How your IRA can fund real estate investment

How your IRA can fund real estate investments

If you are an investor with a developed IRA spread across numerous stocks and bonds, you stand to benefit substantially by diversifying your portfolio with single-family real estate. Very few individuals realize they can use funds from their IRA to invest in real estate, but single-family rentals are a unique asset that offers a different value proposition than the other investments that usually fill IRAs. Using money from an IRA to bankroll SFR investment offers a multitude of benefits and isolates some of your savings from the vagaries of the stock market. While this is not the path every investor takes, it can be a powerful option for a certain type of investor. Here are some basic facts about using an IRA for real estate investing:

The ideal candidate

Someone who has just begun his or her IRA should avoid real estate investing until he or she has built a solid foundation on traditional IRA investments. The stocks and bonds that people usually invest their IRAs into offer a strong starting point for account growth and do not require the same amount of cash as real estate investments. Once a person has accumulated some wealth through these other investments, however, real estate becomes an excellent option for diversification.

The optimal real estate investor has at least $50,000 in his or her IRA. This upfront cash is the biggest barrier to entry when using an IRA to fund real estate investment, but it ensures that the process will be painless. $50,000 is enough money to cover a down payment and any additional expenses that crop up after the initial purchase. This cushion is critical, and ensures the investor will not violate any regulations that govern the use of IRAs for real estate investment.

The regulations

Many people operate under the misconception that the money in their IRA is ineligible for real estate investment. In reality, the money can be used for real estate purchases, but investors will need to consider several laws that regulate these investments.

Before you can shift your money to real estate investments, you’ll need to transition it to a self-directed IRA. This type of account lets an investor take control of his or her money rather than limiting things to stocks, bonds and mutual funds. Once you have control of your money with a self-directed IRA, there are specific rules that surround real estate investing you’ll need to keep in mind.

You cannot directly benefit from the property, which means any rental income or other money you receive from the investment will need to go directly into the IRA. Additionally, you cannot allow family members to live in the house or live in it yourself, as this constitutes a direct benefit. Finally, you’ll need to have someone else manage the property, and all the money used for upkeep and other property-related expenses needs to come from the IRA rather than your personal accounts.

The benefits

There are many reasons why someone would want to invest in real estate, but the biggest is diversification. Real estate removes some part of your retirement fund from the stock market, which means a major drop in stock performance doesn’t completely eliminate your savings. Simultaneously, price fluctuations in real estate are often smaller than shifts in the stock market. While it’s possible to invest in public REITs with money in a standard IRA, this still exposes you to stock market variability. The only way to make yourself largely immune from stock market fluctuations is with a property purchase that ties your investment directly to the housing and rental markets.

Investors who use an IRA for SFR investments also benefit from substantial tax benefits. Because the rental income that you gain from a property must go directly into the IRA, it is not subject to normal income taxes. Additionally, using the IRA to buy the property exempts the purchase from the capital gains tax that would normally be applied to a real estate acquisition.

HomeUnion® makes it easy

With a fully managed property purchased through HomeUnion®, you can reap all the benefits provided by SFR investing without engaging the cumbersome managerial aspects that make real estate intimidating for so many investors. While real estate investing using IRAs used to be an undertaking for the most self-directed and hands-on investors, HomeUnion® makes it a viable option for anyone with the appropriate means.

Registering on HomeUnion®’s site provides access to prevetted properties in cities that provide excellent yields for single-family rental properties. HomeUnion®’s in-house lender makes it simple to procure financing, and HomeUnion® handles the often difficult tasks of managing the property and tenants. For investors who need real estate investing to be as simple as investing in other assets, HomeUnion® provides the ideal solution, and the ability to use an IRA toward real estate investing makes it easy to build wealth for retir​ement using SFRs.

Charles J. Lillicrapp, Jr. Apr 17 2015 - 10:10 AM
Is HomeUnion® offering their services in Pennsylvania?
    Pasha Manali Apr 17 2015 - 10:17 AM
    Hi Charles, Thanks for your inquiry. While we are currently not offering our services in Pennsylvania, we are in a number of other markets. For a full list, please check out: May I ask why you're interested in Pennsylvania specifically? One of the benefits of our service is that no matter where you, as an investor, are personally located, you can invest remotely with full data on the investment properties. Here's an article on the benefits of remote investing, just in case you're interested. If you have any more questions on our services, please don't hesitate to reach out. -Pasha

Ready to learn more? Schedule a call