January 30, 2024

Guide to Investing in Real Estate with Self-Directed IRA

Have you ever thought of investing in real estate using your retirement account? If yes, you can do that, and it does not require a complex process. Some folks own rental properties under a self-directed individual retirement account (SDIRA). 

If you are wondering how to go into a real estate investment with your self-directed IRA, we will discuss this topic in this blog article. We will also talk about using SDIRA for passive real estate investments. 

Buying an Investment Property with an SDIRA

It is possible to use the bulk of your IRA funds to purchase an investment property. If you have qualms about financial markets, you can put your money in real estate markets, given there is a high demand for housing today. Take note of this process when buying a rental property using an IRA. 

Look for a Custodian

A trust company or a custodian helps you in administering your self-directed IRA and following Internal Revenue Service rules. The custodian will take care of the management of your IRA funds, and he will invest it according to your decision. 

Many trust companies charge a percentage of the value of your IRA. Also, getting into an agreement with a trust company is a long-term commitment. So, weigh the pros and cons of each option before signing into it. 

Look for a trust company before searching for a rental property. Make sure you pick a custodian with experience and knowledge about real estate investments. 

Set Up a Limited Liability Company (LLC)

It is smart to own and lease real estate under an LLC. Use your self-directed IRA to own the LLC. Hire an attorney to ensure the agreement is not detrimental to your interest. Then, go to the business licensing administration in your state and file the Articles of Organization. 

The next step is to create a bank account and get a tax identification number. This is pretty much the process, and then your trust company can write a check to purchase the property. 

Finance the Investment Property Using SDIRA

You can borrow the money from your self-directed IRA to purchase a rental property. It is not so different from borrowing from a lender or a landlord who offers a loan. However, take note of two factors when financing your investment property with your SDIRA. 

First, it should be a non-recourse loan you get when financing a rental property using an SDIRA. It refers to the personal non-liability of the borrower if he fails to pay the debt. Like an ordinary loan, it will be the rental property that the lender can repossess if the borrower defaults.

The second thing you must consider is that there is only partial tax shelter for the property’s revenue when you finance real estate using SDIRA. Often, you will only receive tax benefits for the non-financed portion of the investment. 

Different Ways to Invest in Real Estate Using a Self-Directed IRA

There are different options you can take if you want to invest in real estate using your self-directed IRA. 

  • Equity Funds. Investing in a fund that owns a diversified pool of properties is an excellent idea. Using a self-directed IRA custodial account, you can purchase shares of REITs even if you are a non-accredited investor. 
  • Fractional Shares in Rentals. Buying a share of an investment property and becoming one of several owners under an LLC owning that property is also a good option. Then, the best thing is collecting your share of the income from rent. If there is a sale of the property, you can also take a percentage of the profits. 
  • Real Estate Syndications and Funds (Private Equity). This way of real estate investing is also owning fractional shares. The advantage of real estate syndications is they target significant returns around 15% to 30%. There is also the benefit of appreciation, cash flow, and tax advantages. However, this way of investing contemplates long-term commitment without liquidity. It also requires a higher minimum investment, usually around $50,000 to $100,000. 
  • Secured Debt. Investing in loans secured by real estate properties is another way of investing. Secured debt investments usually have fixed interest rates. The advantage of investing in secured debt is you can pick which loans to invest in based on the property, borrower information, interest, and risk. 
  • Direct Ownership. If you want more control in managing the rental property, direct ownership is preferable. The catch is that the cost of entry is higher when you buy a rental property using your SDIRA. The contribution each year in an IRA is only $6,500, and it will take a long time to pay the down payment and closing costs despite borrowing a rental property mortgage. 


You can definitely use your self-directed individual retirement account to invest in real estate. Follow the steps above to guide you through the process.