Real Estate Investing With Your Roth IRA
Mark Twain said it best: “buy land, they’re not making it anymore.” Indeed. It’s estimated that around 80% of the wealth in the US today is in the value of real estate. Real estate has always offered an excellent opportunity for long term growth. Even today, with the real estate market in a slump, there are significant opportunities to be found, and using your Roth IRA to fund your investments can bring a better-than-average rate of return if handled properly.
What Kind of Real Estate?
IRA rules allow you to own almost any kind of investment real estate: single-family or multi-unit homes, condos, co-ops, apartment buildings and even land. With foreclosures high and real estate values down, it’s a buyer’s market. Deals can be had now that won’t be available in another couple of years. People will always need a place to live, the population will continue to grow, and the price of real estate will always go up over the long haul.
Limitations on Use
There are limitations on how your investment real estate can be used. They include:
- The account cannot be used to purchase a home that you, your children, grandchildren, parents, grandparents or great-grandparent live in now or later.
- You cannot buy a vacation home
- All transactions must benefit your retirement fund, and cannot benefit your present-day situation. For example, if the account owns an office building, you can’t rent an office in the building. If your account owns an apartment building, your children can’t live there.
Benefits of Investing in Real Estate
By using a Roth IRA account instead of personal funds, you make more profits because you avoid capital gains taxes when you sell the property. With no capital gains tax to pay, the account balance grows quickly. Plus, the income from the property is added right back into your IRA account. By having the retirement account grounded in real estate, there is a potentially high rate of return, and by diversifying your portfolio you lower your risk in the long run.
How to Invest
For starters, you’ll need to examine your plan to see what investments are allowed. Many IRA custodians only allow investments in traditional stocks, bonds and certificates of deposit. Often, they direct your retirement funds into their own products. You may have little or no right to direct how your funds are invested. In cases where you are able to choose how your funds are invested, you seldom have very many choices.
In order to invest in real estate you need to have a self-directed account with a custodian that offers the self-directed option to their clients. Once opened and funded, mortgages, notes and deeds of trust can all be held in the account.
Transactions are simple to conduct. You find the property that you want to purchase, and the custodian writes a check. The deed to the property is recorded in the name of the Roth IRA account. You can hold the property for future resale or use it for rental income (which goes into the account).
A Solid Investment
Roth IRA investments in real estate are a solid, stable, long term investment strategy. The potential for profit is great in today’s buyer’s market; now is a good time to invest your retirement funds in real estate.
