Investments can be used to generate passive income

Your Guide to Self-Directed IRA Real Estate Investing

A self-directed IRA (SDIRA) offers unique tax advantages that aren't available with traditional retirement plans.

One of the main reasons I swear by self-directed IRAs is because it allows me to invest in real estate, while taking advantage of the tax benefits of an IRA.

As a real estate investor myself, I’ve been able to generate millions in tax-free revenue from various real estate holdings using my tax-protected Roth IRA.

However, self-directed IRAs receive more regulations than most retirement plans and do have some limitations, also known as prohibited transactions.

That’s why I want to share some insights on self-directed IRA real estate investments based on what has worked and not worked for me in the past.

The Basics of a Real Estate IRA

Using your self-directed IRA to invest in real estate is one of the many advantages of converting from a 401(k) or traditional IRA to an SDIRA.

Your SDIRA can be used to purchase the following real assets:

  • Single-family homes
  • Multi Family homes
  • Raw land
  • REITs
  • Commercial real estate
  • Mortgage notes

In addition, SDIRAs can be used to fund non-recourse loans and private equity in mortgage companies that generate lots of revenue.

In short, there is no shortage of ways to invest in real estate using an SDIRA.

Investments can be used to generate passive income on rental properties or to buy and hold equity in a fast-rising market.

All income earned by the property is also directed back to the IRA and is held tax-free if you use a Roth-structured IRA.

However, before we continue, we should note that there are several regulations that govern self-directed IRA real estate investments that many people are unaware of before they open an account.

Real Estate IRA Rules and Regulations

First, all SDIRAs require a custodian, which comes with added fees and time constraints. Custodial interference can be circumvented by achieving checkbook control via an LLC, which I recommend opening through your SDIRA to fund all purchases.

An SDIRA also provides liability benefits, especially if you partner or syndicate a real estate deal.

Secondly, an SDIRA can only be used to buy and sell property in your account—not property you already own.

Third, in order to avoid tax penalties, the IRA owner must avoid a long list of what the IRS deems prohibited transactions.

  • You cannot reside in a property owned through your SDIRA.
  • All handiwork must be contracted out. You cannot work on the property by hand.
  • Your immediate family members, including your spouse, parents, children, grandchildren, and legally adopted children, as well as the spouses of your children and grandchildren, are prohibited from renting or residing in any property owned by your SDIRA account. This restriction also applies to investment providers or fiduciaries of your IRA.

These added caveats do tend to turn some investors off, but these cons are greatly overshadowed by the tax benefits of combining a Roth IRA with an LLC to generate high returns for retirement. Let’s explore some of these pros and cons below.

Pros and Cons of Using an SDIRA to Purchase Real Estate


  • Potential for a high return on investment.
  • Checkbook control enables greater control over assets.
  • Greater investment diversification shields assets from the stock market.
  • Real estate investments grow tax-deferred or tax-free.
  • You can use an SDIRA to invest in properties almost anywhere.
  • Self-directed IRA LLCs are protected from creditors and bankruptcy.
  • All costs come out of the account instead of your pocket.


  • You cannot dwell in the property.
  • Income isn't pocketed until you cash out.
  • It's necessary to have plenty of cash in your account to cover all costs associated with the property.
  • Real estate is not a traditionally liquid investment.
  • No DIY improvements allowed.
  • Everything is paid to the IRA account instead of the investor.
  • Unlike a traditional property investment, a real estate IRA requires third-party involvement in the form of an IRA custodian, though this can largely be bypassed with checkbook control.
  • No tax advantages are available for deducting mortgage interest, property taxes, or depreciation.
  • Potential for negative cash flow, problematic tenants, or major repairs.

How to Fund a Real Estate IRA

Now that we have the basics out of the way, it’s time to explore ways to fund your account.

There are several funding options for real estate IRAs. Many investors choose to transfer funds from an existing IRA or SDIRA. It's also possible to roll funds over from an employer-sponsored 401(k) into a new real estate IRA.

