Can you use your IRA to buy real estate? It’s a question worth asking as you eye up different investment strategies for retirement. 

To answer the question, not only can you invest in real estate with an IRA, but it could provide massive tax benefits that help compound gains in your portfolio. 

To get started, you’ll need to open a self-directed IRA, which is an IRA that allows for alternative investments. Self-directed IRAs can be structured like a Roth or traditional IRA, allowing you to compound those earnings tax-free until withdrawal–if you choose. 

However, there are several self-directed IRA rules limiting what you can purchase. Nevertheless, many investors still have lots of freedom to invest in multiple types of real estate that go beyond the restrictions imposed by traditional IRA custodians.

To help you get started with your real estate IRA investments, I’ve outlined a few ways to purchase real estate using your IRA. 

Five Strategies to Purchase Real Estate With an IRA

 1. Directed Purchase

The simplest way to purchase real estate is by using cash in your SDIRA account. If your account holds sufficient funds, you can purchase a property directly. Otherwise, you will need to pursue other options. 

Like a 1031 exchange, a direct purchase with an SDIRA is one of many tax-free investments you can use to build massive wealth. 

2. Start an LLC

Opening an LLC allows you to acquire complete checkbook control over your SDIRA funds to purchase and move real estate. Unlike direct purchases, which require custodial support, opening an LLC allows you to access funds directly without the support of your custodian, so you gain full control over your investment funds. 

To open an LLC, you’ll need to register it with all of the standard agencies required for incorporation in your state. A passive custodian is then used to transfer funds from the IRA owner to a new IRA LLC bank account.

Once opened, the LLC owner can exercise checkbook control over any investment they want. 

Additionally, LLCs offer investors additional tax incentives by helping them avoid direct federal taxes, so they are taxed at a lower rate. 

3. Partner Your IRA

Only some people seeking to generate wealth through IRA real estate investments have the cash available to purchase a property. Additionally, it can be difficult to raise capital for real estate

Fortunately, you can use your self-directed IRA to partner with additional investors to purchase a property. 

While we often call this partnering your IRA, the official term for this strategy is “purchasing an undivided interest” in a property. Once you’ve combined your self-directed IRA funds with partner funds, your IRA owns a percentage of the property that’s proportionate to your funding contribution. 

In addition, your IRA is responsible for its portion of all property expenses. That same portion applies when proceeds are divided following the sale of the investment.

This approach is a great way to dip your toes in the real estate pool without taking on too much debt or risk. 

4. Invest in Mortgage Notes

What if you want to avoid using your IRA funds to manage a property you own physically? 

Fortunately, mortgage notes offer a passive alternative to traditional real estate investment. 

A mortgage note is a vehicle used to extend credit. Notes are used to back a loan and noteholders by charging interest. 

Portions of mortgages can also be purchased and sold through IRAs. Under this setup, your retirement account will hold an undivided interest in the portion of the note owned as a way to generate income.

5. Use Your IRA for a Non-recourse Loan

A non-recourse loan is another option for someone lacking the full funds to invest in real estate. This type of loan is secured in the name of your IRA using the property being purchased as collateral. 

Unlike personal loans, the IRA holder’s personal assets are used as collateral. So a lender can only legally seize the IRA asset being financed.

Alternative Ways to Invest in Real Estate With Retirement Funds

If these traditional strategies require too much upfront capital or don’t suit your interests, there are several additional ways to leverage an IRA to invest in real estate. 

1. Become a Home Wholesaler

It’s possible to use self-directed funds to put properties under contract from distressed sellers using your IRA. When you resell the contract as a wholesaler, the money from the buyer can be transferred directly to your IRA at closing. 

When done properly, a down payment ranging from just $100 to $1,000 can easily become $10,000.

2. Purchase Tax Liens

IRAs can be used to invest in tax liens that combine low capital, little responsibility for the investor, and generous returns. Tax liens are imposed on properties for delinquent taxes. 

When investors purchase liens from counties, they will make money in one of two ways. In the first case, the investor earns interest when a lien is redeemed. Secondly, if the taxes are never paid, the deed to the property is given to the investor.

3. Invest in REITs

Many people are surprised to learn that a REIT (real estate investment trust) is one of the investments permitted with a standard Roth IRA. REITs are publicly traded companies that own and manage income-producing properties on behalf of investors. The list of property types commonly offered through REITs includes:

  • Homes.
  • Apartment complexes.
  • Offices.
  • Warehouses.
  • Retail centers.
  • Medical offices.
  • Storage complexes.
  • Data centers.
  • Hotels.
  • Cell towers.

Investors favor REITs for their ability to pay out consistent dividends. In fact, IRS regulations dictate that REITs must pay out 90% or more of taxable profits to shareholders. While REIT dividends paid out to individuals are taxed as ordinary income, dividends paid out to IRAs enjoy tax benefits.

4. Form a Joint Venture With a Contractor

Self-directed IRAs can be used to invest in joint ventures. When designing a real estate joint venture, you can enter into an agreement with a contractor to pool resources to build or rehab properties. 

What makes a joint venture different from a partnership is that a joint venture is only intended to operate for a specific period. It’s understood that both parties intend to sell for profit within that time frame, making them easy to enter and leave.

5. Bird Dog With an Experienced Broker

If your goal is to purchase a property through your IRA, there’s no doubt that coming up with full funding using your IRA alone is a challenge. This is why many IRA-minded property investors like the “bird dog” technique, using brokers to help them find distressed, underpriced properties. 

While the broker takes a fee in exchange for leads, investors often find this the best way to scoop up bottom-of-the-barrel properties that can be turned into gems.

6. Purchase Options and Flip Raw Land, Farms, Vacant Lots, and Storage Units

IRAs can absolutely be used to fund “flip homes.” Using a self-directed IRA, you can purchase homes in need of repairs for the purpose of either generating rental revenue or selling. 

However, it’s important to be aware that the IRS has some pretty strict rules in place regarding who can perform work on an “IRA flip” property due to the disqualified person rule.

7. Sell Options on Existing Homes in Your IRA

Once you’ve added a property to your IRA, you can capitalize on that property by selling real estate options. Many investors are attracted to real estate options today because traditional real estate investment channels have become “crowded.” 

With a real estate option, you’re creating a contract that allows the buyer to purchase your property at a set price within a specific period of time in exchange for an option premium. If the buyer declines the purchase at the end of the contract period, you can move forward with another buyer with your premium in tow.

Using an IRA to invest in real estate is a great strategy for staying partially insulated against the stock market. Using the strategies above, investors can combine the tax benefits of IRAs with the growth of real estate to build massive wealth.