10 Tips for buying real estate with IRAs and other retirement accounts
As a supplement to the report, RealtyTrac is also providing the 10 tips on buying real estate with self-directed IRAs and other retirement accounts from a variety of experts.
"Given the combination of bottomed-out home prices and a still-tight lending environment, utilizing funds from a retirement account to purchase investment homes with cash, or at least with a large down payment, can give individual buyers a better chance of competing in this tight housing market," Blomquist noted. "Provided the investments are made with thorough research beforehand, this investing strategy also gives consumers a path to more quickly build their nest egg since all proceeds from the real estate investment -- whether that be from rental cash flow or from selling the property -- go directly back into the retirement account."
Look before you leap
Real estate veteran Sheldon Detrick, CEO of Prudential Alliance Realty in Oklahoma City, Okla., and Prudential Detrick Realty in Tulsa, Okla., knows a thing or two about real estate after 53 years of experience. With the changes in the real estate market over the last eight years, Detrick cautions that using retirement funds can be a good fit for some investors but it is not for everyone.
"It depends on the person's age and the type of property," he said. "Rental property, especially on the lower end, can be a good investment at any age. It's usually profitable and easy to sell. On the other hand, buying land in outlying areas in anticipation of population growth is something only those under 50 should consider."
Know the ground rules
Lorraine and Richard Walls, a couple who lives in Midlothian, Va., decided to use their retirement accounts to buy investment properties in southwest Florida.
But before making the plunge, the Walls spent a full year researching how self-directed real estate IRAs works, learning the basic ground rules every investor should know before they get started. Those ground rules include the following:
•Title: any property purchased by your IRA is owned by your IRA, not you individually.
•Purchase money: any money used to purchase a property with your IRA has to come directly from your IRA, not you individually, and you can't be reimbursed by your IRA. This includes earnest money and closing.
•Rehab and carrying costs: similar to purchase money, and costs associated with rehabbing or carrying the property these costs need to be paid directly by your IRA. Your IRA custodian can help with this. For example, Equity Trust allows you to make these payments paperless online.
•Income: any income generated from the property has to flow back into your IRA
•Prohibited transactions: purchases made with an IRA need to be for investment, not personal use. Also your IRA cannot do business with family members of "lineal descent," which includes yourself, spouse, parents, children, grandparents, grandchildren and great-grand-children. In addition, you cannot borrow money from a self-directed IRA or use it as security for a loan.
Most Popular Stories
- 2014 Will Be 'Breakthrough Year' for U.S., Obama Says
- Prius Among Insurance Institute's 39 Top Safety Vehicles
- Target Overwhelmed by Worried Customers
- Congress Ends Turbulent Year with Approving IRS Chief
- First Family Arrives for Hawaiian Island Holiday
- Renewable Energy Group to Acquire Syntroleum
- Ally Financial Settles Auto Loan Suit
- Covered California Lags on Hispanic Enrollment
- Climate Change Isn't an Equal Opportunity Destroyer
- Chris Christie Set to Sign Tuition Aid Bill