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As a realtor, you know the real estate market like the back of your hand. You’re up-to-date with market trends, understand the value of each unique property or neighborhood, and have a keen sense of what appeals to buyers and sellers. This equips you with unmatched expertise, giving you an upper hand in the market.
However, in times of high-interest rates and low inventory, you may find yourself having to get creative to keep your own real estate investment strategy moving forward. This is where a self-directed IRA (SDIRA) can be a game-changer.
What is a Self-Directed IRA?
In the eyes of the IRS, a self-directed IRA is simply an IRA. The primary benefit to an SDIRA holder is the expanded range of investment options. For realtors, they can serve as an ideal solution when an employer-sponsored retirement plan isn’t available.
Unlike IRAs offered by conventional brokerages, SDIRAs enable investment in alternative assets like real estate, private equity, precious metals, and more. You can use your expertise to invest in properties and diversify your retirement portfolio beyond traditional stocks, bonds, and mutual funds.
Traditional SDIRA vs Roth SDIRA
Not all SDIRAs are created equal.
The two most common account types are the traditional SDIRA and the Roth SDIRA. The primary difference lies in when you pay taxes.
- Traditional SDIRA – Contributions to a traditional SDIRA are made with pre-tax dollars, and distributions are taxed as ordinary income when withdrawn.
- Roth SDIRA – Contributions to a Roth SDIRA are made with after-tax dollars, and qualified distributions (those made after age 59½ and held for at least five years) are tax-free.
In general, if you expect to be in a higher tax bracket in retirement, you’ll pay fewer taxes overall if you opt for a Roth SDIRA. If you expect to be in a lower tax bracket in retirement, then a traditional SDIRA might be the way to go.
Not sure which is right for your unique situation? Speak to your financial, tax, or legal advisor.
The Benefits of Tax-Deferred and Tax-Free Earnings
Realtors may be particularly interested in the tax advantages afforded by self-direction.
By investing in real estate through a traditional SDIRA, the earnings generated by the investment (such as rental income or capital gains) are not immediately subject to income taxes. The earnings grow tax-deferred until they are withdrawn. If the investment is held within the SDIRA until retirement age, the withdrawals may be taxed at a lower rate.
If you opt for a Roth SDIRA instead, you’ll purchase the property with post-tax earnings in exchange for an eventual tax-free qualified distribution.
5 Real Estate Investment Options
Here are some types of real estate that you can potentially invest in with an SDIRA:
- Rental properties: Invest in single-family homes, multi-unit properties, apartment buildings, or commercial properties to generate rental income.
- Real estate notes: Become the lender of real estate debt and collect interest payments.
- Private mortgages: Provide loans to individuals or businesses to finance real estate deals.
- Real estate investment trusts (REITs): Invest in publicly-traded REITs, allowing you to own a portion of a large portfolio of real estate assets.
- Tax liens and deeds: Invest in tax liens and deeds, which allows you to acquire properties that have delinquent property taxes owed.
Purchasing Strategies
There are several purchasing strategies available when investing in real estate with an SDIRA.
Direct Purchase
With a direct purchase, your SDIRA purchases the property directly, holding the title to the property in the name of the IRA. This is most equivalent to a cash offer.
The IRA is responsible for all expenses related to the property, including taxes, insurance, repairs, and maintenance. All income generated from the property must be returned to the IRA. As the account holder, you cannot personally use or occupy the property, as this violates IRS rules.
IRA LLC
An IRA LLC is a structure that allows you to maintain more control over the real estate investment in your SDIRA.
There are three primary reasons investors use IRA LLCs: speed, cost, and flexibility.
Speed: With an IRA LLC, you gain faster access to capital through “checkbook control.” Rather than waiting on an SDIRA custodian like Entrust for each transaction, real estate investors are able to quickly pounce on time-sensitive opportunities, such as auctions and foreclosures.
Cost: Many SDIRA holders substantially reduce their fees with an IRA LLC. Most custodians charge additional maintenance fees for additional assets. An IRA LLC circumvents this. In the eyes of the custodian, whether an IRA LLC owns 4 properties or 400 properties, the LLC is only considered one asset.
Flexibility: Another potential benefit of an IRA LLC is the ease of partnering. It is often much faster and simpler to purchase property and fund investments through an LLC. This allows realtors to pool resources, purchase larger properties, and spread risk.
Partnering
With partnering, you can use your SDIRA to invest in real estate with other investors or entities. For example, you could partner your SDIRA with another individual, an LLC, or even your own personal funds to purchase a property.
Your SDIRA would own a percentage of the property, and the income and expenses would be split among the partners according to their ownership shares. Partnering can be an effective way to make your investing budget go further, but it's important to have a clear understanding of the partnership structure and any legal agreements before proceeding.
For instance, when purchasing a real estate asset, you are able to partner your SDIRA with personal funds only because the purchase is a new transaction. However, any commingling of personal and retirement funds after the purchase could lead to disqualification of the IRA’s tax-advantaged status - and potentially significant penalties.
Explore Real Estate Investment With an SDIRA
Self-direction can be a powerful tool for realtors who want to leverage their real estate expertise, diversify their portfolio, and potentially achieve higher returns on their retirement investments.
This principle doesn’t apply exclusively to industry professionals. Many non-realtors take advantage of self-direction to invest their retirement funds in rental properties, REITs, and community projects. It allows them to feel a closer connection to their retirement savings and invest in local opportunities they believe in.
Want to learn more about investing in real estate with an SDIRA? Download your free copy of our 5 Steps to Investing in Real Estate With an SDIRA guide today.
