Investing in Real Estate with your IRA
I still remember the first time someone tried to explain this concept to me and simply said “huh?” I just couldn’t grasp the fact that you could buy a piece of investment property with IRA funds. So I did months of investigating finding out which companies allowed people to set up “Self Directed IRAs”. I found out that there are basically two kinds of self directed IRAs.
The first is a Self Directed IRA where a custodian acts on behalf of your funds, meaning that every transaction must be approved by the custodian you hire. They cut checks, review your investments and are essentially in charge of every penny that leaves your IRA.
The second Self Directed IRA is commonly referred to as a “Checkbook Control IRA”. This kind of Self Directed IRA sets up an LLC to manage your funds, then deposits your funds into your bank’s LLC checking account whereby you have complete control over your investments since you are the manager of the LLC.
Both kinds of Self Directed IRAs have their benefits and obstacles. The Custodial SD IRA doesn’t give you access to your funds quickly. So if you needed those funds quickly to secure a deal, it probably won’t happen on the timeline you prefer. Secondly, what is an A/C needs to be replaced on an investment property you own? You can’t personally pay for ANYTHING on a property owned by your IRA, so you would have to either wait for the A/C to be replaced once you received the check from your custodian or talk the A/C company into giving you $5000 worth of product and service before they were paid. Neither option sounds very good. But if are lending IRA money to other investors, the Custodial SD IRA option may be just fine.
Checkbook Control SD IRAs appear to give you more flexibility on buying real estate through your IRA since you have the checkbook to your IRA owned LLC funds. The problem here is that if you make one investment that is against the regulations of a SD IRA, you may very well have all your funds confiscated by the Internal Revenue Service (IRS). Ouch! So be careful and fully understand the regulations of Checkbook Control SD IRAs before you pay the money to set one up.
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