Key Factors to Consider While Investing in Rental Properties Using IRAs

home for rentIf you have a great deal of money in your IRA and are using it for investment in stocks, shares and other money market instruments, are you aware of the fact that you can even invest in rental property, which will actually fetch you better returns? This article discusses key factors an investor should consider while investing in rental properties using their IRAs.

Why buy investment property?

Perhaps you have already been burnt by the stock market crashes and volatility. Perhaps you are already wondering how you can invest money to get better returns. Considering that the financial markets, in recent times, have given negative returns, and that property prices seem to have bottomed out, it is the right time to consider investing in real estate. When properties are available at a bargain price, they can only go up.

When you buy property for rental income, if you get all your facts and figures right, have your research in place, you can actually make money from the rent that you get. Over the years, you will not only get rental income, but your property might appreciate as well. As an asset class property may not be as liquid as money market instruments, gold or other investment avenues, but it is a safe long-term investment.

A self-directed IRA gives your greater flexibility in investment. If you have a traditional IRA, you can transfer the money to a self-directed IRA to invest in alternative asset classes like real estate.

The benefits of using IRA to buy investment property

If you get income or capital gains from your investment property, you only have to pay tax on the money that is debt financed. Money from IRA is tax-deferred. The rental income goes directly back to your IRA account and this income is tax-deferred. But you can use the income to generate more money and invest in more than one property, thus increasing your retirement funds exponentially, as money makes money.

What is more, if you don’t withdraw the money, and withdraw it when you are allowed to, you will have made all the money tax-free, thus increasing your funds even more. If you decide, at any time, to sell of your property, you will have to pay the taxes that you are liable for at that time.

Where should you buy investment rental property?

When using IRA funds to buy property for rental purposes, you should learn to buy in areas, which will maximize your returns. As such, it is important not just to look at places where you are staying, but in other parts of the country, where property prices are low, but rents are high.

How do you go about buying investment property for rental returns?

You should use the services of property consultant/ management firms who offer turnkey solutions. They will help

  • Buy the property
  • Rent it out
  • Manage it
  • Have it repaired when required
  • Get tenants evicted if necessary
  • Get new tenants

Such firms also offer rent and maintenance guarantees and professional fees are minimal considering that you are don’t have to deal with any problems. They also have a pool of rentable homes and also potential tenants.

Using your own IRA money to invest in rental properties to add to your investment portfolio makes eminent sense as the cost of living keeps increasing and, owning property, even if you can’t use it yourself, means you will have a comfortable retirement.


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Richard Jan 14 2015 - 8:04 PM
When purchasing such a property using a self-directed IRA, how does financing work? Do you need to keep enough money to cover maintenance in the IRA, or can outside money be used if there isn't sufficient in the IRA? How does that work? I can't find this info anywhere.
    Scott Hetherington Jan 15 2015 - 11:52 AM
    Hi Richard, when using a self-directed IRA, all expenses need to be paid from the IRA. Think of the IRA as it being a separate, once you start mixing money from other sources, those other sources then become in essence part owners of the property and the tax deferred status becomes questionable. avoid any issues, 1) make sure you maintain some provisional assets within the IRA that are liquid so you can pay any maintenance costs that arise and 2) make sure you choose a property that generates enough cash flow so that you have a constant stream of cash to pay for those expenses...If you're interested in learning more, I can set you up with one of our real estate solution managers and they can give you more details and offer some suggestions on how you may want to structure your self-directed IRA. Hope that helps.

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