• Veloce Capital

HOW TO INVEST IN REAL ESTATE WITH A SELF-DIRECTED IRA



IRA's have long been heralded by financial planners and market experts as a safe investment and a great way to plan for retirement. Unfortunately, the stock market can be very volatile. It can be scary to have a significant portion of your retirement investments tied to the stock market. The good news is, there’s another option in self-directed IRAs. SDIRAs allow you to diversify your portfolio by self-directing the funds to invest in real estate without tax penalties, and learning how to invest in real estate with an SDIRA can significantly increase your investment returns.

What is a Self-Directed IRA?

A self-directed IRA (SDIRA) is a retirement account that allows investors to instruct an account custodian to invest funds beyond the traditional stocks and bonds to investments like real estate, precious metals, franchise businesses and private equity. As with traditional IRAs, SDIRAs allow owners to defer taxes until retirement, regardless of the level of returns but also allows you to control your IRA.

Why Invest in Real Estate?

Real estate is a tangible asset that has historically been shown to create multigenerational wealth. Real estate through an SDIRA allows the investor to diversify their portfolio with tangible assets that have the potential for high rewards and gains. Real estate markets do fluctuate, but they are not as volatile as the stock market or mutual funds fluctuations.

Benefits of learning how to invest in Real Estate with an SDIRA - When you use your SDIRA to invest in other real property, you gain:


Diversification.

Using your SDRIA to invest in alternative assets lets you take your invested money with all of the benefits of an IRA yet generate higher returns and a stronger portfolio that is more likely to withstand economic fluctuations and downturns.

Better returns.

Some assets do have a higher risk involved, but they can also yield a higher return. It’s important to evaluate your risk tolerance for any investment you may make.


More control of your financial future.

One of the highest draws for SDIRAs is because you have more control over your financial future and what happens with your money. When investing in real estate, some investors choose to use a self-directed Roth IRA which allows them to pay the taxes upfront and take their retirement tax-free.


Protection from the stock market & mutual funds.

Investing in a physical asset that never loses its value gives you more security and less risk than the stock market. To learn more about our past return comparisons and how to invest in real estate with an SDIRA, contact us for more information.


Your IRA can help you invest in a new investment property or turn your existing property into an investment property. Let’s dive into how you can do this, the pros and cons, and determine if this may be a good move for you.


Potential Risks with SDIRA

When you are the account holder of a SDIRA, you have the burden of doing due diligence on the property or investment itself. If you are just getting started with real estate investing, you may want to hire or work with someone that is more knowledgeable in investing to help guide you during the due diligence process. You do not want to open yourself or your financial future up to potential fraud.


There is also a potential lack of diversification that should also be considered and explored. Most investors using their SDIRAs will lack the capital needed for a truly diversified investment. Investors that purely focus on the potential gains set themselves up for a major risk.


When you invest in real estate property, you lose the liquidity of your SDIRA, which may pose a problem for you in the future. You run the risk of not being able to access the value of your portfolio when it comes time for disbursement in your later years.


Tax implications and potential pitfalls are also important to take into consideration when considering investing in real estate with your SDIRA. Owning your real estate through an SDIRA allows you to grow your portfolio on a tax-deferred basis, which is very appealing to many would-be investors. However, there are certain rules and guidelines that must be followed in order to not lose these benefits. Losing these benefits would create a taxable event that you may not be prepared for.


If your investment in a property tied to an SDIRA runs at a loss, you may also lose the tax benefits. All of your real estate transactions must also be kept separate from your personal interests. That means no using it for personal home purchases or sales between immediate family members. All improvements made to the investment property must also be kept at arm’s length, meaning you’ll want to hire service professionals and licensed contractors rather than Uncle Joe.

Financing Your SDIRA Owned Real Estate

If you choose to finance your investment through a mortgage while tying it to your SDIRA, you will need to pay the Unrelated Business Income Tax (UBIT). This is a guideline set forth by the IRS and is required when dealing with any type of IRA.


Paying Expenses for the Property

Any expenses that are directly related to the property must be paid out of the IRA the property is attached to. These expenses can include HOA fees, property taxes, property management fees, utility bills, renovations, maintenance, upgrades, and more. It is important that you have enough liquid assets to allow for these expenses to be paid out correctly.


How to Handle Income Generated from the Property

One of the main reasons people invest in real estate is to grow their wealth and increase their income. Income generated from a property owned by an SDIRA must go back to the IRA. This is any and all income that may be generated, not just rental income.


Opening a Self-Directed IRA or Self-Directed Roth IRA

SDIRAs can be opened one of two ways: by placing the money through a custodian or opening and placing the funds through a checkbook IRA. As the investment is self-directed, do your homework prior to deciding which route is best for you.


Also, many traditional brokerages that hold IRAs will not transfer the funds to non-traditional holdings such as real estate or precious metals. If you’re transferring a current IRA to an SDIRA, make sure you’re working with a custodian who is familiar with SDIRAs to make the transfer successfully. Follow the rules and guidelines of the SDIRA, and work with trusted and reputable service providers. Veloce Capital has partnered with Rocket Dollar to provide custodial services to our clients.


How to Invest in Real Estate with an SDIRA – Getting Started

As you get started, consult with an accountant to make sure that you are looking at all the aspects of your financial picture and making the right decision for you. You should also evaluate the current real estate and job markets, the income median, and the investment sponsor you plan on working with.


Knowing and following the rules when working with SDIRAs is paramount to the success of your investments. There are some cases where investing in real estate can not only be seen as a taxable event but a full distribution of the SDIRA assets. Do your research and work with a trusted investment specialist, like those at Veloce Capital, who are familiar with the ins and outs of self-directing an IRA and how to invest in real estate with an SDIRA.


Moving Forward

When you’ve set up the SDIRA and chosen a property, it’s time to take the next step to transfer funds to your new investment. You will need to fill out a Direction of Investment (DOI) form to request the funds and direct your investment. This form will contain all the necessary information on the investment such as amount invested, where to send the funds, what documents need to be signed, and more. The account trustee will then process all of the documents per the instructions in the DOI form. Once the closing is finalized, the IRA will be the title owner of the acquired property asset.


Managing Your Property

Any and all expenses for the property must be paid for by the SDIRA. All income and profits likewise must be paid to the SDIRA. Working within these guidelines keeps you within good terms for tax deferment.

If you plan to lease or sell the asset, that’s up to you. The designated trustee will handle the transaction according to your wishes. If you sell the property, the property will be removed from your assets in the SDIRA and replaced with profit from the sale.


More from Veloce Capital

At Veloce Capital, we specialize in helping our clients use SDIRAs to diversify their portfolios in a tax-protected way. We’re familiar with all the ins and outs of every piece of the process, and we’d be glad to answer any questions you may have about real estate investing. For more information about how to invest in real estate with an SDIRA, please email us at info@velocecapital.com


References:

Spann, Scott. “Should You Buy Real Estate in an IRA?” The Balance,


Parker, Tim. “Using Your IRA to Buy Real Estate.” Investopedia, Investopedia, 9 Apr. 2020,


Bergman, Adam. “Five Things To Consider Before Buying Real Estate With A Self-Directed IRA.” Forbes, Forbes Magazine, 10 Apr. 2018