During the fallout from the recession, many investors found that investing in stocks was no longer the best option for meeting their investment goals. As a result, many people began to look for ways to diversify their portfolio. Real estate offers an excellent way of doing so, but the problem that many people encounter is the ability to tap into sufficient funds for doing so. A self-directed IRA resolves this problem nicely.
With a self-directed Individual Retirement Account (IRA), it is possible for investors to utilize their retirement funds in order to invest in assets other than those that are traded on the exchanges, including real estate. Real estate is often a popular choice for investors who are looking to diversify their portfolios due to the fact that it offers the potential for significant long-term gains. Additionally, real estate can be particularly attractive, as many investors are more comfortable with this investment vehicle because they have prior experience. It must be understood that real estate transactions do work different when using a self-directed IRA.
For instance, there are some restrictions when using self-directed IRAs to purchase real estate. The main restriction is that is that self-directed IRAs are not allowed to hold any assets that may be used for the personal benefit of the owner while the asset is held in the IRA. Due to this restriction, real estate assets held in self-directed IRAs are not allowed to be used for personal use. This means that you are not allowed to live in or work in the property. You also may not benefit from the property in any while it is held by the IRA. Additionally, you may not provide any services, which includes any repairs or maintenance, to the property.
Depending on the requirements of the custodian, a third-party property manager may be required to handle income-producing property. The manager should have no affiliation whatsoever with the owner of the account, meaning that you cannot hire a family member to serve as a property manager.
Among the most common questions that many people have about using an IRAs to purchase real estate is the types of properties that can be purchased. IRAs can actually be used to purchase both long-term residential properties and short-term residential properties. This includes condos, multi-family homes, single-family homes, apartment buildings, and commercial properties.
In order to make this work for you, it is important to understand the best ways to use a self-directed IRA to purchase real estate. Among the most common method is a direct purchase in which the IRA is used to purchase the property outright through the funds in the account. A partnership or tenants-in-common purchase may also be used. In this method, the funds of the investor's IRA are combined with funds from other individual's IRAs to make the purchase.
While there are numerous ways in which a rental property may be purchased, it is important to keep in mind that due diligence should always be conducted in selecting tenants.