Buying Real Estate With An IRA: How to Do It and Why You Should |
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Buying Real Estate With An IRA: How to Do It and Why You Should

By: Gregg Cohen, CEO, JWB Real Estate Companies
April 19, 2019
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Buying real estate with IRA is recommended in today’s market. Take a look at why the experts say that this is a great way to move your money.

Perhaps you have heard about it from friends or family members, or even the news. Now that the financial crisis has passed, most people have been changing their investment strategies.

This is due to the fact that the recent recession has taught them that you can’t rely solely on the stock market.  We were well aware of its instability and the seemingly pseudoscience-like means of earning.

There is a never-ending influx of stock market gurus that can sell you their ideas and techniques but at the end of the day, it is not science and although there may be existing general principles, you can never draw the exact its demarcation line with a chance.

Many people tend to focus on probable investments such as real estate.  And yes, there is no doubt that real estate is and will still be a promising focus of the investment. That goes for you as well.

We won’t be discussing to you the pros and cons of investing in real estate because we know for sure that you have already covered that yourself. All we can say is that you have chosen the right field.

What we’ll be discussing with you this time is an excellent source for you to be able to invest in real property; your Individual Retirement Account, also known as an IRA.

Further, we will discuss to you why it is such an excellent idea for you to look at buying real estate with an IRA.

What is an IRA?

Now, first, let us discuss what an IRA is and get a general understanding of the topic before we move further.

Also construed as an Individual Retirement Arrangement, IRAs are provided or catered to by financial institutions for individuals or groups.

It comes in many forms such as but not limited to individual retirement accounts, trust or custodial accounts, and individual retirement annuity.

An IRA can mean either the actual Individual Retirement Account and/or the Individual Retirement Agreement.

The Types of IRAs

Now that we have given you a brief idea on the forms of IRAs, let us discuss their different types. There are several types of IRAs:

Traditional IRAs

They are produced by Congress through its Employee Retirement Income Security Act of 1974, it was created in order to encourage workers to save for retirement.

It was designed to include special tax treatment for the tax you put in your IRA. It is ideal for workers who foresee themselves to belong to a lower tax bracket after retirement and to those who don’t have other retirement plans such as a 401(k).

What about that special tax treatment?  It goes like this: your contributions can be tax deductible if you are eligible.

In case you are not eligible, you have an option to make non-deductible IRA contributions.  For married individuals, so long as you have earned enough, you can also contribute to a spousal IRA even if your spouse does not earn any income. Take note that the growth of funds inside an IRA is tax-deferred.

That means, unless or until you make a withdrawal, all your dividends, and capital gains don’t earn interest. However, early penalties are issued on early withdrawals. By early, this means before the age of 59.5 years.

The penalty is computed as 1/10 of the total withdrawal amount plus income tax payments.  So, hold on to that as much as you can.

Roth IRAs

Your contributions to your Roth IRA are non-tax-deductible. However, funds growing inside are tax-free. Therefore, no tax is imposed on your dividends and capital gains as long as you adhere to the Roth IRA withdrawal rules.

Simplified Employee Pension (SEP) IRA

This is applicable to self-employed individuals or contractors. You can apply for a Simplified Employee Pension and get tax benefits when making contributions for your employee/s.

The employer may contribute up to ¼ or 25% of the employee’s annual salary while the employees can at the same time, deposit to their own account.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

This is a type of IRA plan that is ideal for smaller companies. By small, it means having an employee number of 100 or less. It works similarly with a 401(k), however, the required contributions are much lesser.

With or without the employee’s contribution, the employer must put in 3% of the employee’s annual salary. However, like the other two (2) IRAs discussed, SIMPLE IRA also allows both employer and employee to place in more contributions.

Please remember that your hard-earned life savings, taken as they are, aren’t investments.  Yes, they do work like one in a certain way, since they earn interest.

However, one good way of looking at them is as a means to investing at a very promising field; real estate.  Now, why would I do that?  Well, let me discuss to you why.

Although it may seem obvious by looking at the facts I’ve stated above, let’s go through the benefits of using your IRA to buy real estate.

What are the Benefits of Buying Real Estate With IRA?

There are many useful benefits to purchasing property with your IRA. Continue reading to find out.

First Benefit: More Income

One obvious reason would be, while your income grows, your tax is deferred. That’s right.

When you buy real estate with your IRA, you start earning when you starting seeing the returns of your investment while your tax is deferred. There’s a way for you to compute the probable ROI.

Think about it this way, you are an individual (A), who has an IRA (B). The funds inside B grow when a portion of it is being used as capital instead of letting it stay where it is.

