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You are here: Home / Real Estate

Investing In Real Estate

Real estate is one of the most popular alternative investments chosen by self-directed IRA investors and it’s no wonder since real estate is a familiar and tangible asset that could contribute to IRA growth and portfolio diversification. Additionally, income-producing real estate investments can help turn IRA wealth into supplemental retirement income.

Real estate is a tangible asset that can easily be evaluated as a potential IRA investment. In most cases an IRA investor can walk the property, drive through the neighborhood, obtain market data and talk to nearby property owners to determine the viability of a potential IRA real estate investment.

Investing in out-of-state or out-of-country property requires a little more due diligence on the part of the investor and greater reliance on qualified and licensed real estate professionals.

It is important for IRA investors to “do the math first” as any expense related to the real estate investment must come from real estate funds. This requirement makes it important to calculate the “total cost of ownership” and ongoing recurring expenses such as property taxes, association fees and maintenance and unanticipated expenses for repairs and replacements.

There are various ways to structure the IRA real estate investment and investors should be familiar with Prohibited Transaction rules before proceeding with any IRA-funded investment.

Click here to download our document that describes your options for structuring an IRA real estate investment. Also review our Real Estate Investment Document Requirements to insure that all relevant investment documentation is completely accurately to insure an efficient real estate investment transaction.

Forge Trust Real Estate

Advantages of Investing In Real Estate Through Your Self-Directed IRA

Real estate purchased through an IRA is considered a secure asset. Therefore, the investment is extended protection from personal bankruptcy filings. All transactions are conducted separately from an individual’s personal finances.

There are several tax advantages associated with investing through an IRA. Capital gains and income made on property or land purchased through an IRA are afforded tax-deferred advantages. If the investment is made through a Roth IRA, the capital gains and income are exempt from tax.

Real estate investments provide an opportunity to diversify your holdings. IRAs allow investors to go beyond the usual stock, bond, and mutual funds. Holding property in an IRA account provides real benefits and investment options you just can’t get anywhere else.

IRA-owned real estate assets can be handed down to future generations. These type of investments can sometimes appreciate in value. The investment, along with its value and tax advantages are able to spill over into the next generation under beneficiary designations.

Build Opportunities with a Real Estate IRA

With Forge Trust you have the ability to invest in almost any type of real estate using your individual retirement account.

Types of Real Estate

Individual Retirement accounts may be used to invest in several different types of real estate transactions.

The most common transactions for real estate options are:

Homes, apartments and condominiums
Office buildings, retail stores, malls, and other commercial properties
Farmland
Timber, water, or mineral rights
New construction and development
Real Estate Investment Trusts (REITs)
Tax Liens, trusts, deeds, and mortgages
Vacant land
Resorts and hotels

  • Case Study: Susan
  • Case Study: Arizona

IRA-Services-Real-Estate-Investing-Case-StudySusan has decided to use her IRA to purchase commercial real estate in an up-and-coming neighborhood. Susan’s IRA will only cover half of the purchase price so she decides to take out a non-recourse loan to fund the balance.

In a non-recourse loan, Susan can use the property as collateral without putting herself or her IRA at risk.

She sends all the necessary paperwork for Forge Trust Company to make a 35% down payment. The bank Susan chooses finances the rest on the IRA’s behalf.

IRA-Services-Retirement-Real-EstateAfter speaking with his advisor, Joseph decides he is going to invest in real estate using his IRA. He calls Forge Trust and explains that he is ready to rebalance his portfolio.

Joseph wants to invest in something that acts as a good fit for his financial future. He chooses to invest in property in Arizona because he eventually wants to retire there.

Joseph is granted the exclusive right to purchase some beautiful property in Arizona for a specific price and on a specific date. If he fails to buy the property on the agreed-upon date, the option expires. The seller would then be free to sell the property to another buyer. Joseph does not want to miss out on the opportunity to buy the property in Arizona, so he asks IRA Services to handle the filings. He knows they will get all the necessary papers correctly filed and that they are aware of the important deadlines.

Joseph gives Forge Trust written instruction to wire earnest money as part of the purchase. Forge Trust reviews the documents to make sure the IRA is listed as the buyer of the property, and that IRA guidelines are being followed. They sign the necessary documents on behalf of the IRA and wire the earnest money.

While closing documents are prepared, Joseph hires a property manager to oversee his new real-estate investment, collect rent, and pay bills. Joseph instructs Forge Trust to execute an agreement between the management company and the IRA.

Leveraging an IRA funded Real Estate Investment

Real estate investing with IRA funds requires the investor to “do the math first” to calculate the initial and ongoing cost of ownership to determine if enough funds are available in the IRA for the investment. In those instances where adequate IRA funds are lacking, a non-recourse loan may be a consideration for funding the deal.

The loan is called “non-recourse” because it allows for no recourse against the individual account owner; only the named property owned by the IRA. In the event of a default, the only recourse for the lender is to look to the property as the sole source of repayment; the lender cannot pursue other assets that may be owned by the account owner or the IRA.

The source for a non-recourse loan is either a bank with expertise in non-recourse lending or a private money lender. Investors should be aware of the fact that these lenders will have their own set of investment criteria that will need to be met.

Additionally, a non-recourse loan to finance an IRA real estate investment will trigger Unrelated Business Income Tax (UBIT) on the Unrelated Debt Financed Income (UDFI). This tax may not be a deal breaker but is important to know before you make an investment.

When considering a non-recourse loan for an IRA funded real estate investment it is important to review the lenders requirements and become familiar with UBIT on UDFI that can be found in IRS Publication 598. You should always consult with your tax professional before directing an IRA investment.

The typical loan requirements to obtain a non-recourse loan include:

The property must generate rental income. Lenders will often use this to determine whether there will be sufficient income to cover a loan and other expenses.

There must be a 60%-70% debt-to-equity ratio on the property. In some instances, an IRA is required to put 30%-40% down in order to meet this requirement.

What types of Alternative Investments does Forge Trust custody?


Real Estate


Promissory Notes


Private Equity


Private Placements


Precious Metals

 

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Forge Trust
PO Box 7080
San Carlos, CA 94070-7080

(800) 248-8447
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IRA Services, Inc., Retirement Planning Service, San Carlos, CA

FORGE TRUST AND FORGE TRUST COMPANY AND THEIR REPRESENTATIVES IS NOT A FIDUCIARY UNDER ERISA AND DO NOT OFFER TAX OR LEGAL ADVICE. DO NOT PROVIDE INVESTMENT ADVICE, DO NOT SELL INVESTMENTS, DO NOT EVALUATE, RECOMMEND, OR ENDORSE ANY ADVISORY FIRM OR INVESTMENTS. INVESTMENTS ARE NOT FDIC INSURED AND ARE SUBJECT TO RISK, INCLUDING THE LOSS OF PRINCIPAL. CLIENTS ARE ADVISED TO PERFORM OR FACILITATE THEIR OWN DUE DILIGENCE WHEN INVESTING. THE INFORMATION CONTAINED HEREIN DOES NOT CONSTITUTE LEGAL OR TAX ADVICE AND SHOULD NOT BE CONSTRUED TO APPLY TO ANY INDIVIDUAL PERSON OR SITUATION. EACH PERSON SHOULD CONSULT WITH HIS OR HER OWN PERSONAL TAX ADVISOR, FINANCIAL PLANNER, ATTORNEY OR ACCOUNTANT WITH RESPECT TO SUCH INDIVIDUAL'S SPECIFIC SITUATION AND SHOULD NOT RELY UPON THIS INFORMATION WITHOUT SUCH CONSULTATION.

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