Estate Planning and using a Self-Directed IRA to Own Real Estate

Estate Planning is all about preparing for retirement, while making your wealth work for you. An IRA is a common term. You can see mention of it in most banks, in most stock portolio companies. However, every now and then, someone has the idea of what else can an IRA invest in.
Many very successful individuals have made their wealth in real estate. Many even withdraw from their IRA or other retirement accounts to help purchase a house, to make a down payment, and to even acquire rental properties.
This Post will dive into the topic of IRAs purchasing income producing investment property. This IRA can be called:
- Self-directed IRA
- Real Estate IRA
- SDIRA
What can an IRA buy?
An IRA can own a wide range of property types in a real estate IRA, such as:
- land
- single and multi-family homes
- commercial properties and more
However, an IRA must be an investment. It cannot be owner of personal homes, it must make an income and the income goes back to the IRA. You cannot use the Real Estate IRA to finance you home, period.
What are the Benefits of a Self-Directed IRA investing in real estate?
Diversification and solid-asset holding. The Stock Market can rise and fall. CDs and interest Rates can increase and decrease. A Regular IRA invests in items that cannot be touched, that cannot be directly affected. If the market falls, it is related to the overall economy, which is outside of your control. A Self-Directed IRA lets you invest in more tangible items, such as:
- Real Estate
- Gold and Silver Bars
- LLCs or Corporations
- Small Businesses and Start-ups
Each of the above examples can have a brick-and-mortar address, can collect dust, and can possibly have the potential of earning a profit.
How would a SDIRA in a Rental Property compare to an IRA investing in Stocks or ETFs?
For the comparison, lets say the IRA Valuation is $200,000, and we will round numbers and percentages.
A regular IRA can invest the $200k into one ETF [insert preference here] at an annual return of %5. 5% of $200k equals $10,000. The $10k would be the profit from the investment. The ETF Value could have increased and it could have decreased. Markets tend to trend up or down.
A SDIRA in real estate can buy 1 rental property for $200,000, no loan needed, 100% cash purchase. The property is very desirable, many amenities nearby, move-in ready, and the comparables estimate a monthly rent of $2,000. Like any Real Estate investment, you have to consider the rental income against the normal expenses, such as:
- taxes
- insurance payments
- hoa fees
- property manager fees
- repairs and maintenance
After deducting all of the expenses, lets say the monthly profit is $1500. In one year, the Rental could generate an income of $18,000. Additionally, the $200,000 valuation of the property could increase to $220,000 or $240,000. $240,000 plus $18,000 could mean an SDIRA Valuation of $258,000 in just 1 year.
A Regular IRA can be capped at growing, whereas a Self-Directed IRA can help realize greater wealth. Again, many very successful individuals have made their wealth in real estate. Converting an IRA to an SDIRA may be an ideal option in your Estate Plan.
Visit our Estate Planning Webpage for more information: https://www.fickeymartinezlaw.com/estates
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