One of the most common questions I get asked by new clients initially investing in real estate with an IRA is around the different types of real estate investment vehicles that are allowed in a self-directed IRA. Back in April of this year, I spoke on a panel at an annual Real Estate Investor Summit in Miami. The audience, a mix of real estate professionals, fund managers, fundraisers and individuals interested in income-based real estate investing, were very curious about some of the rules and logistics around using an IRA to invest in real estate. But the discussion that seemed to capture everyone’s attention was about the pros and cons of direct vs. indirect real estate investments in an IRA. Direct investing is just what it sounds like: purchasing a piece of property for buy-to-rent or flipping purposes. This hands-on approach is typically the preferred method for investors who like to have a lot of control over the transaction. The way it usually works is that the investor will find a property, gather the required documents for the IRA custodian (including a purchase contract, settlement statements, escrow documents and more), sign them as “read & approved” and send them to the custodian for countersignature. The name on the deed for the property will read “(IRA Custodian) FBO (client name) IRA,” and all expenses, tax bills, improvements, etc. must be paid from the IRA’s cash balance. Many custodians also require that in the case of a buy-to-rent investment property, a third-party property manager must be retained to gather rental payments from the tenant and disburse the rental income back to the IRA. This method puts the onus on the client to coordinate the transaction and to make sure that they are not committing any prohibited transactions. However it does give them much more freedom to buy/sell investment properties. The second way to invest in real estate through an IRA is to place that money into a real estate fund or private equity entity that invests in real estate. These can be multi-billion dollar REITs, private LLCs/LPs, joint ventures, or other equity vehicles. Investing in this manner takes much of the stress and legwork away from the account owner, since the fund or investment company controls everything and chooses where and when to invest the client’s money. The LLC distributions and payments flow back to the IRA as normal, where they grow tax-free. So which approach is right for you? Both methods give investors a tax-advantaged way to invest in real estate, but when choosing how you get exposure it really comes down to your preferred investment style. If you like having a lot of control and don’t mind the extra legwork, you may be happier with a direct real estate investment. If you want to be more hands off, a fund or private equity entity is probably the way to go. About the Author: If you have a question about investing in real estate using a self-directed IRA, Pensco Relationship Manager Michael Howe should be your first phone call. Since 2010, Michael has answered every question imaginable about self-directed IRA transactions, ranging from the simple to the very complex. His prior experience as a document processor/reviewer at Pensco prepared him well, as he had to learn the subtle nuances of each alternative investment. But it’s his personal interest in real estate – and the fact that he spends most of his free time reading about the subject and attending real estate/mortgage conferences – that makes him a true expert.
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