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Investing in Real Estate with a SDIRA: Everything You Need To Know

September 30, 2020

A self-directed individual retirement account (SDIRA) gives you the advantage of investing in alternative assets, such as real estate. It enables you to diversify your retirement portfolio and grow the funds higher.

Investing in Real Estate with SDIRA Infographic
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Why Should You Invest in Real Estate Assets With Your SDIRA?

If you are a holder of an SDIRA and make investments in real estate assets using the account, it constitutes a real estate investment. It does not only help you to diversify your retirement portfolio but also there will be no taxes due as long the investment is not distributed to you – ‘the account holder’.

Types of Real Estate Investments

There are many types of real estate investments, like:


As the name implies, these assets are used for commercial purposes. Some examples are Parking Lots, Office Buildings, Grocery Stores.


These are real estate properties with grounds and a building meant for dwelling purposes, such as Single Family & Multi-Unit Homes, Apartments, Condominiums, Mobile Homes, etc.

Real Estate Owned (REO) Properties or Real Estate Investment Trusts (REITs)

REO properties are usually owned by financial institutions that are not directly in-line with their business. And REITs are commercial properties and are mostly traded in the form of stocks. For example, Foreclosed Real Estate.


Land, especially undeveloped land, as it offers great potential for generating incomes in the future when they are sold or developed.

Tax Liens

Tax liens are an indirect way to invest in real estate that can generate consistent income and can also be resold at a higher value.


Storage offers space for people to store things they do not need right now. In the US, at least 1 out of every 10 households uses storage.

Joint Venture

When two or more parties combine resources for a specific development or investment, it constitutes a joint venture in real estate.

These are only some of the many types of real estate investments. Apart from these, you can also consider investing in building bonds, leases, offshore property, etc.

Real Estate Investment Strategies

A proper strategy is crucial for successfully investing in real estate assets so that you gain profitable returns. There are three types of real estate investment strategies:

  • Partnering: Using personal funds or other IRA
  • Leverage: Applying for a loan
  • Options: Choosing to buy and sell real estate

Steps to Follow While Investing in Real Estate with a SDIRA

If you are a SDIRA holder and want to invest in real estate assets, there are five steps to get started:

Start the Paperwork

The first step is to complete the associated paperwork after you finalize the real estate asset. Usually, it begins with drawing up a purchase agreement and agreeing to an earnest money deposit. According to the IRS regulations, you need to sign all purchase contract agreements, including countersigning by an IRA custodian.

The Deposit

The next step is to make the deposit. You need to transfer the earnest money deposit funds to the title or escrow company through your IRA custodian. Keep in mind that you cannot move the money directly from your personal account. It will constitute a prohibited transaction.

The Review

The IRA custodian will review all documents to ensure that the investment is suitable for administration and devoid of prohibited transactions. This stage includes:

– Generating a preliminary title report for the property (confirming that the seller is on the title and is not a disqualified person)

– A proposed grant deed (highlighting who the buyer & owner, custodian are, and the owner’s address)

– Escrow instructions from the title/escrow company, a final settlement statement, and completed custodial forms.


Once all the funds from the SDIRA are in escrow and documents are signed, investors can move forward with their investment. They are now free to sell, rent, or lease the property. According to the existing rules, investors wanting to rent or lease the property should take the help of a third-party property manager who will collect rental payments and forward them to the SDIRA. It ensures the transfer of all income from the property to your SDIRA. 

Due Diligence

It would help if you did the necessary due diligence in understanding the nitty-gritty of real estate investment to achieve success. It will also help if you consult a competent tax professional beforehand.

Pros of Using a Self-Directed IRA for Real Estate


You can exercise greater control over your retirement portfolio. If you invest prudently, you can gain significant returns on investment.

Tax Deferral

You can grow your retirement funds in a tax-deferred or tax-free environment. It allows you to reinvest profits from real estate investments, including rental income and capital gains, into other tax-free investments. Tax-deferral applies to the money you spend in real estate investments from your SDIRA and not any outside financing.

Asset Protection

You can protect your real estate asset from federal and state bankruptcy laws. A SDIRA is a trust, meaning the owner and the account are separate entities. Besides, it has its own asset protection rules.

Higher Returns

As your retirement fund will grow at a higher rate with a SDIRA, you will reap higher returns.

Rules and Regulations for Real Estate Investment

Like any other investment, there are rules and regulations associated with SDIRA based real estate investments too. It will help if you acquaint yourself with the rules and regulations to not slip off track. Read on:

Rule 1

You cannot own the real estate asset as you are a ‘disqualified person.’

Rule 2

You cannot have indirect benefits from the properties invested under your SDIRA, such as renting the garage apartment in a house that your SDIRA owns.

Rule 3

The asset must bear a unique title. As you and your SDIRA are separate entities, the investments should be titled in the name of your SDIRA.

Rule 4

You can purchase real estate assets with a combination of other funds, such as partnerships and undivided interest.

Rule 5

If you are using financing, you need to pay Unrelated Business Income Tax (UBIT).

Rule 6

You need to pay all expenses related to SDIRA-owned properties from the SDIRA itself. The expenses can include building association fees, utility bills, maintenance fees, renovations, and property taxes.

Rule 7

All income generated by the properties owned by your SDIRA must be returned to your SDIRA.


Real estate investment with a self-directed IRA is one of the best ways to diversify your retirement portfolio and make your retirement funds grow faster. This article helps you with the nitty-gritty of the investment to enable you to reap the benefits.