With the popularity of real estate IRAs trending, you may have wondered how it’s possible to use your IRA when investing in real estate. Given the current IRS annual limits on making IRA contributions, there’s no question that it could take more than a few years for an investor to amass sufficient funds in an IRA to purchase a real estate property. But think of it this way – the source of funds used for Real Estate IRA investing usually come from workplace retirement accounts when you leave a company, change jobs or from transferring other IRAs held at other financial institutions. Even then, this may not always cover the full amount of cash needed in an IRA for a real estate purchase or leave room to pay for real estate expenses or make improvements. Although when this happens, there are other paths that an IRA owner can consider. Here are three popular strategies an investor may use when investing in real estate through an IRA:
Partnering with Others
A self-directed IRA can invest in a property with other IRA owners, other investors or even personal funds. When doing this, your IRA (and each of the other investors) holds a partial interest in the property. For more expensive real estate properties, it may even take a group of investors. In any case, when your IRA partners with others to purchase a property, each investor, including your IRA, would own a fractional interest of the property, and any expenses or income generated would be split accordingly.
Leveraging an IRA
Your IRA can take out a loan – but the IRA rules require that it be a nonrecourse loan. A nonrecourse loan is simply a loan in which the IRA owner is not personally liable for repaying, meaning the loan payments would be handled through the IRA. Keep in mind that the IRA owner cannot personally guarantee the loan that the IRA acquires, as this would create a prohibited transaction, causing the IRA to be disqualified.
There are a handful of banks and lenders that are willing to loan funds to your IRA, and are familiar with the requirements – primarily that the lender, in the event of a default, has no recourse against you as the IRA owner or to other assets held in your IRA. The lender’s only option would be to recover the underlying property which secures the loan, including your IRA’s equity in the property.
Financing with your IRA
You can also choose to invest passively in real estate with trust deeds, also commonly referred to as real estate contracts or mortgage notes. In this scenario, your IRA loans funds to a borrower, with the loan being secured by the property. The IRA technically holds a promissory note, secured by the property, and the borrower makes payments to the IRA according to the rate and terms outlined in the note.
By knowing the options that may be used for funding a real estate purchase in an IRA, retirement investors can expand their access to a wide range of real estate investments including raw land, ranches, single family homes, multi-family properties, commercial buildings, office or retail space, warehouses and storage facilities, industrial properties, trust deeds, mortgage notes, real estate contracts and more.
For more information about investing in real estate with a STRATA IRA, see our recent whitepaper, Things You Need to Know Before Holding Real Estate in an IRA, or visit the Real Estate Investing section on our website to learn more.
Founded in 2008, STRATA Trust Company has built a reputation delivering streamlined and straightforward custody solutions for today’s investor. Our service-driven team has helped thousands of investors and investment professionals unlock opportunities in self-directed retirement accounts across a wide range of alternative investments.
With offices in Austin and Waco, Texas, STRATA operates as a Texas-chartered trust company with direct oversight by the Texas Department of Banking. Led by a seasoned team with over 350 years of collective experience, 33,000+ investors empowered and over $1.8 billion in assets under custody, our customers experience a clear difference in our approach to IRA custody.