How to Invest in Real Estate Through a Self-Directed IRA

Real estate investing can be a lucrative endeavor, but what most investors don’t realize is that they can venture into this domain through their Individual Retirement Account (IRA).

Individual retirement accounts make it simple to invest in assets like stocks, bonds, and exchange-traded funds (ETFs). However, a self-directed IRA (SDIRA) lets you own real estate and other alternative assets. [1]

Self-directed IRAs is a type of individual retirement account that allows account holders to have more control and flexibility over their investment choices compared to traditional IRAs. With an SDIRA, investors can invest in a broader range of assets beyond the typical options offered by traditional IRAs, such as stocks, bonds, and mutual funds.

SDIRAs offer a unique avenue for savvy investors to diversify their portfolios by allocating funds towards real estate ventures. While this approach may be unconventional, it allows investors to harness the potential of real estate while enjoying the tax advantages of their retirement accounts.

Inexperienced investors should be careful when taking this approach because there are tons of rules governing everything from property ownership to profits. It is easy to make a mistake and get in trouble with the IRS. [1]

Investors must adhere to IRS regulations and guidelines governing what assets can be held within an IRA to maintain its tax-advantaged status.

SDIRAs typically require a custodian or trustee to manage the account and ensure compliance with IRS rules. This custodian doesn’t provide investment advice but assists in facilitating the transactions and ensuring they comply with IRS regulations.

Before opening an SDIRA, it’s advisable to thoroughly research and understand the rules, fees, and potential risks associated with this type of retirement account.

Consulting with a financial advisor or tax professional who specializes in retirement accounts is highly recommended.

In this article, we’ll explore the benefits of investing in real estate through a self-directed IRA and provide a step-by-step guide on how to get started. Later we will also tackle one of the best alternative investments for real estate investors: multifamily syndication.

Why Invest in Real Estate Through a Self-Directed IRA?

Investing in real estate through a self-directed IRA can offer several advantages. This strategy is known for its tax benefits, diversification, flexibility, control, and potential for higher returns.

With a self-directed IRA, your real estate investments can grow tax-deferred or even tax-free if it’s a Roth IRA. Income generated from real estate within the IRA typically goes back into the account, allowing for potential compound growth without immediate tax implications.

Real estate can be a valuable addition to a diversified investment portfolio. It provides an alternative asset class that isn’t directly tied to the stock market’s performance. By owning real estate, you can diversify away from major asset classes like stocks and bonds. [1]

Unlike traditional IRAs, which often limit investment options to stocks, bonds, and mutual funds, a self-directed IRA allows you to invest in a wide range of assets, including real estate. This gives you more control over your investment choices.

Real estate investments have the potential for significant returns, especially if you can identify properties with strong appreciation potential or those that generate consistent rental income. This is one of the main reasons investors choose to open an SDIRA for real estate.

Real estate also tends to appreciate over the long term, which is a good fit for those who want to build wealth for their retirement. [1]

Additionally, real estate is often considered a hedge against inflation since property values and rents can increase with inflation, providing a safeguard against the decreasing purchasing power of money.

Keep in mind that no investment is perfect, so even this approach has some noteworthy drawbacks. For example, when you own real estate in an IRA, you lose certain tax benefits that you would otherwise receive such as 1031 exchanges and deferred capital gains. [1]

We also mentioned the fact that there are a lot of rules to learn before you can make the most out of this investment. It also may be difficult to find a real estate IRA custodian to work with. Because of its complexity, this investment requires thorough due diligence. Investors need to research properties, understand market trends, manage tenants, and handle property maintenance.

How to Invest in Real Estate Through a Self-Directed IRA

If you are set on using a self-directed IRA for real estate investing, there are certain steps you need to take in order to get started.

First you need to choose a custodian and open an account. During this time, you will have to decide on the type of IRA you want to open, be it traditional, Roth, or SEP. [1]

Take note that not all IRA custodians offer self-directed options, so find one that does and understands real estate investments within an IRA. You can then fund the IRA.

You may transfer funds from an existing IRA or rollover funds from a 401(k) into the self-directed IRA.

Review the IRS guidelines and familiarize yourself with what you can and cannot do. For example, you can’t buy a property you already own personally. Ensure compliance with IRS rules to avoid penalties.

Analyze various real estate options to invest in: rental properties, commercial real estate, raw land, etc. Consider the location, potential returns, property condition, and management requirements. Once you have decided how you are going to pay, you can proceed with escrow. All funds for the purchase must be paid or wired by your real estate IRA.

You can start renting or leasing the property once escrow is closed. Your real estate IRA must then pay all expenses and receive all income.

If you are investing in a rental property, you may want to consider hiring a property manager to handle its day-to-day management. Unless you have some experience being a landlord, this is a very challenging endeavor that will eat up all of your free time.