Investors can also make annual contributions within the IRS's contribution limits, which is $6,500 for people under 50, with a $1,000 catch-up rate allowed for people 50 or over.

How to Begin Investing in Real Estate With an IRA

First, you will need to open a self-directed IRA that will be used for investing in real estate through a brokerage. All real estate IRAs require an IRA custodian, so conduct your due diligence in finding the right one.

After you open an account and fund it, you will need lots of money for purchases and repairs. I recommend establishing an LLC.

LLCs come with liability protection against bankruptcy, and they allow you to exercise checkbook control, which cuts out the middleman of going through your custodian to make a purchase. Since real estate deals are notoriously tedious, this saves you lots of time.

If an IRA has sufficient funds to purchase a property, a cash sale can be made. If the account doesn't have sufficient funds, the investor has several options for closing the gap, which include:

  • Partnering funds with other investors. In this scenario, profits, expenses, and ownership are divided based on investor contributions.
  • Acquiring a non-resources loan. Note: Non-recourse loans allow the lender to foreclose on real estate used as collateral in the case of default.

Investors can also purchase mortgage notes instead of physical real estate as a low-commitment option. This option makes it possible to earn money from borrowers instead of being a landlord.

Keep in mind that a real estate IRA transaction follows all of the same steps of any traditional property sale. Once escrow is closed, the investor is free to rent or lease the property to anyone who isn't classified as a disqualified person.

An SDIRA makes it possible to buy real estate that can be used to generate income and value while avoiding taxes.

By following the simple steps outlined above and keeping yourself apprised of all of the latest IRS regulations, you can begin buying and holding real estate in your retirement portfolio so that when you retire, you will have substantially more money baked into equity and generated from passive income.


What is the 5-year rule on the self-directed IRA?

Applied specifically to Roth SDIRAs, the 5-year rule requires investors to own an IRA account for a period of 5 years before taking penalty-free and tax-free distributions. Otherwise, the account holder will be responsible and must pay a penalty.

How do you avoid taxes on an SDIRA?

If you'd like to avoid paying taxes at the rate of ordinary income during the withdrawal period, opt for a Roth SDIRA that is funded with post-tax dollars instead of pre-tax dollars.

Do you pay capital gains on an SDIRA?

With earnings on an SDIRA having tax-deferred status, capital gains and dividends will pile up until the withdrawal period after age 59 1/2. Once withdrawals begin, the earnings will be subject to capital gains taxes at the rate of ordinary income. However, Roth IRA accounts are not subject to capital gains during the withdrawal period.

determine what early retirement looks like to you

Your Investment Guide to Retirement Early | How to Build Wealth Fast

The feeling of financial independence isn't something you can tally up using retirement calculators. It's also not something you can achieve on a whim. While the average American's retirement age is 61, your lifestyle, both leading up to and during retirement, will determine your true feasible retirement age. 

To help you retire early, I’ve laid out a few investment secrets I’ve learned over the years that allow you to scale your wealth quickly and sustainably for retirement. 

Step 1. Determine How Early You Want to Retire

First, determine what early retirement looks like to you. Do you want to retire in your 60s, 50s, or maybe even your 40s?

For some people, the idea of freely traveling, relaxing, or pursuing hobbies is all the motivation they need to aggressively save during their working years. 

Setting an "end date" is necessary because you have to work backwards from the age you want to retire to the age you are today to work out your investing strategy. 

Step 2. Calculate How Much Savings You'll Need for Retirement

Determine the "monthly nut" you'll need to sustain your standard of living during retirement. Your nut can consist of housing, utilities, transportation, groceries, and anything else you pay for that allows you to "exist."

An easy way to do this is to create a monthly average by looking at your monthly spending for the past six months. While some people think that coming up with a flat sum for their full retirement is the way to budget for retirement, it's actually important to calculate your way forward based on monthly expenses to create an annual retirement need. 

From there, you can see how much money you'll need to cover your anticipated retirement duration. 

