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Using a Self-Directed IRA for Real Estate Investing

March 17, 2021


You’re probably familiar with companies like Fidelity, Charles Schwab and Vanguard, which limit your IRA investment purchases to the stock market. You invest your money in stocks, bonds and mutual funds.

NuView, considered a “third-party custodian,” allows you to invest in non-traditional alternatives like real estate, including rental properties such as an apartment building, senior living, or an Airbnb. You can also use your money to invest in mortgage notes, tax liens, tax deeds, and the purchase of raw land.


How do you use a self-directed IRA for real estate investing?

Here’s an example to illustrate how it is done:

You have enough money to invest in real estate but your money is invested in stocks, so what do you do? Simply transfer your balance to a Self-Directed IRA at NuView, which allows for alternative investments. You can then invest the money in the real estate you want to buy.

The purchase will be treated like any other real estate purchase, with an inspection and a closing. When the purchase is complete, you will be free to find tenants, who will pay their rent to your IRA. Your property deed would read “NuView, trust custodian, FBO (your name) IRA.” If you looked up the property title, it would say the owner is your IRA.


Why would someone want to do that?

A self-directed IRA allows for alternative types of investments. If your money is invested in the stock market, you hope that you put your money in the right place. In 2020, many people lost money in the stock market due to the economic downturn caused by the pandemic.

In some instances, stocks plummeted. But real estate is still doing well and people are still paying their rent, even if they are relying on assistance from government programs.

Real estate, unlike stocks, is a tangible investment that you can control. With real estate, you know how much money you will be making from your rental income. If you are unhappy, you can sell.


Can you buy a car with the rental property income?

No. The rent money must be paid back to the IRA because the IRA owns the rental property. The wealth you build through compound interest will be available to you when you retire.




What if I am ready to retire, and the money is tied up in a rental property with tenants?

You can sell the property and the profit you make on the real estate goes right back into your self-directed IRA, which is available to you upon retirement age.


Who is investing in real estate through self-directed IRAs?

Many are real estate investors who come from all walks of life. Others are average Joes who happened to save enough money to buy a single family home or condo and want to invest in real estate instead of traditional stocks and bonds. Most investors are in their forties or fifties, and beginning to think about.

They might have taken a recent hit in the stock market, or they simply do not trust the stock market. They feel safer investing in real estate. They have saved enough money in a traditional IRA or a Roth IRA and they want to transfer it over to a self-directed IRA so they can diversify their retirement portfolio.


Is it too risky for someone in their fifties to invest in real estate in a self-directed IRA?

NuView does not provide any kind of financial advice. It is up to every client to do their own due diligence on their investments. However, it is important to note that real estate can always be sold, if you no longer want to be a landlord.

We are not a fiduciary. We don’t provide any type of financial advice on whether something is a good or a bad investment. It is up to the client to conduct their own due diligence and understand the investment that they’re making. It is important to remember that you can always sell real estate. If you don’t want to be the landlord anymore, you can sell the real estate.


Why Are self-directed IRAs for real estate growing in popularity?

Self-directed IRAs for real estate have been around since the 1970s but probably less than 10 percent of investors even know they exist. Employer plans that are monopolized by the stock market are the most common type of retirement savings, and they do not allow for alternative investments.


What are some of the more unconventional things you can do with real estate in a SDIRA?

Clients who have self-directed IRAs for real estate can serve as private lenders and collect interest on the loans they provide. Here’s an example: A house flipper finds a home he wants to rehab and needs a $100,000 loan.

He borrows the sum from a self-directed IRA owner who lends him the money, called a “secured note,” on the condition the loan be repaid in six months at 10 percent interest.

The borrower rehabs the house and sells it, then repays the IRA lender the loan with interest. Both sides win. The IRA owner loans another “rehabber’s” money to renovate another house and repeats the same process again. If the borrower defaults on the loan, the IRA can foreclose on the property, just like a bank.


What are the risks?

Risk is directly related to the property and how much work it needs done. In a worst case scenario, if the borrower defaults on the loan without finishing the renovations, the client will end up with a partially-rehabbed property. They would then have to decide if they wanted to have someone finish the rehab and keep it as a rental or flip it, or simply sell it as is.


What is a self-directed IRA for real estate?

A self-directed IRA for real estate is the option to use your IRA money to invest in an alternative asset and buy and own a piece of real estate in your IRA.


Why do real estate investors use self-directed IRAs?

