Purchasing Investment Property using an IRA (Part 2 of 4)
Using an IRA account to purchase real estate can be a great way to add to an existing retirement plan or simply diversify current holdings. Following the guidelines of the law for these types of investments can bring strong yields to the IRA owner.
Different Ways to Use IRA with Real Estate
There are actually several ways to use an IRA as an investment in real estate.
* Act as a bank – The money in the IRA account can be loaned out to individuals who offer up real estate as the primary collateral. In essence, the IRA account becomes a mortgage lender.
* Own property – Most people choose to use their IRA funds to outright purchase an investment property. The seller of a home enters into a contract with the IRA and the IRA becomes the owner of the property.
* Partner with others that own property – It is possible for an IRA to become a partner with investors such as other IRA’s, entities or individuals.
Property Value Requirements
Most IRA companies will require that the property has a report of market value in order to be accepted as an investment. Furthermore, some companies may require that a new value report be presented each year. This is to ensure that the correct property taxes are being paid. The report can come in the form of an appraisal or a market analysis completed by a real estate agent.
Basic Guidelines for IRA Real Estate Investment
* All transactions must be arm’s length – This means that the owner of the IRA cannot buy any property from the IRA. Conversely, the IRA cannot purchase one of your existing properties.
* The owner of the IRA cannot use the real estate – This means that you cannot live in the home nor can you use it as a second home or vacation property.
* The IRA account only invests for the account – The owner of the IRA cannot receive any type of immediate benefit from the investments.
* No sweat equity allowed – Any repairs or improvements made to a property must be completed by a third party.
How to Manage the Property
Once an IRA has bought real estate, the expenses for the property will need to be managed via the IRA account. The expenses can be controlled by a property manager or by the IRA owner. Once again, there are some rules to keep in mind.
* You are in control of decisions for the property – You have the say in which plumber to hire, who is allowed to rent the home and other similar decisions. However, you cannot do any physical work on the property.
* No personal funds used for the property – Your personal funds cannot be used to pay property taxes, secure insurance or anything else related to the property. For this reason it is always wise to open up an IRA account with a nice cash buffer to handle expenses.
This is Part 2 of a 4 Part Series.