Ideally, your monthly spend will not include a mortgage payment. The hard rule of retiring early is that your mortgage and other debts should be paid off by your retirement date. If your home has significant value, selling the home to purchase a smaller property for cash could be part of your plan for early retirement. 

Generally, it's recommended that you create a situation where you're living on 80% of your pre-retirement income to enjoy a similar standard of living. The less monthly costs you can avoid, the earlier you’ll be able to retire. 

For people retiring early, it's necessary to rely on your own investments and savings until Social Security payments can begin at age 62. If you can hold off until 70 before cashing in, you'll get the full benefits. 

Step 3. Start Saving Money

Even the smallest expense burden you can cut today brings you an hour closer to retiring. If you're doing retirement planning as someone who isn't a millionaire, there's no shame in "going cheap" for the sake of your end goal. Here are some ways to start cutting costs to get to the retirement finish line earlier than your peers:

  • Aggressively pursue promotions and "job leaps" that will max out your earning potential as quickly as possible.
  • Choose one streaming service that you like. Cancel all other subscriptions.
  • Pay off or refinance high-interest debt.
  • Open a short-term certificate of deposit (CD) for cash that isn't already being invested.
  • Invest in the annual family vacation fund instead of taking multiple vacations.

While this will help to build a nest egg, there's only so much that cutting costs can do for your retirement plans. It's just as important to grow money in anticipation of retirement. 

Step 4. Grow and Compound Your Money

Open a retirement account to start putting your retirement funds to work early. Receiving a matching 401(K) is a good place to start, though I recommend opening a self-directed IRA (SDIRA).

An SDIRA allows you to invest your IRA in alternative assets like real estate and crypto, which can grow in equity or accrue monthly mortgage payments to fund your retirement. There are several ways to raise money for real estate using your SDIRA that will allow you to compound your earnings without going broke.

If you're over age 50, take advantage of the IRS's catch-up contributions for retirement investing. Other growth and compounding options that are simple enough for the average person without a financial and investment background to use include:

  • High-yield savings accounts.
  • Certificates of deposit (CDs).
  • Bonds or bond funds.
  • Money market accounts (MMAs).
  • Real estate investment trusts (REITs).
  • Dividend-paying stocks.

Step 5. Reduce Debt and Expenses

Pay off all debts before retirement to limit your monthly spending. If your final mortgage payment falls beyond the date you want to retire, consider refinancing to a 15-year mortgage if you're in a position to make larger payments now in exchange for a mortgage-free retirement. 

I still recommend investing your money before paying off debt, though aggressively paying off your debt early will allow you to avoid interest payments. 

Step 6. Avoid Taxes

Many people lose a big portion of the money they've scrimped and saved for their entire working lives to taxes during retirement. If there is one secret the wealthy know that everyone else doesn’t, it’s how to avoid taxes

If real estate is your investment of choice for funding your retirement, make sure you're taking advantage of the 1031 exchange to jump from property to property without ever paying for capital gains on your earnings. 

A Roth-structured SDIRA is another great option to avoid getting hit by taxes. With this option, all of your income and gains will flow right back into your IRA on a tax-free basis. That means you're constantly building wealth without paying taxes on it until the day you need to take a distribution. Just remember to follow the IRS’s SDIRA rules.

Step 7. Budget for Healthcare and Other Expenses

The time from when you walk away from employer-sponsored insurance to when Medicare kicks in at age 65 is a long road. While it may seem like going without insurance can reduce your monthly nut, the truth is that one health emergency can leave you bankrupt in retirement.

A retirement health savings account (HSA) is one of the best ways to put aside money for care during retirement because it allows you to tuck away pre-tax dollars. If you've been carrying life insurance, consider swapping it for long-term care insurance once your policy terms are up.

The secret to retiring early is that nobody ever really stops working. That's because managing your investments and finances will remain a priority for the rest of your life. If you feel the nudge to get out of the rat race early, the first step is working with a financial advisor to start planning a realistic retirement budget.