Given the complexities and regulations, consult a tax advisor or financial professional specializing in self-directed IRAs before making any investment. Investing in real estate through a self-directed IRA can offer diversification and potential growth within a tax-advantaged retirement account. However, it’s crucial to understand the rules, risks, and requirements before proceeding.

Investing WIth BAM Capital Through Self-Directed Retirement Accounts

Nearly every retirement account product including IRA 401k and Roth IRA can actually be self-directed. If you’re looking for help in this area, BAM Capital can’t offer advice, but can certainly help point you in the right direction to unlocking your retirement funds and using them to invest in apartments.

What is Multifamily Syndication?

Investing in real estate through a self-directed IRA is a naturally complex process. If you want to invest in real estate and enjoy high potential returns without going through this much work, the best alternative is multifamily syndication.

A syndication deal is a type of real estate deal in which multiple investors pool their resources together to raise money and acquire, purchase, or rehabilitate multifamily properties. [2]

Multifamily syndication is a way for real estate investors to pool their financial resources and expertise to purchase larger apartment communities that they normally wouldn’t invest in as a lone investor. Because of the strong and consistent cash flow of multifamily properties, multifamily syndication is the most popular type of real estate syndication.

In a syndication deal, there are two main parties involved: the syndicator or sponsor who serves as the general partner (GP) and the passive investors who act as limited partners (LPs) in the deal.

It is the GP who takes on an active role in the investment, locating the investment property, raising money, and providing disbursements to the passive investors. They put the deal together, look for passive investors to provide most of the capital, and also handle property management once the syndication deal is in place. [2]

Syndicators typically have expertise in real estate and a track record of successful investments.

On the other hand, limited partners are individuals or entities who contribute capital to the investment. Unlike the GP, investors simply invest their money into the syndication to receive a stream of passive income. They have limited liabilities and limited responsibilities. They are not legally or financially liable for anything involved with the syndication deal. In fact, they only face the loss of their initial investment should anything go wrong. [2]

It is worth noting that most syndication deals are exclusive to accredited investors. These are investors or entities that meet specific financial criteria set by the Securities and Exchange Commission (SEC). Not only do they have the net worth and income to give themselves a financial safety net in case an investment does not work out, they also have the financial sophistication and investing experience to weigh the risks of certain investment opportunities. As such, they are allowed to participate in private investment opportunities that are not available to the general public.

Investors contribute funds to the syndication in exchange for an ownership stake or shares in the property. The syndicator typically structures the deal to provide investors with returns, often through preferred returns or a share of the property’s profits after expenses. Every deal is different. They may vary in terms of profit split, but the exact terms will be detailed in the private placement memorandum (PPM) before investors decide to participate.

The syndicator is responsible for managing the property, handling day-to-day operations, maintenance, tenant relations, and other responsibilities. It takes away the usual headaches associated with owning real estate, especially one as large as an apartment community.

As the property generates income (rental payments, for instance), the syndicator distributes profits according to the agreed-upon terms outlined in the syndication agreement. Investors may also earn a portion of the equity upon resale, depending on the deal structure.

Multifamily syndication allows individual investors to access larger real estate investments that might be beyond their individual financial capacity. It also allows for diversification as the investment is spread across multiple investors and properties.

However, it’s essential for investors to conduct due diligence not only on the property itself but also on the track record and expertise of the syndicator before committing funds.

Work With BAM Capital for the Best Multifamily Syndication Deals in the Midwest

Investing in real estate through a self-directed IRA offers numerous benefits, including diversification of your retirement portfolio, tax advantages, and greater control and flexibility over your investments. By following the steps outlined in this article and keeping these tips in mind, you can successfully invest in real estate through a self-directed IRA and secure your financial future. However, this approach is far too complicated, and so you may be interested in finding easier alternatives. This is where multifamily syndication comes in.

Multifamily syndication is one of the most lucrative investments in real estate. It is also far less complicated than a self-directed IRA. However, no investment is without risk and you still need to perform your due diligence before hopping into a real estate syndication deal.

Choosing a trustworthy syndicator with a proven track record for excellence is key. If you are an accredited investor interested in multifamily syndication, work with BAM Capital.

BAM Capital is an Indianapolis-based syndicator that has cemented itself as an industry leader by prioritizing Class A, A-, and B++ properties with a strong Midwest focus. This syndicator finds high quality multifamily properties with in-place cash flow and proven upside potential, and uses their award-winning strategy to mitigate investor risk while creating forced appreciation. [3]

BAM Capital is also a vertically-integrated company, meaning they can handle every step of the syndication process. They can guide you through the entire syndication process, from locating the properties to managing and renovating them.

Their investment strategy is the reason that they now have over $700 million AUM and 5,000+ units. [3]

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.

Sources:

[1]: https://www.forbes.com/advisor/retirement/real-estate-ira/

[2]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important

[3]: https://capital.thebamcompanies.com/