There are a number of ways in which an investor can buy real estate with an IRA. The best choice for you will depend on your unique goals.
Standard IRAs and REITs
The most common means of purchasing real estate with an IRA is via a Real Estate Investment Trust, or REIT.
A REIT is a company that is primarily involved in the purchasing and/or maintenance of income-producing real estate, and it distributes the profits to investors in the form of dividends. An IRA can buy shares in a REIT via one of the standard exchanges or in a mutual fund which incorporates a REIT product. The attraction of REITs is the fairly high rate of return that most of the funds yield.
However, from a retirement perspective, there is a downside which should be seriously considered. Although dividends are paid out on a steady basis, there is little capital appreciation. If you’re looking for a nest egg that has the chance to appreciate (as well as provide income), then REITs may not be the best bet for your IRA.
Self-Directed IRAs and Real Estate: Custodian Model
In simple terms, the Custodian model—or Trust model—requires a custodian to act as a middle man through whom you access your self-directed IRA. Whenever you want to make a transaction, you have to go through the custodian. If you want to buy a piece of real estate with your self-directed IRA, you have to go through the custodian. If you want to do renovations, you have to go through the custodian. If you want to pay a real estate contractor, you have to go through the custodian.
Not only do you face the hassle (and paperwork) of going through the custodian for every move you make, but your self-directed IRA will also be charged a fee for the transaction. In effect, you are paying somebody to hassle you. So what’s the alternative?
Self-Directed IRAs and Real Estate: Checkbook Control Model
A self-directed IRA with Checkbook Control takes care of all of these problems. With Checkbook Control you can buy real estate with your IRA, and you can do so without the hassle or crushing fees.
It works through the creation of an LLC. When you sign up with Broad, we will set up an LLC for your self-directed IRA, which will then allow you to open up a checking account at your local bank. This checking account is under the control of just one person: you.
That means that there is no middle man to go through in order to access your retirement funds. If you want to buy real estate with your IRA, just write a check to the seller. If you want to buy supplies for renovations, just write a check at your local hardware store. If you want to pay a contractor for repairs, just write him/her a check. Having access to your self-directed IRA via a checking account allows you to effectively cut out the fees and the aggravation of third-party processing.
A self-directed IRA with Checkbook Control allows you to easily buy investment properties, such as foreclosures, multi-families, and undeveloped land. So to answer the question, “Can I buy real estate with my IRA?" the answer is most definitely, “Yes." Just make sure you do it with Checkbook Control.