11 Ways Wealthy People Avoid Taxes

One of the most common questions I get asked is: how do rich people avoid taxes without getting in trouble? 

It’s all too common to see headlines of rich celebrities and corporations that pay close to $0 in taxes. Recently revealed IRS files found that wealthy individuals like Jeff Bezos and George Soros have paid $0 in taxes over the years. 

However, the truth is that these individuals are able to do this through completely legal means available to any investor. 

While you may not have a team of attorneys and accountants working on your side, educating yourself on common tax loopholes and laws will help tremendously. 

Rethink your tax bill strategy with these 11 ways to avoid paying taxes like the rich. 

1. Invest in a Tax-Deferred Retirement Account

Capital gains taxes for assets can be as high as 20% depending on how long you held it and how high it was worth. 

One way to circumvent these taxes is to hold your asset for longer to qualify for a smaller capital gains tax. 

However, you can avoid most capital gains taxes altogether by growing your portfolio tax-free with an individual retirement account. 

IRAs offer many of the same tax benefits as a 401(k), except Roth IRAs can be managed almost tax-free. For example, all contributions to a Roth IRA are not taxable, and earnings can be withdrawn tax-free as long as they are within the required retirement window. 

Furthermore, a self-directed IRA under a Roth structure allows you to invest in alternative assets like real estate and crypto without being taxed. 

Other retirement accounts you might be interested in include:

  • SEP IRA: Recommended for self-employed individuals.
  • SIMPLE IRA: Recommended for small businesses.

Just be sure to research self-directed IRA IRS rules to maximize the benefit of your account. 

2. Depreciation

While many people are familiar with capital gains taxes, capital losses actually work in reverse–a process known as depreciation. 

You don't need to do anything special to benefit from depreciation. Under the IRS tax code, your assets automatically depreciate if you sell an asset at a loss. 

The simple depreciation formula requires subtracting the asset's salvage value before dividing the asset's cost by the estimated number of years of useful life. 

The asset's salvage value is the total it's estimated to be worth at the conclusion of its useful life. The number you get at the end is your depreciation expense.

Another method called double-declining depreciation allows you to bulk up your write-off of an asset's value right after its purchase in exchange for declining deductions as time passes. 

This is a good option for a small business that's struggling under the weight of startup expenses. The formula uses two times the number you get when you multiply your asset's single-line depreciation rate by its book value at the start of the year.

3. Charitable Donations

Claiming charitable donations on your tax return helps reduce your taxable income for the year. 

Both cash and material donations can be tax deductible as long as the recipient is a 503(c)(3) charitable organization. So plan your donations wisely. 

For example, if you anticipate being in a higher tax bracket this year, plan a larger charitable gift carefully to minimize your tax burden without exceeding the limit. If a donation is more than 60% of your income for the year, the excess amount will be rolled over for tax benefits for the next year.

For many, donating to charity is a great way to put the money they would have paid in taxes to better use. 

Remember, keep your receipts. 

4. Long-term Investment Income

As previously mentioned, the long-term capital gains tax is substantially lower than the short-term tax. 

While the short-term capital gains rate is between 10% and 37%, long-term capital gains are tiered at 0%, 15%, or 20% for people in different income and filing brackets. 

All it takes is holding on to an asset for a whole year before you sell. 

5. Tap Into Tax Breaks in Real Estate or Similar Industries

Every industry has its own set of "secret" tax breaks. 

In real estate, 1031 exchanges allow you to continuously raise money for real estate using the sale of your previous property without paying taxes on it. 

Let's also not forget about write-offs for property taxes, property insurance, repair costs, advertising, office space, legal fees, accounting fees, travel, and so much more. Wealthy Americans never leave these breaks and incentives on the table.

6. Step-up Basis

A need-to-know option if you're inheriting assets, the step-up basis loophole allows you to avoid capital gains taxes on inherited property. 

When a person inherits property or assets, the IRS resets the asset's original cost basis to its value on the inheritance date. 