However, since that portion was used as the capital when it earns a profit that profit is placed altogether where the capital is (B) and this process is tax-deferred.

Therefore, even if it is technically income in your part since it goes inside your IRA, it is subject to the benefits of an IRA, unlike any other regular income that you earn.

Direct and Immediate Access to Capital

There was a time years ago when people started looking at their 401k in order to pay off their debts. It never occurred to some that their 401k funds actually existed until the time came with the dire need for funds.

If you are looking for an accessible capital to buy real estate, the nearest one there is would be your IRA. Avoid the enormous interests that banks and other lending institutions impose on business loans.

By using your IRA as capital, you are making your savings better work for you.

Better Protection for Your Finances

This is what most people are missing. When you purchase real estate mortgage in your IRA, that mortgage is not titled in your name.  What does that mean?

It means it is in the name of your IRA. If it is in your IRA’s name, it is a non-recourse loan. With that, the borrower is the IRA itself, not you.  The loan is only backed by the value of the estate it is paying for.

Take for example if you default on the loan due to unwanted circumstances, the lender may seize such property but your other assets and credit score won’t get affected.

Further, the income growth and stability of real estate outweigh that of inflation. So this isn’t something that you really have to worry about.  Just make sure that you invest in the right property.

Rental Income

Pertaining to the previous item, so long as you get the right property, the properties’ rental income can be used to pay off the mortgage along with the other additional expenses of your property.

What you need is a down payment in order to get started, which can be taken from your IRA.  Any extra income from rentals goes towards your IRA until it covers for the withdrawn balance.

You are simply taking a bit of step forward in order to make your savings work for you instead of letting it stay there and earn minor interests.

Things to Understand When Buying Real Estate With IRA

Now that you know the benefits of buying real estate with your IRA, let us discuss how to go about this.

First and foremost, get to know certain rules and guidelines when it comes to purchasing real estate using your IRA. These are (but not limited to) some important things to know about purchasing a property through your IRA:

  • Your IRA cannot be used to buy property owned by yourself or any disqualified person.
  • Purchased properties cannot be used by you or any other disqualified person today. In other words, there can be no “indirect benefits” from a property bought through an IRA.
  • The titling of an IRA purchase property is different. As of the meantime, the IRA serves as an equity trust custodian with you as a beneficiary.
  • All expenses such as improvements, maintenance, property taxes, condo association fees, etc. must be paid from your IRA.
  • Income from real estate bout through your IRA must return to the same.

Buying Real Estate With Your IRA

Considering that you have already contacted an agent, and are now looking at using your IRA to make the purchase, you need to look for a “custodian”. IRS regulations require you to hire a licensed custodian to do the back office work for you.

Choosing a Custodian

Make sure to choose the right property custodian. Saving on a custodian fee doesn’t necessarily mean getting the best deal. Contact the real estate seller or contractor and with your agent’s help, you can make a proposal in your custodian’s name.

This is one of the main functions of the property custodian. A property purchased under an IRA is uniquely titled since it is under the status of trust property with you as beneficiary until your retirement.

After the proposal has been prepared by the agent, you’ll have to wait for its approval. Once it gets approved, your custodian will sign on behalf of the IRA.

However, please make sure to review the documents since you will be the one to sign the authorization letter to wire the funds from your IRA for the payment to be made.

Survey the Property

Once everything has been completed and you are given the keys, don’t forget to congratulate yourself for this milestone. The next step that you need to take is to survey the property for any repairs, improvement, or any type of work to be done.

Remember, we told you that as part of the general rules and guidelines, you are not able to spend for the improvement and repairs on your own right?

Check out all the work that needs to be done, list them and contact a contractor to reassess the work needed and give you a quote on the expenses. Just a piece of advice, don’t contact just one contractor.

Bidding is one advantage that a consumer can take in this free market society. To pay the contractors, you need to have your custodian’s help in working with the documents for the funds.

The security deposits and monthly rents will be set up to be sent to your IRA custodian. Remember, it is still in the IRA’s name.

Purchase a Property Now!

One excellent thing that must be taken note of about buying real estate with IRA is that the unique set up works to your advantage.  Since the IRA holds the property in trust for you as the beneficiary, it goes right away to your IRA.

There couldn’t be any safer thing to keep your earnings.

To succeed in this endeavor, all you need is the right people to help you with investing in the right property, and a good custodian to advise you on what type of IRA is best (or whether or not your available IRA can be used).

Contact us now to speak with our representative/s. You’d be amazed at how much is there in store when you start to consider the possibilities.