You’ve done it. With a little help from Mashvisor, you’ve found your perfect investment property. Between the location, income potential, and sale price, you know it’s the right choice. Now it’s time to purchase.
What if there was a tax-efficient way to do so that also makes use of the retirement savings you’ve already got? With a Self-Directed IRA, you can do exactly that.
What Is a Self-Directed IRA?
A Self-Directed IRA (SDIRA) is simply an IRA. What differentiates it from the rest are access and control; and with a SDIRA, yours are unlimited. Your investment options go beyond the typical stocks, bonds, and mutual funds offered by banks. Instead you can diversify your retirement portfolio with alternative investments, like real estate.
Why Invest with a SDIRA?
Some of the advantages of using a SDIRA to invest in real estate include:
- Enhanced potential for growth: Opening a self-directed retirement account gives you the freedom to invest in almost any type of real estate asset you choose – you’ll have more flexibility in the amount of risk you take on and more potential for a higher rate of return.
- Greater control of your financial future: When you invest in real estate with a SDIRA, you’re laying the foundation for long term stability for yourself and your family. Your SDIRA assets can not only give you comfort in retirement, they can also be passed on to your heirs.
- Protecting your wealth against economic fluctuations: Diversifying your portfolio by investing in alternatives like real estate can act as a hedge against market fluctuations and volatility. You can also use your SDIRA to invest in precious metals, private equity, and more.
- Increasing your savings in a tax-advantaged account: Investing over time in a SDIRA allows for tax-deferred or tax-free growth, which can significantly affect future wealth positively.
Who Can Invest With a SDIRA?
Regardless of whether you’re purchasing your first rental property or your 50th, a SDIRA can be a valuable tool in your investing arsenal.
First time real estate investors:
With Mashvisor, you can streamline your research process for finding your first investment property. With a SDIRA, you can access the retirement funds you’ve already got to make it happen.
Experienced real estate investors:
Once you have a few rental properties going, you’ve learned how to make them generate revenue. A SDIRA empowers you to take advantage of your expertise to grow your retirement nest egg.
Real estate agents or brokers:
Want your clients to be able to purchase their dream investment property? Introduce them to SDIRAs. Doing so can not only bridge any funding gaps, but it also positions you as their go-to resource for retirement and real estate investing.
How Does Investing in a Rental Property With a SDIRA Work?
The process for investing in real estate with your SDIRA isn’t much different from a standard transaction, but there are some rules and regulations you must follow. Some of the most important ones to keep in mind include:
- Your SDIRA cannot sell, exchange, or lease a property to a disqualified person (like yourself or some family members).
- Your property is titled in the name of your SDIRA: The Entrust Group FBO [John Smith] IRA [Account Number].
- Any income or expenses related to the property must go through your SDIRA – no personal funds allowed here.
No matter what you choose to invest in, it’s important to remember these rules to keep your account in good standing.
An Overview of the Real Estate Investing Process with a SDIRA
Step 1: Before you invest
Start by familiarizing yourself with your prospective SDIRA provider. Be sure to choose one that has educational resources and materials available for you. Once you’ve chosen a provider, you’ll need to open an account.
The most common account types are Self-Directed Traditional and Roth IRAs. The two are very similar, but differ in their retirement tax benefits. With a Self-Directed Traditional IRA, you contribute pre-tax dollars and don’t pay taxes until you start taking distributions. With a Self-Directed Roth IRA, however, you contribute after-tax dollars. Your earnings can potentially grow tax-free, providing certain conditions are met.
Once you’ve opened your account, it’s time to fund it. You can move funds from an existing IRA or employer-sponsored plan with a transfer or a rollover. If you don’t already have an IRA or 401(k) that you can move funds from, fear not. You can start by making a cash contribution and build your account year after year.
Step 2: Find your investment property and determine your purchase strategy
Once you’ve found your perfect investment, it’s time to decide how you’re going to pay for it. No matter the property, be sure to do your own due diligence first.
Some common strategies for purchasing investment properties include:
- Direct purchase: Paying cash by using the funds in your SDIRA.
- Partnering: Combining the funds in your SDIRA with another source. These can be your own or belong to someone else. So, for example, if you’d like to purchase a property with 50% of your own cash and 50% of your SDIRA funds, you can. The same principle can be applied to others as well. If your spouse wants to invest using their own SDIRA or cash funds, you can use your SDIRA to partner with them.
- Leveraging: Using your SDIRA to borrow money to purchase a property with a non-recourse loan.
Step 3: Execute the transaction
Once you’ve got funds in your SDIRA, and you’ve found the property you’d like to buy, it’s time to initiate the purchase process.
Start by directing your SDIRA provider to initiate the transaction. The contract should be titled with the name of your SDIRA as the buyer. For example, “The Entrust Group FBO (For the Benefit Of) [Client Name] IRA [Account #123456].” Once the contract is executed, your provider uses your SDIRA funds for the earnest money deposit.
Once your offer is accepted, your real estate agent opens escrow. Then you can instruct your SDIRA provider to wire your earnest money deposit and money for additional expenses, like a home inspection. Once you’ve read and approved all the documents related to the sale, your SDIRA provider signs on behalf of your SDIRA.
After any remaining inspections or contingencies are cleared, your SDIRA provider receives all required documentation. They can then wire the agreed-upon amount to escrow in accordance with the closing statement. After the payment is successfully completed, your SDIRA owns the property.
Step 4: Rent your new rental
Now it’s time to start renting your new investment property to generate revenue, via a short or long term arrangement. While it is not required, some investors choose to hire a property manager for the purpose of consolidating rental income and expenses. This can simplify the management of your property and ensure that you avoid entering into any type of prohibited transaction that could put your account in jeopardy.
Remember that because your SDIRA owns the property, any rental income that you make goes back into it. This allows you to build wealth over the long term and have a reliable stream of income when it’s time to retire.
What’s Next?
Purchasing a rental property with your SDIRA is a creative way to kickstart your retirement planning. It can help you to create a more diverse and resilient portfolio, ensuring long term stability throughout your golden years.
Interested in learning more about how it works? Download your free copy of the 5 Steps to Investing in Real Estate With a SDIRA guide.
This sponsored post has been contributed by The Entrust Group.