While the heir will pay capital gains on that basis when selling the asset, the overall rate will be lower.

7. Gifting

Did you know that giving money to family members can lower your tax burden?

According to the IRS, a gift is not considered income for federal tax purposes unless it exceeds the annual exclusion of $17,000. 

As of 2023, the IRS allows you to give away $12.92 million in gifts cumulatively over the course of your life without ever paying gift taxes. 

Just be warned that the gift tax rate climbs to somewhere between 18% and 40% if you exceed the $17,000 cap in a single year.

8. Moving

While millionaires and billionaires hang out in the priciest zip codes in the country, they know better than to claim their wealthiest dwelling as their primary residence. 

If you currently live in a high-tax state, moving your primary residence to a home in a low-cost state can instantly boost your net worth. 

Changing tax residency is a complex process that usually requires the help of a tax expert. The biggest thing to remember is to never spend 183 days or more in a state other than the one you've claimed for your primary residence. 

9. Forming an LLC

An LLC helps you avoid double taxation the same way that the wealthy do. 

When you form an LLC, you'll enjoy the structure of a pass-through entity that allows earnings to go directly to you without prior taxation. That means you're only paying taxes on your personal income. 

LLC owners also enjoy tax deductions for business expenses, the Qualified Business Income deduction, and other perks that self-employed people don't get without an LLC.

10. Establishing Trusts

Establishing a trust can help you to reduce taxes in the context of a wealth transfer.

The first thing to know about this strategy is that trusts reach the highest federal income tax rates at lower thresholds compared to ordinary income. That’s why proper trust management is everything. 

The trick to using a trust to reduce your tax burden is to make distributions to a trust beneficiary only if that beneficiary is in a lower tax bracket. 

11. Understanding the Tax Code

This is probably the most important aspect of how wealthy people avoid paying taxes. 

You don't need to know all the tax laws to lower your tax rate, but it pays to know about the laws that relate to your investment decisions. 

Make sure to research various deductions and employ some of these tactics before the new tax year to lower your tax burden. 

Wealthy people don't just get lucky with taxes. They use existing tax codes to their advantage to keep more of their money without breaking the law. 

One of the best-kept secrets in personal finance is that many of the tax-deferral options available to millionaires are available to people making minimum wage, six figures, and everything in between. 

Experiment with some of these methods to try and lower your tax burden. Remember to talk to a financial advisor first.

How Do Self-directed IRAs Work?

While the days may feel long, the truth is that the years are short. This is especially true when it comes to saving away as much money as possible for retirement. 

If patience isn’t one of your strong suits, then looking for ways to build up for retirement as fast as possible may be tempting. 

One retirement plan I recommend to all of my followers and customers is a self-directed IRA (SDIRA). 

Unlike traditional retirement accounts, SDIRAs give you the freedom to explore alternative assets with high-growth potential. As a result, investors like me and Peter Thiel have used SDIRAs to significantly boost our wealth and portfolio. 

So how do self-directed IRAs work? Read more to learn the basics of opening a self-directed IRA.

What Is a Self-directed IRA?

A self-directed IRA is an individual retirement account that allows you to hold alternative assets. Unlike a traditional IRA that limits investments to stocks, bonds, annuities, unit investment trusts (UITs), mutual funds, and exchange-traded funds (ETFs), a self-directed IRA allows for investments in exotic, high-return assets. 

For example, a self-directed IRA allows investors to invest their IRAs in the following assets:

  • Commodities.
  • Real estate.
  • Raw/undeveloped land.
  • Water, oil, mineral, and gas rights.
  • Private stock.
  • Limited partnerships.
  • Cryptocurrency.
  • Precious metals that match specific standards.
  • Crowdfunded startup assets.
  • Foreclosure tax liens and deeds.
  • Foreign currency.

While custodians must oversee self-directed IRAs, each IRA is managed directly by the account holder. The burden is on the account holder to perform due diligence, conduct research, and maintain proper management of assets. 

