Leverage Self-Directed IRAs to Invest Passively in Real Estate

Many of the wealthiest people in the world invest their money one way or another, but they use a near-universal path to do so: real estate. Investing in real estate allows you to save for your retirement while leveraging your retirement account.

Using a standard 401(k) or a Roth IRA to invest in real estate is possible, but a Self-Directed IRA (SDIRA) is the most useful tool for investing one’s retirement accounts in real estate. Because a SDIRA grants investors more autonomy over their investments, it is the preferred option as there are investment limitations on other types of retirement accounts. It is imperative to do due diligence to see if your particular SDIRA is restricted from investing in real estate, as some are, and how your investments will be managed. This is why a custodian is involved.

Real estate investments can offer better total long-term returns and preserve wealth during the ups and downs of the stock market. Using your SDIRA, you can pick and choose your investment options, enjoy the benefits of tax-free growth for your retirement funds, and maximize profits. This is possible by collecting rental income or holding a property while allowing it to appreciate over time.

There are several important rules to pay attention to when using a retirement fund to invest in real estate. First, any expenses incurred by the investment property are paid for with funds from the SDIRA, including down payments, maintenance costs, utilities, property taxes, and HOA fees. Second, all income must be paid directly into the SDIRA. Third, the property’s title is in the SDIRA’s name rather than yours. Lastly, prohibited transactions can invalidate tax-exempt status, such as living in the investment property yourself or leasing the property to any business you own 50% or more. Unlike their personal real estate holdings, investors are also prohibited from claiming deductions for property taxes, mortgage interests, depreciation, or any other expenses related to the property.

The benefits include having a more diversified investment portfolio, which will often move counter to traditional financial markets. Historically, real estate investments appreciate over time, making them the ideal investment for long-term goals. The property is at your discretion (with certain restrictions), though it is possible to simply buy, sell, flip, or just accumulate properties for your portfolio. Also, while the investor cannot personally make repairs or live in the properties, they can act as great investment opportunities for both short- and long-term financial plans.

Retirement funds were not meant to be created and left alone until needed. It is possible to utilize them to further branch out your options for later in life while they are still growing. The smart investor uses every tool to make the most of their future retirement, so why not their retirement funds? By leveraging a SDIRA, investors can make the most out of what they have for years to come, laying a solid foundation for their retirement.