How
to Invest in Real Estate using your Individual Retirement Account
(IRA)
(August 1st, 2009)
You
can invest in real estate via several methods if you already have
an IRA. In fact, you can invest in real estate using your 401(k),
403(b) or 457(b) plan if you invest in Type 1 below, because it
is very similar to buying stocks and selling them. The 2nd type
of investment we cover requires you to create a self-directed IRA
where you actually buy physical real estate and not just real estate
stocks/mutual funds. We discuss the investment choices available
to you below:
Self-Directed IRA Video
- How to Use your IRA to Invest in Real Estate
This video shows you how Section
408 of the IRS Code can be used to purchase real estate investments
using your Individual Retirement Account (IRA).
Method 1 – Invest in Real Estate Mutual
Funds or Real Estate Investment Trusts
1) Find a real estate mutual fund that
is most appropriately linked to your retirement goals and objectives.
To view a listing of all real estate mutual funds, go to http://bwnt.businessweek.com/mutual_fund/
or check rankings of Morningstar mutual funds.
2) Buy shares in a real estate mutual fund
just like how you would buy any other mutual fund of your choice.
Usually you would do this through a broker, or inform your 401(k)
plan administrator to buy your selection of investment choices.
3) Buy shares in a Real Estate Investment
Trust (REIT) just like how you would buy any other ETF. Actually,
a real estate investment trust is just like an Exchange Trade Fund
(ETF) in that it works like a mutual fund but trades like a stock
with daily price fluctuations. The best way to find real estate
investment trusts is by searching for “REIT” in Google
and browsing through the first few selections
Method 2 – Buy Physical Real Estate,
Homes, Buildings and more
1) Open a self-directed
Individual Retirement Account (IRA) which is a special kind
of IRA that allows you to invest in real estate and other more modern
investment choices such as ETFs and mutual funds. Search for Self-directed
IRA in Google and you will come across many custodians that
house IRAs and provide investment advice, as well as a wide variety
of investment choices.
2) Transfer a portion of your retirement
funds from your current IRA to a self-directed IRA. This transfer
of funds can take between 2-3 weeks and your IRA custodian will
provide you with all the legal forms necessary to do so.
Invest in Commercial Real
Estate within your local city with your Self Directed IRA
This video shows how Sun West Trust can help you invest in real
estate and commercial buildings, real estate investment trusts,
and lots more diversified investments other than your bank certificate
of deposit or on Wall Street.
3) Once you have a self-directed IRA set
up, consider purchasing actual physical real estate by withdrawing
funds from your IRA to make a down payment on the home, and get
a mortgage, or if you have enough funds, purchase the entire home
by paying 100% cash. You are not allowed to take a mortgage from
your IRA, like how you would take out a loan from your 401(k) and
pay it back in a certain period of time. When purchasing property
from your IRA, remember this key point that all gains you make from
this property such as rental income, capital gains, etc must be
contributed back in to your IRA.
4) Consider the business of ‘hard’
lending money to other investors to buy old & damaged properties
that need repair. The business of buying old and damaged properties,
renovating them and bringing them to good shape and putting them
for resale in the market is the job of “property flippers.”
At the beginning when the house is old and damaged, banks typically
will not issue mortgages for such old homes. Thus
there might not be enough money to buy the property and make all
the necessary repairs, thus your role in this would be to finance
the repair & renovation of these properties. Investors doing
this usually charge very high interest rates because of the risk
involved in providing financing to repair old & damaged properties,
as the risks of default or failure are high. You can easily expect
to receive 15% interest from such a loan for 12 months. Of course
the flippers who renovate these properties also expect to make large
capital gains from their purchase and sale of these properties,
so it is a win-win situation for both the lender (you) and the renovator
(flipper).
You
can invest in real estate via several methods if you already have
an IRA. In fact, you can invest in real estate using your 401(k),
403(b) or 457(b) plan if you invest in Type 1 below, because it
is very similar to buying stocks and selling them. The 2nd type
of investment we cover requires you to create a self-directed IRA
where you actually buy physical real estate and not just real estate
stocks/mutual funds. We discuss the investment choices available
to you below: