The self-directed IRA offers several distinct tax advantages to holders. It’s an ideal method of entering the property market. You need to beware of what you can and can’t do, though. That list of prohibited transactions will soon become your best friend.
We go through how you can find a property to add to your portfolio in this article.
The Property Market
Unlike precious metals, the real estate market fluctuates radically. We’re gradually starting to leave the remnants of the massive housing bubble burst of 2008. Now is the time to start looking into using a self-directed real estate IRA to enter the market and take advantage of rising housing prices.
Demand will always be high and supply will always be there. It’s just a matter of waiting for the prices to rise again, and this is happening. Whether you buy to rent or build something yourself, there’s money to be made.
The Mortgage Issue
To get started, you need to understand the type of mortgages available for Self Directed IRA. A Self Directed IRA can only get a non-recourse loan. A non-recourse loan is one where the bank only holds the property as collateral. The IRA holder does not sign a personal guarantee on behalf of the IRA account.
There are options where you can partner with your IRA and assume the loan but you have to be very careful that you structure it properly.
Building a Home
This is where it really gets complicated. Don’t waste your time with this option if you don’t have a significant amount of money. You can’t use so-called sweat equity or the favors of friends and family to get the job done. This would be a breach of the account terms and conditions.
You’ll have to pay for everything to get your house built. And this will nearly always be more than simply buying a home that’s already built.
What Can You Charge?
Let’s assume you intend on renting your investment home out to people. Before you purchase anything, find out about the going rates in that area. You need to determine how much you can realistically charge before you can predict how long it will take you to start making a profit.
The same thing applies to homes you intend on simply selling to someone else. Get an idea of pricing trends in the local area. If they’re on the up, it might be a good idea to purchase the home. If prices are fluctuating, and there are economic problems, stay away from it.
Many Small or One Big?
The debate over whether your self-directed IRA should contain lots of small properties or a single large property has many convincing arguments. In general, you should treat your investments as you would the stock market.
Diversify your market portfolio. One big property is always a risk because there’s no defense if the price crashes or it’s affected by some sort of natural disaster.
Yes, having more properties might mean more time spent managing them, but you can outsource this work. There’s nothing with contracting all the maintenance work out to a management company. As long as the company isn’t related to any branch of your family, nothing is stopping you from doing this.
Check with Your Custodian
Whenever you make a purchase or make a transaction of any kind, talk to your custodian. They’ll be able to check if you’re remaining within the rules. Get into the habit of doing this and you’ll never have to deal with the wrath of the IRS.
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