How Your Self-Directed IRA Can Earn Income on Real Estate Investments

Real estate is the most popular investment in a self-directed IRA. Why? In part because many people are familiar with the process of real estate investing and can easily navigate the transactions. Also, individuals understand the long and/or short-term value the right acquisitions present.

While no investment is guaranteed, real estate has long been considered a somewhat safe asset. Even though costs of property do fall (plummet, even) the costs often rebound depending on circumstances and especially over extended periods of time.

With that being said, there are several different ways you can build wealth for retirement by participating in real estate investing transactions. Depending on your level of expertise, you can take advantage of the benefits—starting today, using your self-directed IRA.

Property Appreciation

As mentioned above, on an average the appreciation of property over time increases. Provided you have the capital to invest and the time to wait, your IRA can acquire many different types of real estate (residential, commercial, improved and unimproved land) and hold on to it until such a time in the future that you can sell it and hopefully make a nice return on your initial investment. Because the initial investment was acquired by an IRA income gained at sale is tax-sheltered and may be used to reinvest, make improvements on another asset owned by the IRA, or even taken as a distribution if you’re of retirement age.

Rental Income

Rentals work for many a self-directed account owner. From commercial office space to condominiums and single-family homes—rental income can provide steady growth in an IRA. Additionally, property appreciation may eventually come into play here, as well, if you decide to sell during a peak in real estate costs.

Private Lending Transactions

Your self-directed IRA use mortgage loans as investments to non-disqualified persons and entities and earn returns based on the terms (interest, etc.) of these notes. As the owner of the account lending the money, you determine the interest rate, term of the loan, and can decide whether it’s secured by collateral or not.

Investing in Tax Liens and Deeds

Timely payment of property taxes is critical to the daily operations of governing municipalities. When homeowners and property owners fail to pay these taxes, the local government takes steps to collect the funds by selling tax lien certificates and tax deeds of the properties to the highest bidder. Investors purchase liens and deeds and in turn become the collectors of these debts, gaining income most commonly by attaching interest rates to the property owner until the debt is paid in full. To learn more about investing in these types of real estate options, read our previous blog.

Keep in mind that you must fully understand the rules regarding disqualified persons and prohibited transactions when investing in real estate or any other opportunity. If your retirement plan operates outside the rules and regulations set forth by the IRS, the consequences could be severe.

If you have questions about this article or want to learn more about controlling your own retirement funds and decisions, please contact us.