What is an IRA?
Individual retirement accounts (IRAs) are IRS regulated savings accounts aimed to serve as a source of income for retirement. IRAs are only managed by the account owner via an approved custodian or administrator, or a professional investment firm that acts as fiduciary for the account. The funds in an IRA are held by the financial institution, which has the right to invest them in traditional investments such as mutual funds and stocks.
What is Self-Directed IRA & how it differs from a regular IRA?
Self-directed IRA (SDIRA) is another option for an IRA holder, which allows them to invest in diversified assets. To expand on “diversified assets,” this means that you aren’t restricted to stocks and bonds like most IRAs. You are able to invest in many different things. SDIRA serves as a savings account where your money can grow tax-free until you withdraw the funds, unless it is a Roth IRA. If it is a Roth IRA, the money is taxed prior to going into the account and when it is withdrawn, it is tax-free.
The owner simply transfers funds from his/her IRA or other retirement account to SDIRA. Many of them increase the amount invested with their personal contributions to the account.
Can I create Passive Income using SDIRA??
YES! A lot of investors who are close to their retirement are interested in creating passive income, so they can have a comfortable post retirement life. They are mostly in their 50s or 60s and looking for investment options but they don’t know that they can invest their IRA in real estate.
Ways to Invest your IRA in Real Estate
1. Real Estate Investment Trusts (REITs)
If you are looking for easy transactions both in and out, REITs provide that. Many REITs are registered with the SEC and are publicly traded on a stock exchange. These are known as publicly traded REITs. Others may be registered with the SEC but are not publicly traded. These are known as non- traded REITs (also known as non-exchange traded REITs). All REITs have their own specialties, so make sure you do your due diligence on the company. REITs are required to distribute 90% of its taxable income as dividends, so many retirees look to REITs for income.
2. Hard Money/Private Money
With this option, you are basically the bank. You lend out funds to other investors and they pay you interest on that money. Interest rates can vary from as low as 6% to as high as 15%. There can be some up front legal costs to make sure all of the paper work is in order but once you find a good borrower, this can be steady money. One big downside to private money is the loan eventually will mature. Once it matures you may have to start the search all over for another borrower. We frequently use private money in our business, so if you have questions about structuring deals reach out.
You can also invest in rental properties. You can buy distressed properties, rehab them and rent them out or you can buy performing ones. If you decided that you want to go the distressed route you’ll have to keep a very close eye on the accounting. There are lots of rules in regards to tracking the money. You can either manage them on a daily basis or go through the process of hiring a property manager to manage it for you. This is a good way to build a passive income stream.
4. Turnkey Real Estate Investment
Turnkey is another viable option for SDIRA owners. This basically means that you are working with a turnkey investment company that are selling rental properties. Most of these investment properties are already rehabbed and rented out. You just need to buy the property and everything else in managed by the turnkey company. This is the best option for out-of-state investors or someone who’s not interested in buying, rehabbing or managing the property. You’ll get the rent every month and you’ll pay a portion of that to your turnkey company for managing the properties. It is a easy hands off approach to investing in real estate, if you want to learn more take a look at my ebook How to earn double digit returns while sitting on the couch.
You may have noticed that fix and flip is not on this list. And there is a big reason for that. The idea behind an IRA is that it is a retirement account, not a business account. If you start conducting business in your IRA, it can open you up to tax liabilities. If you are looking to be involved with fix and flip, I urge you to look into private lending as an alternative.
With that all being said, I am not a tax attorney, accountant or an expert on IRA’s. Please consult a professional before taking action. If you want to learn more about how we can help you invest in real estate, please contact us for a FREE private consultation.
Where would you like to invest your IRA money? Share in the comments below.
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