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

Featured Image

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

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, Even Their IRAs

If your account doesn’t have sufficient funds to purchase a property outright and you’d rather not take out a mortgage (your account can use a non-recourse loan to buy real estate. Click here to learn more), you can partner with other investors — even their IRAs — to purchase a percentage of the real estate asset.

Less recognized, your account can even partner with disqualified persons or their IRAs, provided a clear distinction between your account’s ownership and their ownership is maintained 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 person or their IRA. 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 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 on behalf of the account rather than coordinating activities through the IRA provider.

A note of caution about investing with an LLC – 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 Other Real Estate Buyers and Investors

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 property. If you so choose, you can secure this loan with collateral, which could include the applicable investment property.

Purchase Real Estate Derivatives

A self-directed IRA or HSA can invest in real estate through a variety of means that don't necessarily involve the acquisition of actual property:

  • Real Estate Options - An options contract provides the holder with, as the name implies, the option to purchase a property at a specific price at a specific time (the "expiration"). Contracts can either be re-sold prior to expiration, exercised upon reaching expiration, or allowed to simply expire if exercising it isn't financially prudent. 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. Investing in tax liens is a passive way to earn interest on your money and possibly acquire real estate should the tax lien go unpaid. A tax lien holder has the right to foreclose on a property if the taxes go unpaid for a specified period of time.
  • Equity Crowdfunding - This is similar to partnering on an investment, except your IRA can partner with countless others from the comfort of your home computer. With equity crowdfunding, multiple individuals (or their self-directed accounts) 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 an e-mail at info@ndtco.com if you ever have questions about your account or about your investment choices.