Don’t buy an investment property BEFORE you decide to invest in a self-directed individual retirement account. That is absolutely the wrong order of operations. For all you do-it-yourselfers: Don't Do This Yourself!!!

 

STEP ONE: FIND A COMPANY THAT IS EXPERT IN THIS TYPE OF INVESTMENT 

 

It’s for people who want to invest in nontraditional assets such as real estate, want complete control of their IRA and want to reduce overhead costs such as fees. The average person, whose retirement account is in a mutual fund, is paying 3 to 5 percent overhead. They just don’t see the undisclosed fees. 

 

​STEP TWO: HAVE THE SELF-DIRECTED IRA COMPANY SET UP YOUR DOCUMENTATION

 

You will need to set up your real estate IRA as a limited liability corporation or LLC. This is because you will be collecting rent on the property and paying for things like repairs and upkeep. Once again, don’t do this yourself. It’s a lot more complicated than you think and will need to withstand an audit, should that ever come to pass.

 

Once money has been transferred to the LLC, it is intact as an IRA. Your real estate IRA now holds title to the property. Now, you manage all the funds. Once you pay the set-up fee there’s no broker, no market maker, no dealer, and no Wall Street fund manager to pay. 

It will take a company from 12 to 18 hours to set up this investment at about $200 an hour.

 

This is a one-time fee paid upfront. No nickeling and diming, like mutual funds. You’ve got to establish the investment correctly. Stuff happens, like death, divorce, and an IRS audit. 

The right company will understand how to avoid the problems. 

 

​STEP THREE: BUY THE PROPERTY 

 

This is an investment property, meaning you can’t take benefit of the asset, which means you cannot live there yourself. Nor can your spouse, kids, or parents. Your cousin, uncle, or aunt, can stay there. Technically, a non-adopted step-child or in-law can stay there, too.

You are going to rent the property, and when rent comes in, it becomes a dividend, included into the value of the property.  Repairs are paid for by the IRA. Be sure to put about $5,000 in cash into the IRA to pay for the repairs.

 

You’re going to hold this property the same way you would hold your retirement portfolio. At this point you cannot personally contribute to the needs of the asset (the property). If you want to make further contributions, you need to contact the custodian of the IRA.

At age 59 ½, you can either sell the property or pay the tax on the property and own it outright. By age 70, you must begin taking distributions, like any other IRA.

 

An example of this kind of investment

 

Many people who invest in a self-directed IRA are between the ages of 40 and 60. Let’s take a look at what would happen if a 40-year-old invested in a real estate IRA.

 

You need to pick a property you believe will have a return on investment in 8 to 10 years. 

Our 40-year-old will buy a house for $140,000. Assuming the property can command $1,200 to $1,500 per month in rent, it would take 100 months to make back the initial investment, or 8.33 years.

 

Then, our investor can buy another property for $140,000 at age 48. The second property is cash flowing at a similar $1,200 to $1,500 a month and she makes back that investment 4.3 years because there are two properties paying income. Then, she buys a third property at age 56, also at $140,000.

 

This person’s IRA can grow to $1 million in 20 years. Tell me what mutual fund can do that?

 

Next month: The nitty gritty of my particular real estate IRA.