Here are three common possibilities for buying property with your real estate IRA. One strategy you may know well and two little-known options that may take you by surprise.
Option #1: Direct ownership in a property. In case you haven’t seen the commercials or read the ads in magazines; you can own real estate inside of a Self-Directed IRA. The good news is that it’s a direct and pure investment into real estate that you can see and touch for yourself.
There are important IRS regulations regarding what your real estate IRA can and cannot do! For example, you cannot physically maintain the property or use it personally. If you do, the tax deferral of your IRA is blown and you could owe a huge tax bill.
Option #2: Public ownership via a REIT (real estate investment trusts). A REIT can provide broad diversification geographically and across multiple sectors. The good news is that public REITs can be purchased easily on the open market and are more liquid than their private or non-traded counterparts.
The bad news is that public REITs are not considered pure real estate since you only own equity in a company that owns real estate, not actual, tangible real estate. Thus, protection from inflation is weak. Even worse, because of the liquidity feature of public REITs and their being traded on the equity markets, they retain a much higher level of correlation to traditional stock market swings.
Option #3: Seller financing. A seller financing strategy involves a loan provided by the seller of a property or business to the purchaser.
Quite simply, rather than the buyer having to get financing from a conventional bank, the seller provides the buyer a loan. Usually, the purchaser will make some sort of down payment to the seller and then make installment payments (typically on a monthly basis) over a specified time, at an agreed-upon interest rate, until the loan is fully repaid.
To a seller, this is an investment in which the return is guaranteed only by the buyer’s credit-worthiness or ability and motivation to pay the mortgage. For a buyer, it is often beneficial because he/she may not be able to obtain a loan from a traditional bank. In general, the loan is secured by the property being sold. In the event that the buyer defaults, the property is repossessed or foreclosed on exactly as it would be by a bank.
In this case, the seller financing is being provided by your Real Estate IRA
The best part of it all is that you are 100% in control of the financial terms in the promissory note. And, the interest payments will be made directly to your Self-Directed IRA without any taxation!
This strategy is commonly used by Self-Directed investors that are seeking an alternative fixed income strategy when the yields of traditional investments aren’t sufficient.
Which of the three options is right for you?
For more information on how you can discover your IRA investing alternatives, download our FREE report: “The Truth About IRAs REVEALED.”
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