Many people don't realize it, but you can use your individual retirement account (IRA) to invest pretax money in real estate. This strategy can be very profitable; however, it is not widely done because there are several important rules and stipulations you must follow in order to buy real estate through your IRA.
Step 1
Find an IRA custodian who is willing to work with real estate investments. This is the first thing you need to do in order to invest in real estate through your IRA, according to the National Association of Realtors. The custodian is necessary to purchase and help you manage the real estate investment. A custodian can be found through your local banking agency, mutual fund companies or a brokerage firm.
Step 2
Find a company where you'd like to open an IRA. According to the financial website BankRate.com, in order for you to be able to use your IRA to invest in real estate, it has to be a self-directed IRA. You may have to set up a new self-directed IRA if you only have a traditional IRA, or you can work with the company to convert your traditional IRA to a self-directed IRA. Bankrate.com states that a self-directed Roth IRA is the best type to use for real estate investments, so you may want to work with the company to set yours up as a self-directed Roth IRA.
Step 3
Look for a real estate property that you would like to invest in. The National Association of Realtors states that the IRS will not allow you to use a property that you have purchased with your IRA. You can only buy investment properties through your IRA. Research commercial properties and rental properties in your area and decide what would be the best investment for your money. If you are unsure how to analyze the profitability, you can pay for the services of an investment locator company, which will analyze the best properties and present you with several options. If you do not have enough money in your IRA to purchase a whole property, you can use your IRA to purchase an interest in a property, according to the National Association of Realtors.
Step 4
Tell your custodian when you have decided what property you want to purchase or purchase an interest in. The custodian will purchase it for you. The National Association of Realtors states that you cannot purchase real estate yourself through your IRA; the custodian must be the one to do it.
Step 5
Make annual contributions to your IRA account to cover property expenses, such as taxes and insurance. Your custodian can tell you what the maximum annual contribution amount is for your state.
Things You'll Need
- Self-directed IRA
- IRA administrator
- Investment property
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