Pros and Cons of an SDIRA

A self-directed IRA is an exceptional choice for someone seeking diversification of assets. 

For many people facing retirement, investing in alternative assets using an SDIRA is viewed as a shield against inflation and volatility. Here's a glance at the advantages of SDIRAs:

  • Flexibility: Self-directed IRAs provide a much broader scope of asset classes compared to traditional IRAs. Diversification beyond stocks, bonds, and mutual funds can help a portfolio to remain resilient against downturns. In addition, investors can dip their toes into exciting markets with everything from gold to cryptocurrency staking on the menu with SDIRAs.
  • Potential for Higher Returns: SDIRAs are especially attractive to investors looking for assets with higher-than-average investment returns. On the flip side, an SDIRA can also be a powerful tool for investment, such as raising capital for real estate using dormant retirement funds. 
  • Control: The account holder ultimately controls the destiny of an SDIRA. Many investors enjoy using their specialized knowledge regarding specific asset classes to make custom investment decisions. In fact, an SDIRA makes it possible to invest in hobbies and passions!
  • Tax Benefits: IRAs are amazing tax-free investments to build wealth to keep up with inflation without forfeiting most of it to the IRS. 

Some of the "pros" of self-directed IRAs can also be cons. For instance, the freedom and self-direction that make this an attractive option for some investors could turn an SDIRA into a hassle for others. Here's a look at the potential disadvantages of opening a self-directed IRA:

  • Full Control: The success of an SDIRA depends entirely on the judgment of the account holder. The pressure is really on when it comes to making smart investment choices.
  • Loss of Liquidity: While it's exciting to be able to invest in alternative assets, unloading them can take time and effort. Unlike traditional assets that can be sold off with the press of a button whenever the market is open, alternative investments can take years to sell, and some might never find buyers.
  • Fees: Fees can be slightly higher with SDIRAs. While the general cost to set up an SDIRA is reasonable, some custodial firms charge a lot for administration.
  • Complexity: A self-directed IRA comes with a long list of rules and prohibited transactions regarding your own assets. For example, real estate investments made through an IRA cannot be touched for personal use. The simple act of fixing a broken toilet in a property you own through an IRA could result in IRS penalties, interest charges, and forfeiture of your SDIRA tax benefits.

What's the Difference Between Traditional and Roth SDIRAs?

The difference between a Roth and Traditional SDIRA comes down to its tax structure. You have to consider whether you will be in a higher tax bracket now or at retirement to reap the full benefits of each IRA. 

Traditional SDIRA

With a traditional SDIRA, the account holder contributes pre-tax dollars. This investment then grows on a tax-deferred basis until being taxed as current income once withdrawals begin after age 59 1/2. 

This works for most people because they benefit from deferring taxes on a portion of their income during their "peak" earning years. For the average person, peak earning years are when their income is taxed at a higher bracket. 

The assumption is that people fall into lower tax brackets after retirement because they no longer work full-time. As a result, they will presumably pay a lower tax rate on their IRA withdrawals.


With a Roth IRA, the account holder contributes after-tax dollars that will then grow on a tax-free basis. All withdrawals made after age 59 1/2 will not be taxed as current income. This can be a good option for someone anticipating that they will be in a higher tax bracket during retirement.

Rules, Contribution Limits, and Prohibited Transactions

In 2023, account holders under the age 50 have a contribution limit of $6,500. Account holders over 50 can add an additional $1,000 in catch-up contributions to max out at $7,500. 

Once a person reaches age 59 1/2, they can begin making withdrawals tax-free. However, the IRS only requires withdrawals at age 72, known as required minimum distributions (RMDs). 

Withdrawing funds before age 59 1/2 will result in a 10% penalty. The account holder will also need to pay income tax on the withdrawal amount based on their ordinary income tax rate. 

Fortunately, Self-directed IRAs do qualify for the same hardship distributions as other IRAs.