The reason why somebody would want to use a self-directed IRA for real estate instead of buying real estate with their own cash is simple: tax-free or tax deferred interest. With a Traditional IRA any profit would be tax deferred. With a Roth IRA to purchase real estate, the investment would grow tax free.

If the client bought a house with a self-directed Roth IRA and collected rent from that property for 10 years, then sold the house, all the profit would be tax free.


What is the benefit of a self-directed IRA for real estate?

The taxes on the real estate are either tax deferred or tax free, depending on the type of IRA.


Is this viable for an average investor, or only seasoned real estate clients?

Average people use self-directed IRAs for real estate once they understand how it works. There are a lot of clients who never invested in real estate before using self-directed IRAs to buy real estate.




What are the key points to know before investing in real estate with an SDIRA?

There are several rules established by the IRS that must be followed when using a self-directed IRA for real estate. These rules are inflexible.

  1. First, the investment must be passive.
  2. Second, it must be at arm’s length.
  3. Third, the IRA owner can never live in, or rent the property from the IRA, nor can any disqualified parties, which include the IRA owner, their spouse, both of their parents and grandparents, and their children and grandchildren.

There are a few other things the IRA owner is prohibited from doing. If the property needs work done such as rehab, it must be completely hands-off. None of the disqualified parties can put sweat equity into the property. It must be a third party that does the work.

Relatives who are not disqualified parties, such as brothers, sisters, aunts, uncles and cousins may do work on the property, according to the IRS. They can also rent the property and live on it but must be treated as any other tenant and pay a rent that is a fair price. Sweetheart deals are prohibited.


Can a neighbor or a friend rent property owned by the IRA holder?

Yes, they are not among the disqualified parties, according to the IRS.


What does the term “at arm’s length” refer to?

It refers to all the disqualified parties.


Which companies handle self-directed IRA real estate accounts?

There are about 50 different companies that handle self-directed IRA accounts. Among the best-known names are Equity Trust, Advanta, Midland and NuView.


Are self-directed IRA real estate accounts new?

No, they have been around since the early 1970s.


Why don’t more investors know about self-directed IRAs?

The top two percent of the wealthiest people in the United States are self-directing their IRAs. This is how they get around all the taxes. They probably have the highest net worth Roth IRAs because Roth IRAs grow tax-free.


What percentage of the ultra-wealthy use self-directed IRAs for real estate investing?

Not directly. Some clients start out with small accounts at a hundred thousand dollars, and in a few years, their investment grows significantly.


If NuView does not provide financial advice, where do your clients get it?

We do provide a lot of education. We bring in professionals that are doing real estate investments and people who are raising capital for private companies or to buy a building. It is really up to the client to decide what they want to invest their money in. Often, clients will go find a rental property on their own.


Can someone who already owns an apartment building put it into a self-directed IRA?

No, because you already own it. If that happened, your IRA would be paying you directly for the purchase of that property and that would be a prohibited transaction.


What kind of real estate can a self-directed IRA invest in?

Self-directed IRAs can be used to invest in many different kinds of real estate, but the most common is a single family home. Other options include mobile home parks, self storage, apartment buildings, hospitals, and multi-family syndications which typically involve apartment buildings and storage units.

(A syndication is a group of people who are investing in the same thing.)

Other permitted investments include condominiums, vacant land, forest land, farmland and mineral-based property.


When are self-directed IRAs used in real estate development?

A lot of clients buy a piece of land with plans to develop it. It is important to note that if the IRA owns the land, the IRA is responsible for all the development-related costs associated with the property. The IRA gets 100 percent of the profits from the development project.

If the IRA purchases some vacant land that is slated for the construction of three single family homes, what happens? The property would have to be surveyed and prepared for development. The IRA owner would have to find a contractor to build the project, and pay for all construction-related costs.

When the project is completed, the IRA owner would have to decide whether the property should be sold or rented.


What are the rules for self-directed IRA for commercial real estate?

The rules are similar to those for non-commercial real estate: no disqualified parties can rent the property, live on the property or put sweat equity into it. They can decide who the tenants will be because they are still decision-makers on behalf of the properties.

They can decide what company is going to rent that commercial building, and determine how much that party will be charged. But the rent must reflect fair market values.


What are the rules for self-directed IRAs and real estate loans?

The only type of loans that are permitted are called “non-recourse loans,” which allow lenders to lay claim to assets if borrowers default on their obligations and fail to repay their debts.


What are the rules for real estate down payments in a self-directed IRA?

