tax benefits. But, at the same time, they don’t want people setting up these SD-IRAs and just doing whatever they want.
So there is a barrier that they have to have in place, the custodian.
The custodian is usually the Self-Directed IRA company with whom you have your IRA. They act as the “go-between” when you’re going to invest. Many custodians have guidelines on what you can invest in, how long it will take you to make your money work for you once they approve the investment, etc. Some custodians are more passive and let you have a checkbook to write checks from your SD-IRA to make investments.
You should do your homework and find the custodian that’s right for you.
Do some research to find the right fit for you.
Some have more expensive fees than others, and some give more flexibility than others.
How Does Income Work With Real Estate In An IRA?
The income generated in your IRA may not be used for your “personal current benefit.” This means that all revenue generated by the property must remain within the IRA until you retire. Selling the property will require you to leave all profits within your IRA. Also, property taxes, insurance, improvements, and other costs associated with the property must be paid by the IRA. Failure to comply with these regulations could disqualify your IRA, subjecting you to income taxes on the entire value of the property, plus a 10% early distribution penalty.
It’s crucial that all distribution rules associated with an IRA (or Roth IRA), including taxation, required minimum distributions, beneficiaries, and other factors, do not change when using a self-directed IRA to purchase a property. There can be a huge upside to real estate in your IRA, but it’s best to know exactly what’s in store.
What To Ask A Self-Directed IRA Company Before You Work With Them
Before you sign on with an SD-IRA company… ask them a few key questions.
- What are your fees? – Fees can vary wildly. Some charge an annual fee based on the value of the account, some charge an annual fee, some charge hefty setup fees, etc. Find out what works for you. But, the idea is that by investing in real estate with your IRA, you’ll more than makeup for the fees you’re paying with your higher returns.
- What’s the process for approving an investment? – Some companies can take up to 30 days+ to fund an investment after sending it in for approval. Some SD-IRAs give you what’s called “true checkbook control,” where you get a checkbook where you can write checks from your IRA account, which provides you with immediate access to the funds (i.e., to close a deal quickly). Checkbook control usually is a tad more expensive to set up than an IRA account that requires all investments to go through the sometimes lengthy custodian approval process, but again, find out what’s best for you.
- Are there any restrictions on what I can invest in? I want to invest in real estate and make private loans. – Some SD-IRAs with larger, more traditional companies like Schwab and Smith Barney put restrictions on what your account can invest in. Some don’t allow real estate even if you’re qualified buyers, while others do. Just ask.
- Is my retirement account eligible to “roll over” into an SD-IRA? – Not all retirement accounts can be rolled over into a self-directed IRA. However, most IRAs can be, and even some 401(k)s can be. Just ask your financial advisor and ask the representative at the SD-IRA company you’re working with.
- How long will it take for my account to be up and running and have funds available for investment? – Some people wait way too long to get this process rolling. If you know you want to use your IRA to invest in real estate, get the ball rolling on getting it rolled over into an SD-IRA account asap. Some companies may take weeks or even over a month to have your account setup complete and ready to invest. So, please don’t wait until you’ve found a great real estate deal to get started; get started today, so your funds are ready to invest when you need them.
Getting Off The Sidelines And Getting Your Money Working For You
If you feel a self-directed IRA may be an excellent way for you to invest a portion of your retirement in things you know (rather than the unpredictable stock market), then dive in, take some time to educate yourself on the pros and cons of an SD-IRA (those websites I put above are a great place to start. They have all kinds of resources to learn more about self-directed IRAs and how you can use them to invest in real estate).
If you have any questions on how you can work with us as an investor, just connect with us through our contact form or call us anytime at (610) 533-6122 or (215) 359-6090. We offer discount investment properties in Philadelphia and surrounding areas to investors like you, who often buy them and keep them as rentals. Also, for those qualified buyers who want to explore private lending, contact us, and we’ll talk about how we work with private lenders as well.