Four Ways to Invest in Real Estate Through Self-Directed Accounts

Self-directed investing is all about options. We founded NDTCO on the belief that investors deserve the freedom to invest in assets they know and believe in. You may be aware that you can buy a property with a self-directed IRA, but you may not have known your full spectrum options within this asset class.

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Here we’ll explore four different ways you can invest in real estate with your self-directed IRA.

Direct, 100% Purchase—Owning the Property Outright

This model is fairly straightforward: Your account purchases a property and enjoys tax-deferred earnings for the benefit of your retirement. An IRA can hold rental property, execute fix & flips at your direction, or participate in just about any real estate investment model you can employ outside of a tax-advantaged plan.

Partner with Others (or Their IRAs)

If your account cannot purchase a property outright and you’d rather not borrow money (you could use a non-recourse loan; click here to learn more), you can partner with other investors — or their IRAs — to purchase a percentage of the real estate asset.

Your account can even partner with disqualified persons or their IRAs, provided you maintain a clear distinction between your account’s ownership and their ownership over the course of the investment. This distinction, generally defined by the account receiving returns and paying expenses in proportion to its ownership percentage, is essential. Ownership percentages must remain intact throughout the life of the investment when you partner your IRA with a disqualified entity. However, when partnering with a non-disqualified person, the ownership percentages can be re-allocated if deemed appropriate.

Those interested in partnering their self-directed accounts with others may consider utilizing an LLC rather than investing directly. Instead of buying a property outright, your account could open and fund a private entity, typically an LLC, of which you can name yourself manager and assume checkbook control over the account funds. This enables the investor to directly execute investments for the account rather than coordinating activities through the custodian.

That being said, with a higher degree of flexibility comes a higher degree of responsibility. Prohibited transactions, be they intentional or unintentional, are far more likely upon assuming checkbook control of your tax-advantaged money. Always remember that every IRS rule pertaining to self-dealing still applies to the LLC approach.

Lend Money to Others Seeking to Invest in Real Estate

If real estate simply isn’t your chosen or most knowledgeable asset class, your self-directed account can also “be the bank” and issue a private loan to real estate investors who apply the capital to purchase a property. If you so choose, you can secure this loan with collateral, which could include the applicable investment property.

Invest in Real Estate Derivatives

A tax-advantaged plan can invest in real estate in ways that don’t necessarily involve the acquisition of actual property:

  • Real Estate Options – An options contract gives the holder a chance to purchase a property at a specific price by a specific date. Contracts can either be re-sold prior to expiration, exercised, or allowed to expire. Investing in options is highly speculative, so proceed with caution if considering this avenue.
  • Tax Liens – Tax liens are 1st position liens placed on real property when property taxes go unpaid. The interest rate paid for tax liens is guaranteed by state law and most counties hold online auctions for investors. This approach is a passive way to earn interest and possibly acquire real estate should the tax lien go unpaid. A tax lien holder can foreclose on a property if the taxes go unpaid for a specified period of time.
  • Equity Crowdfunding – This is similar to partnering with others except your IRA can partner with countless others from the comfort of your home computer. With equity crowdfunding, multiple investors can browse online marketplaces and pool their allocations into common investment vehicles. Investors can purchase equity in a private company, in a piece of real estate, in a private company that makes money in the real estate industry, etc.

Don’t Hesitate to Reach Out!

Self-direction is about having options. As a company founded to empower investment options, we’re always happy to discuss those options with you. Please give us a call at 877-742-1270 or send us a message through the Client Portal if you ever have questions about your account or about your investment choices.

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