While much is made of the alternative investment options available through the SDIRA, this account type isn't made for free-for-all investing. For example, SDIRAs cannot invest in art, S-corporations, or life insurance. 

SDIRAs also have strong restrictions against what the Securities and Exchange Commission calls self-dealing. This means that IRA owners are not permitted to essentially "do business with themselves." 

For example, selling your property to yourself, lending yourself funds from an IRA, taking IRA income, and paying IRA expenses with your own money are all prohibited. 

In this scenario, the SDIRA owner is referred to as a "disqualified person" by the IRS. 

In the case of a real estate investment, this distinction means that the IRA owner is prohibited from living at a property, staying at a property, doing any kind of work or maintenance, or directly funding any kind of work of maintenance. 

The disqualified person's title even extends to an account holder's spouse, children, grandchildren, and parents. The same goes for any entity where the account holder possesses more than 50% ownership, holds a director role, or can be classified as a "highly compensated" employee.

How to Open a Self-directed IRA

A self-directed IRA must be opened with help from an account custodian or trustee. While some brokerage firms offer custodial services for IRAs, it's more common to use banks and trust companies that specialize as custodians of self-directed IRAs. Once the account is open, you are free to select investments.

Is a Self-directed IRA Right for Me?

Anyone seeking a bit of diversification and adventure in investing should consider an SDIRA. Although riskier, they tend to yield higher rewards. 

I recommend SDIRA owners research the risk involved with their investments, as well as what is allowed and disallowed in an SDIRA.

Opening an SDIRA isn't a spur-of-the-moment decision. You have to be both passionate and knowledgeable regarding the asset class you're investing in because you're betting on your ability to know a good thing when you see it.

Ultimately, an SDIRA is a great way to enjoy tax-free retirement earnings gained from real estate, private companies, cryptocurrency, and other unconventional asset classes.

Self-Directed IRA FAQ

What Type of IRA Lets You Invest in Cryptocurrency?

Unlike regular IRAs, the self-directed IRA allows investors to invest in cryptocurrency using tax-deferred income.

Can You Manage Your Own SDIRA?

While account holders get to make all of their own investment choices using an SDIRA, a custodian is required to open an SDIRA account. Trust companies and banks typically help with setting up SDIRAs.

What Can't You Invest in with an SDIRA?

While SDIRAs allow you to invest in a range of alternative assets, not everything is permitted. Art and collectibles, life insurance, and S corporations are all considered prohibited assets. In addition, certain precious metals won't qualify.

How to Use Real Estate Syndication to Build Wealth

There's power in numbers when investing in real estate. That’s why one of my favorite investments is through real estate syndication. 

Real estate syndication brings a group of investors together to pool their money to purchase a revenue-generating property. You don't have to be a millionaire to participate in real estate syndications, and it’s a great way to raise capital for real estate investments.

Thanks to the JOBS act passed in 2012, investors can now crowdfund real estate deals to earn passive income. 

Here's a glance at what you need to know about real estate syndication deals. 

How Real Estate Syndication Works

Prior to real estate syndications, single investors were forced to take on the full burden of funding the purchase of a property. Investors were also forced to manage every detail of property ownership. The income earned was anything but passive. 

While most people were simply locked out of investing in real estate due the cost and time required, the ones capable of funding investments had to put in full-time "landlord" hours just to keep a property profitable. 

However, real estate syndications allow you or your real estate LLC to pool your money with hundreds of other investors to invest in high-value real estate assets. While investing in a simple single-family home would be a bridge too far for most people, syndications make it easy to hold partial ownership in a high-value apartment building in a hot market. 

Once the property is purchased, it is managed by the syndicator responsible for originating the deal. That means that an investor isn't forced to deal with tenant issues, and profits and losses are distributed among the investors. 

The Real Estate Syndicator

Investment opportunities offered by a real estate syndication are initiated by a real estate syndicator. Also known as a sponsor, a syndicator is responsible for bringing the deal to life. 

