How I Bought Real Estate With My IRA

Daniel Penzing
Written by
Last update:

Step One: Study Real Estate, Understand SDIRA Rules, Select Custodian

Because of the IRS rules, not all retirement accounts can be used to buy real estate. For example, the IRS says it is illegal for an IRA or 401k to be used for Real Estate investments, but it does not say it is illegal for a retirement account to own real estate.

The IRS rules say that it is illegal to use an IRA or 401k to invest in publicly traded assets, partially publicly traded assets, or assets requiring active management. There are a number of Real Estate investments that do not fall into those categories, however, so investors have found ways around the rules.

A Real Estate IRA allows you to use your IRA money to purchase Real Estate, but purchase Real Estate it is still not. It turns out that such an IRA can purchase Real Estate the same way it can purchase stocks and bonds.

In this post, we will look at the IRA rules for real estate investments and then show you how you can use a Self-Directed IRA to buy real estate.

A self-directed IRA allows the investor to direct where the money is invested and often allows a greater range of investments than the typical opportunities found in IRAs and 401k’s.

Step Two: Select Agent, Research Market, Buy Home

Now that you have an agent, it is time to set some objectives.

First, I shopped simultaneously with two different agents.

You never know how an agent will perform and a backup is always a good idea.

Second, I set a price range.

Most experts’ advice is to let your agent set the price range. For some reason, I did not follow this rule.

Third, I picked the neighborhood that was in my price range.

If you do not select a neighborhood first, you are not being strategic.

Fourth, I picked the city that was within commuting distance of where I was working.

This was important because I wanted to be able to enjoy the full potential of my property as well as keep the taxes down.

My objective was to keep my commute time as close to my current commute as possible.

So I shopped specific neighborhoods in three cities close to where I worked but with a different tax rate. I also shopped specific neighborhoods in three cities close to where I lived but with a different tax rate. I found that the overall tax rate was roughly a wash and the property taxes were nearly halved.

Step Three: Get the Property Rent-Ready

You'll usually need to fix up any properties or make them rent ready, but the most important things to repair are safety issues. Fix anything that's going to hurt a tenant. Change light bulbs, patch holes in the walls, and add new locks. Replace electrical components that may be faulty. Look over the furnace, water heater, and heating system to make sure they're working and safe.

Go through every room and make sure there’s no black mold. You won’t get many takers on a property with black mold, and it’s dangerous to live in. When you’re done, create a list as a reference for the property manager’s final inspection.

Before you show the property, make sure the yard is clean. Get a mower and trim back the hedges. Add some pretty plants and pick up any debris. Make sure the floors are clean. Wipe down the walls and clean out the cabinets.

Next, take pictures of the good stuff and create an online listing. You can get free pictures from Google Images. On the description, list the property features and any upgrades, such as stainless steel appliances or new cabinets. List the amenities, such as a pool or a gym.

Then, it’s time to start taking applications.

Step Four: Rent the Property

Rent to your kids, nieces, cousins, and the uber neighbor’s kid who hangs out in front of your house constantly.

They are more likely to take care of the property, they don’t need credit checks or that long of a rental history. They are more likely to pay on time, if not a little behind to make you dance.

If the kid says they will pay the rent on the first, and then you have to remind them on the second, and then their mom tries to collect money from you for the rent on the third, do not pay till the kid brings you cash, not until you see tangible evidence that they have the money. You will end up paying a couple more times to make the kid happy, but as long as the payments keep coming, it’s worth the two or three temporary payments.

In Summary…

In this post I will walk you through the step by step process I took to purchase real estate using my retirement account. I'll tell you the steps I took to get started, where I looked for real estate, and how I found the perfect piece of property. Let's begin!

The first thing you need to do is open a self-directed IRA at a reputable bank, brokerage or some other type of financial institution. Next, you need to locate a piece of income producing real estate with a potential for appreciation. In my situation, I purchased a duplex that was a short sale. When you purchase a short sale, you are buying a property that is already in foreclosure which allows you to purchase a property for a much lower price. Be aware that in a short sale the bank will need to approve your loan and the sales price of the duplex I bought was about 70% of the market value. So in short, you can pick up some great deals on these types of properties and don’t let the word short sale scare you.

It's important to complete your due diligence before purchasing a piece of property. Use the resources available to you and the contacts you have already built, and you should be able to complete your due diligence effortlessly and with confidence.