Self-Directed IRA Investing: How to Get a Loan to Invest in Real Estate

If you’re investing in real estate, you’re likely aware of the large returns you can get from this class of assets. You’re also familiar with the risks — as well as how to mitigate them. But if you’re not investing in real estate through a self-directed IRA, you’re missing out on tax advantages.

We’ve written a lot about self-directed IRAs and how to know if they’re right for you. They indeed require a lot of work and attention from the investor. But the extra work can amount to higher returns with investments in nontraditional assets. 

If you’ve determined that a self-directed IRA is a good retirement saving tool for you and you’re interested in real estate investing, you might consider adding some property to your portfolio.

Investing in real estate through a self-directed IRA isn't as straightforward as it is outside of this retirement account. For instance, borrowing is more difficult because you’ll need a certain type of loan. But it’s not impossible.

In this article, we’ll cover the basics of investing in real estate with a self-directed IRA — including borrowing — from the investor's perspective.

Self-Directed IRA Real Estate Investing Basics

A self-directed IRA allows you to invest in nontraditional assets — like real estate, precious metals, and cryptocurrency— while reaping the benefits of a tax-advantaged retirement account. A self-directed IRA gives investors a lot of freedom, but it's up to them to research the investments they’re buying. Investors also must open their account with a custodian, who makes transactions on their behalf and ensures they’re following IRS regulations. 

Benefits of investing in real estate with a self-directed IRA

There are many reasons why you might want to invest in real estate with a self-directed IRA. First, it allows you to diversify your investments outside of your typical portfolio of stocks and bonds. Real estate can also provide consistent cash flow that you can reinvest in your retirement. Finally, because property values — and rent — rise along with inflation, owning real estate that you can rent out is a great hedge against inflation.

Types of real estate you can invest in with a self-directed IRA

You can invest in many different types of real estate with a self-directed IRA, including:

Rules for investing in real estate with your self-directed IRA

While the types of real estate you can purchase with a self-directed IRA are nearly limitless, there are several rules you should be aware of about how these properties can be used. We go into detail about these rules in our blog post, How to Invest in Real Estate with a Self-Directed IRA, but here are the basics:

  1. The property must be purely an investment.

  2. You or any “disqualified persons” cannot benefit from the property in any way.

  3. You can’t use the property you or a disqualified person already owns as a self-directed IRA investment.

  4. The IRA — not you — owns the property.

  5. Rental income must go back into the IRA, which you can then re-invest.

How to Buy Real Estate with a Self-Directed IRA

The first step in investing in real estate with a self-directed IRA is to set up an account with a custodian if you don’t already have one. Once you have a self-directed IRA set up, you have a few different options when it comes to purchasing a property.

Many investors fund their self-directed IRA with enough cash to purchase a property outright. That’s because — as we mentioned — it can be more difficult to get a loan through a self-directed IRA. We’ll come back to this below.

If you can’t purchase a property outright, you can still invest. Some investors partner together to purchase a property — of which you’d own a percentage.

And if neither of those options works for you, it is possible to get a loan through your self-directed IRA. 

Mortgaging Real Estate in a Self-Directed IRA

If you need to borrow money to purchase real estate through your self-directed IRA, you’ll need to know about non-recourse loans and how your investments will be taxed.

Non-recourse loans

Common debts — like credit, car loans, and (usually) mortgages — involve recourse loans. Recourse loans allow the lender to pursue the borrower’s other assets (in addition to collateral) if the borrower’s debt exceeds the value of the collateral. These loans typically have lower interest rates because they’re more advantageous to the lender.

On the other hand, non-recourse loans are more advantageous to the borrower, so they’re harder to get. Non-recourse loans restrict the lender from pursuing the borrower’s assets outside of the collateral. Because of this risk to the lender, these loans usually have higher interest rates and require an excellent credit score. Few banks offer non-recourse loans, but this is the type of loan you’ll need if you’re borrowing money through your self-directed IRA.

If you do have to borrow, you’ll need to get a non-recourse loan in the name of your IRA. In this case, you — the IRA account holder — are not liable. Rather, if you default on the loan, the lender can only pursue the assets within your IRA. 

Even if you have the value of a property’s purchase price saved in your self-directed IRA, you may still need to borrow. That’s because closing costs, taxes, and any other costs associated with the property must come from your IRA — not your personal bank account. For example, you (and all other disqualified persons) are prohibited from improving or renovating the property yourself. You’d have to hire a third-party contractor to do the work, and you’d need to pay for it out of your IRA.

Taxes

It’s also important to know that when you get a loan in the name of your IRA, the IRS will tax it as an Unrelated Debt-Financed Income Tax. The amount you put down won’t be taxed, but the loan will — because those funds didn’t come from your tax-advantaged IRA. Remember also that taxes must be paid from your IRA, not your personal account.

How Chicago Trust Administration Services Can Help

There are a lot of details involved in real estate investing with your self-directed IRA, but we’re here to help make the process go smoothly. 

If real estate investing is something you’re interested in, you should consider investing with a self-directed IRA. Real estate can be a great source of cash flow to fund your retirement while you benefit from tax advantages. At Chicago Trust Administration Services, we make fast, compliant transactions so you can start adding real estate to your portfolio in no time.

To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.

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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.

Steven Miszkowicz