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Buying Real Estate in an IRA this Spring? Consider These 4 Tips

House and grass

  |  By Chris Shanahan, CISP®

A large number of buyers are flocking to the housing market this spring selling season, drawn by the continued rebound in housing, a brightening picture for US employment and the relatively low level of mortgage rates.

According to the National Association of REALTORS, an unusually large number of home buyers are joining this spring’s house hunt, especially in markets that have seen solid job gains and firmer economic growth. Pending home sales rose 1.1% month-over-month in March and are 11.1% above year-ago levels, according to the NAR's Pending Homes Sales Index.

Pending home sales rose 1.1% month-over-month in March and are 11.1% above year-ago levels

Here is a regional look at the NAR’s Pending Home Sales:

  • South: Contract signings rose 4 percent in March and are 12.4 percent above year-ago levels.
  • West: Contract signings increased 1.7 percent in March and are 15.6 percent higher than March 2014.
  • Northeast: Contract signings fell 1.5 percent for the fourth consecutive month but remain 0.6 percent above a year ago.
  • Midwest: Contract signings decreased 2.5 percent in March but are 11.3 percent above year-ago levels.

At PENSCO, one of the most popular ways for our clients to hold real estate in their self-directed IRAs is to buy single-family homes with the intention of renting the house to tenants. This allows IRA to not only benefit from any home price appreciation, but to also develop a steady income stream in the form of monthly rent checks.

For self-directed IRA holders who are looking to buy an investment property in their IRA, here are four things to keep in mind before making a purchase:

  1. Find a sweet spot: While it might be tempting to buy an investment property in a housing market that is on fire – like my hometown of San Francisco - rapidly rising prices mean that buying a single-family rental home may not always make sense. In hot markets, there is a chance that any rent you collect may not be enough to offset the high price you paid or ongoing property expenses, such as maintenance and taxes. This could result in a low-yielding investment. Instead, you may be able to ensure a sufficient yield on your investment by focusing on markets where there is a better balance between purchase price and rental demand.
  2. Consider how you will pay for the property: To buy a property to hold in your IRA you have four options:
    • Pay for the purchase 100% with cash that is held in your IRA
    • Pay for the property using cash in your IRA and a non-recourse loan
    • Pay for the property partially with cash in your IRA and partially with personal, non-IRA cash
    • Pay for the property with cash in your IRA and third-party investors
  3. Have enough cash on hand in your IRA: All expenses related to the property must be paid from the IRA itself – not from your personal account. This includes expenses that might seem straightforward, such as the down payment, mortgage payments and property taxes. But it also includes other expenses that might not be on your radar, such maintenance and repair. Rent that your IRA collects may be used to pay for these expenses but it’s important to always maintain enough cash in your IRA to cover planned and unplanned property expenses.
  4. Understand the rules of holding real estate in your IRA: Purchasing and maintaining real estate in IRAs differs from traditional property investments. For instance, you must avoid “prohibited transactions” and you cannot use the property for personal reasons. The property must be treated as an investment that is not for the immediate benefit of you, your business or your family. In addition, all maintenance and repairs must be done by a third party. If the IRA owner provides any “sweat equity” activities – such as changing a light bulb – there could be significant penalties.

If you are curious to find out if a real estate opportunity you are interested in can be held in a self-directed IRA, please check out the PENSCO Opportunity Analyzer. You can also learn more about investing in real estate with your IRA by downloading our guide here:

PENSCO’s Blog is purely for educational purposes.  PENSCO does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Individuals are encouraged to seek professional advice before making any investment decision. Investments are not FDIC insured and are subject to risk, including the loss of principal.