Think of the syndicator as the general partner in the business arrangement. Here's a rundown of everything the syndicator handles in a typical deal:

  • Arranging the financing for purchasing a property.
  • Negotiating prices and terms with the seller.
  • Building a business plan.
  • Attracting investors.
  • Raising capital.
  • Hiring a team to manage the property.
  • Managing investor relations.
  • Handling all tax and financial reporting.

In many ways, an investment is only as good as the syndicator behind it.

A syndicator should be a real estate expert with experience in investing. 

They make everything happen by applying their experience and familiarity with real estate to handling underwriting, making deals, and performing due diligence on behalf of the investors pooling money into a deal. 

The Investor

The investor is an individual who decides to invest in the real estate deal being offered by the syndicator. You can think of an investor as a limited partner in the deal. 

As an owner of a percentage of the property, the investor gets all of the general benefits of property ownership without the administrative burdens that accompany owning property.

Syndicators may take a larger cut due to their active role in deals, but investors have far less liability.  

Benefits and Drawbacks of Real Estate Syndications


  • Grow your real estate portfolio without investing large amounts of time, money, and research toward each investment.
  • Gain greater buying power by pooling money with other investors.
  • Access real estate in hot markets outside of your financial reach.
  • Offset gains with “paper losses” to reduce your tax burden. 
  • Invest passively (investor) without the headache of property management. 
  • Generate a high return on investment.
  • Gain knowledgeable advice on lucrative deals from trusted syndicators. 
  • Real estate syndication is available in a real estate IRA via self-directed investing. 


  • Syndication deals have very specific investor requirements (must be an accredited investor).
  • Deals may be geographically limited. 
  • Deals may take a long time to develop and actualize. 
  • Investors have limited control over property management. 

In many ways, syndications are similar to real estate investment trusts (REITs). However, many investors prefer syndications over REITs because syndications allow investors to choose the properties they want to invest in instead of being forced to go in blindly. 

Eligibility Requirements

Eligibility is where real estate syndications begin to look different from other crowdfunded real estate options. While many investing platforms allow anyone with a few hundred dollars in their pocket to get in on deals, syndications come with very specific investor requirements. 

A person must be an accredited investor to participate in a real estate syndication. 

An accredited investor is defined as someone with an annual income of at least $200,000, a combined spousal income of $300,000, or a net worth of at least $1 million. 

How to Start Investing in Real Estate Syndication

Real estate syndication all starts with finding the right syndicator. 

It's important to look for a competent, experienced syndicator with a history of finding revenue-generating properties. 

A syndicator should also bring experience in property management, a successful track record with previous investments, and knowledge of real estate deals.

Real Estate Syndication Tips

  • Don't rush into anything. 
  • Conduct your due diligence.
  • Becoming familiar with the portfolio of a syndicator you are considering. 
  • Be ready for the long-haul–most syndicators hold a property for five to seven years before seeking buyers willing to purchase the property at a higher price. 

Real estate syndication can be a very high-risk, high-reward proposition.

If you are eligible for real estate syndication, I would strongly recommend considering it as an investment option for your portfolio.

Real estate syndication provides a great opportunity to earn high returns or to ramp up your retirement portfolio using a self-directed IRA

Quick Q&A Recap

1. Who Can Invest in Real Estate Syndications?

Unlike REITs, real estate syndications are generally only open to accredited investors. People who qualify as accredited investors are wise to take advantage of syndications instead of using crowdfunding platforms that allow anyone to invest because syndications provide access to high-value residential and commercial real estate. 

2. How Many People Can Participate in a Real Estate Syndication?

A real estate syndication technically only needs to have two investors. However, many have several hundred. 

3. What Are the Tax Benefits of Real Estate Syndications? Investors in real estate syndications can enjoy tax deductions, deferred income taxes, and lower tax rates. As a syndication investor, you also enjoy the benefits of depreciation for potentially paying capital gains taxes at lower rates. In addition, the 1031 exchange tax rule that allows you to defer capital gains taxes if you swap one property for another can apply to syndication investors.