Most Investment Retirement Accounts (IRAs) are invested in common security instruments such as stocks, bonds or mutual funds. With property prices substantially lower these days, investing in real estate has become an attractive alternative to holding stocks and bonds.
1
Why use your IRA to acquire property
Acquiring real property from an IRA allows the IRA owner to expand the investment capability of their IRA accounts to take advantage of the twofold investment returns associated with real estate; rental income and appreciation. In addition, long term strategy can include acquiring a vacation or retirement home.
In order for an IRA to acquire real property certain procedural conditions must be met, and there are several limitations on the type of properties that can be acquired. These issues include having a knowledgeable account custodian willing to handle real estate, knowing what properties can and cannot be acquired, financing acquisitions and the use and operation of the property after closing.
2
A Good Custodian is a must
The first issue is the capability of the IRA custodian to participate in handling the acquisition of real property. Many traditional IRA custodians, such as brokerage firms and banks are not set-up to deal directly with real estate, limiting your investment options to their offerings, usually stocks and bonds. In order to invest in real estate, you will need to find a custodian who handles these unique investments, and the options are currently limited. A Google search for “IRA real estate custodian” only yielded thirty-three hits. However, once you find an acceptable custodian who handles these real estate or self-directed IRAs, the procedure to transfer the funds from your traditional IRA custodian should not be difficult.
3
Types of property allowed in an IRA
The second issue is the restrictions imposed on the type and nature of the property being acquired. First, your IRA cannot acquire property that you, your spouse or other family members own. Second, you cannot live in or use the property that is acquired by the IRA, though the property can be acquired with the intention that after your retirement and disbursement, you can use the property. This use limitation would extend to leasing space in any commercial property individually or through any affiliated business.
If your IRA does not has sufficient funds to make an “all cash” purchase of an appropriate property, you will have to either find partners to acquire the property, which is permitted, or finance the purchase with a lender.
4
Financing the purchase
However, the loan has to be non-recourse meaning no personal liability for the IRA, and you cannot guarantee the loan for the IRA. This limits the amount of financing available, and will greatly increase the loan to value ratio needed by the IRA to get financing. Generally, expect that the IRA will have to put down at least thirty to fifty percent to obtain this non-recourse, non-guaranteed financing, if available.
The advantage of financing the purchase is the ability to stretch your IRA dollars to acquire a more suitable property that will both generate a positive cash flow and appreciate in value. In addition, this method is a very suitable way to acquire a retirement home at today’s lower values. Simply select a property that you wish to use at retirement, finance the purchase with the IRA providing the down payment, lease the property to cover the carrying costs to the IRA and then, when you retire, take the property in distribution of your IRA for use as a retirement home.
5
Pool with other investors
Another alternative is to use the IRA monies as part of a pool with third parties to invest in a fractional share of ownership, either directly or through an appropriate holding company. For example, three families with three IRAs totaling $100,000.00 can pool the money to buy a $300,000.00 investment property, with each IRA owning a 1/3rd share. It is important to have a good joint venture agreement with the other owners to insure that ownership, lease, maintenance and sale issued are addressed in advance to avoid conflict and a future lawsuit.
Comments - add comment