“Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.”
~Russel Sage, American financier and politician
As a real estate investor, you know the long-term benefits of investing in real estate (of course) – that’s why you chose this career path. There are many ways to invest your money wisely, but did you know that one of them is through a self-directed IRA?
Hey Moguls, Chris Urso at your service. One of the questions I get asked from time to time is how to finance real estate investments via a self-directed IRA. There can be quite a bit of confusion surrounding this topic, so I wanted to take a moment to address it here.
A self-directed IRA allows you to use retirement capital to acquire real estate properties, such as single-family homes, multi-family properties and even commercial real estate. Compared to a traditional investment, it offers you:
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More control
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A higher rate of return
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The ability for more diversification
Not to mention... it’s also a great way to get into multi-family property investing. Self-directed IRAs can be used for rental properties – which is perfect for investors who are looking to invest in an apartment building or other multi-unit property.
I don’t want to muddle through too many details, but I do think it’s vital for every real estate investor to have a basic understanding of self-directed IRAs…
So, I put together a simple Q&A for you.
Keep in mind that a good chunk of this info comes from IRA custodian professionals my company has worked with. Their expertise has been a huge help for me, so I wanted to share the knowledge with you as well!
Basically, an IRA custodian does just this...
Custodies assets and accounts for investors who are utilizing their retirement savings to move into real estate private notes and any type of alternative assets. These professionals help investors with any questions they may have about compliance, operations and the process of getting a self-directed IRA.
So, without further ado, let’s get into it...
Q: What is a self-directed IRA?
A: It’s similar to any IRA, except you have more freedom to invest in the areas you would like.
For example, a typical IRA custodian may only allow you to invest your money in stocks, bonds, mutual funds or CDs. But with a self-directed IRA custodian, you can invest in those – plus real estate, notes, etc.
Even though the funds must be overseen by a financial custodian, you still have a great deal of control. For some real estate investors, this can be a hugely beneficial path that leads to future financial security – but you also have to be willing to put in the effort to manage the self-directed IRA in a responsible and savvy way.
Q: I haven’t heard about self-directed IRAs before. Is this a new concept?
A: Many people aren’t aware that when the Employee Retirement Income Security Act (ERISA) was passed in 1974, it allowed investors to use their discretion when it comes to investing their tax-deferred funds or retirement funds.
This act allowed – and still allows – you to transfer those monies to a true self-directed IRA. As a result, you can invest directly into real estate private notes.
New concept? Not so much – this has been allowed for almost 42 years!
Q: What’s the benefit of a self-directed IRA?
A: As an investor, you can invest in real estate (your area of expertise!) by using your tax-advantaged retirement money.
As interest compounds over the years, you can build wealth for your future and your family’s future.
Q: What’s the difference between a financial custodian and an administrator?
A: Trust custodians for alternative assets are required to have a background check, and they work with trust officers. So, in a nutshell, a bank-chartered custodian has a high degree of checks and balances.
Custodians also have a yearly audit, and their trust officers must undergo background checks. Plus, they also have FDIC insurance (up to $250K per account). And there is total segregation of all client monies, aside from the operating capital for the company.
Administrators are not held to those same high standards; there is a distinct difference. An administrator has to conduct business through a trust custodian. So, as I like to say, why go through two layers of administrative help, when you can go directly to the custodian?
The Bottom Line
A self-directed IRA can be an awesome way to prepare for your retirement, because it gives you the ability to determine where your money is invested.
When you invest in real estate, this is an especially beneficial way to build long-term equity and wealth (plus, you can legally take advantage of a few tax benefits along the way).
It’s a win-win situation, but it needs to be handled with care. By going through a reputable financial custodian, you will be setting yourself up for success.
Penny for Your Thoughts
What questions do you have about self-directed IRAs? Let me know in the comments section below.
Research financial custodians in your area; it may help to ask other investors if they have any experience working with these professionals.
Talk to a qualified tax professional before you move forward with pursuing a self-directed IRA.
Determine if this is the right investment strategy for you. Remember, it’s not for everyone! But it can be a hugely beneficial financial decision if handled correctly.
Christopher Urso
is the founder of URS Capital Partners and National REIS. Chris has been investing in real estate since 2001. Over the years he has been involved in all aspects of real estate, from single-family fix and flips, buy and hold cash flow houses, and finally to apartment buildings. His real estate investment career only took off when he purchased his first apartment building 3.5 years ago. He now controls over $15,000,000 of apartments and has raised over $8,000,000 of private money in just over 3 years. He now structures investment partnerships to acquire large apartment complexes and also private coaches investors helping them purchase their own apartment buildings.