A self-directed IRA for real estate is responsible for the down payment on property that is purchased by the IRA.


An interesting caveat:

You can partner with your self-directed IRA for real estate using your own cash. For example, if you purchase a property 50/50 with your IRA, then you would also be entitled to half of the rental income property.

Because you purchased half the property with your IRA, all the rules regarding disqualified parties still apply. The advantage here is that you are making money at the same time your IRA is growing.

However, this practice is not encouraged because it is easy to make mistakes. For example, if the rental property that you own 50/50 with the IRA needs a new roof and there isn’t enough money in the IRA to pay for half of the roof, you might be inclined to pay for the entire roof yourself, which is prohibited.


What are the rules for SDIRA real estate expenses?

If the self-directed IRA for real estate owns the property a hundred percent, the IRA is responsible for a hundred percent of all the expenses, and the IRA keeps a hundred percent of all the profits.


What are the rules for self-directed IRA real estate fees?

There is a fee to establish an account, an application fee and a transaction fee when you buy or see an asset. All must be covered by the self-directed IRA for real estate except the custodial fees, which you can pay yourself.


What are the rules for annual appraisal requirements?

We are required to report to the IRS with the fair market value of what your assets are worth on an annual basis. It is very important that clients keep the fair market value of their assets up to date.


How can a self-directed IRA be used to sell real estate?

Just like any other transaction, you would have to have someone like a realtor sell the real estate, which would be a cost to the IRA. Once the property is sold, the purchase price would go back into the IRA.


Explain the rules for a self-directed IRA, LLC.

This is also known as a checkbook control LLC. In this instance, the custodian (NuView) is removed from the transaction process. Instead of having your money sit in a custodial account, it is available to the client in a small business checking account.

However, once the money becomes available to the client, it is the client’s responsibility to follow all the IRS guidelines. The money cannot be used for personal expenses. All the same rules apply that apply for a self-directed IRA for real estate apply to a self-directed IRA, LLC.

There is also more responsibility because you become the bookkeeper and process all your own transactions, including things like paying the taxes on the property and making repairs or renovations.

On the other hand all the rental income from the tenants goes back into the account.


Of note:

If the client makes any contributions to the IRA or takes a distribution, that money must flow through the custodian.

Checkbook control is popular with clients who buy property at auctions or fix and flip properties because of the immediate access to funds.


Do you try to steer people away from checkbook control?

No. We educate them so they thoroughly understand what the rules and risks are.


What is a UBIT?

UBIT (Unrelated Business Income Tax)is the actual tax that is owed based on the income received within the tax-exempt account or entity. It is the tax imposed on the unrelated business income generated by tax-exempt organizations.


What is a self-directed Roth IRA?

Like any other Roth IRA, you pay your taxes on whatever contributions you have made to the plan, or if you converted money from a pre-tax account to a Roth, you pay the taxes on that. Your investments will then grow tax free.
An aside, a lot of people are not eligible for a Roth IRA because they make too much money. Keep in mind there are income limits for making contributions to a Roth.


What is a self-directed SEP IRA for real estate?

A SEP IRA, also known as a self-employed pension, is used by self-employed people. It allows contributions up to $57,000. If you are over age 50, it is higher.


Who might use a SEP IRA?

Self-employed entrepreneurs. It would operate just like any other IRA, but you can put away more money faster than in a Roth or a traditional IRA.


What are some best practices about SDIRAs and real estate investing?

  • Make sure you’re up on market trends.
  • Know where you are buying because location is important.
  • Research the area carefully around the property you want to buy to make sure it is a wise purchase.
  • Review crime reports and check out plans for future development in the area.


Can you take a distribution from your IRA?

Yes. If you are under the age of 59 1/2 and you take a distribution, you will have to pay a 10 percent penalty and you will have to pay taxes on it.


What is the difference between a SDIRA versus a solo 401K?

A solo 401K is a plan for self-employed individuals with no common law employees. It is designed for people with a business of one person. A spouse is also allowed to be a plan participant.

This plan appeals to people like real estate agents or real estate brokers, who have no other employees.


What is the most common question you receive?

People usually want to know if they can live on the property in their self-directed IRA. They want to know if they can paint the house, or if their children could live on the property. And we have the answers when they call in.


This article was meant to answer several questions most real estate investors have when considering using that as strategy to drive better than average returns of stocks and bonds.

If you have any questions we have not covered, please feel free to contact us.
NuView Trust Company is one of the most trusted Self-Directed custodians for both new and seasoned SDIRA investors.