How To Invest in a Foreign Property with a Self-Directed IRA – Part 1

Posted on: October 8, 2021   |   Category: How To
Foreign Property, Self-Directed IRA

Why do investors choose international assets? Why do Self Directed IRA custodians not hold foreign properties?  

Thinking about international property 

One of the key advantages of utilizing a Self Directed IRA is the ability to diversify better. In a classic IRA, the account holder can diversify within the asset class of market products (e.g. mutual funds.) With a Self Directed IRA, the account holder can complement that diversification by expanding into non-market assets like real estate. If the account holder would like to diversify even further, they can expand their assets to include international properties.  

Truthfully, this sounds like a bit of a stretch for most Self Directed IRA investors. Domestic real estate already possesses a learning curve, and investing internationally comes with a whole new set of regulations. However, this is one case where the bark may be worse than the bite. The fundamentals of investing in a foreign property with a Self Directed IRA are the same as for local real estate. It’s true that you have to keep local regulations in mind, but these can be addressed fairly quickly with some on-the-ground contacts. If you have an interest in using your retirement funds to invest internationally, it pays to explore the option. Many Self Directed IRA accounts (including some of the nation’s biggest) have successfully placed retirement funds in foreign properties. 

Why would a Self Directed IRA invest in foreign real estate? 

A number of factors may push a self-directed retirement account into considering international property. 

  • Expanded diversification – As mentioned above, going international opens up new possibilities for your investing. Nobody can really predict which country will have secure and stable real estate prices, especially twenty years down the road. By placing your Self Directed IRA funds in different countries, you can help mitigate a loss if one of those countries fail. 
  • Retirement destination – A small but growing number of Self Directed IRA investors wish to retire outside of the United States. This may be for any number of reasons. The account holder has family internationally that they would like to be close to. Property prices or cost-of-living may be dramatically lower. Or they may just want a change of scenery for relaxation purposes. In any case, investing in an international property with a Self Directed IRA can help make that happen. They can accrue rental income from the property while it is owned by the IRA. Then, when they reach retirement age, they can take the property for themselves as a distribution. 
  • Timely investment – Sometimes an investor just happens to find a good deal. When you remove the limitations on asset choice by considering foreign real estate, those good deals may appear a lot more frequently.  
  • Legal protection – In the United States, a Self Directed IRA account holder could be sued and the judgement can be collected from their retirement assets. (The laws regarding these transactions vary from state to state.) In the case of a foreign asset, this would be much harder to do. Depending on the structure of the Self Directed IRA, the plaintiff would very possibly have to travel to the foreign location in order to sue for that asset. Even in the rare case that a plaintiff was willing to travel, they would still have to prove their case in the foreign court. As this is unlikely to happen, the foreign property acts as a safety net for any deleterious legal actions.  

What kind of Self Directed IRA can purchase an international property? 

Technically, any Self Directed IRA can purchase an international property. There is nothing in ERISA which prevents a retirement account from investing in an overseas asset. However, as you’re most probably well aware, when it comes to Self Directed IRAs, there can be a large gap between what’s legal and what’s practical. Many Self Directed IRA custodians will not hold foreign property on behalf of their account holders. The reasons can vary, but one of the primary ones is investor safety.  

Legitimate Self Directed IRA custodians want their investors to be safe, and as such are very averse to holding assets that may possibly be fraudulent. Foreign property is one of those assets which are highly susceptible to fraud. Since the property is overseas, it is hard for the investor to personally verify the veracity of the deal. Con men take advantage of this fact and offer what sounds like an amazing investment opportunity, but which in fact may be an inferior property or one that doesn’t exist at all. In light of this, most custodians prefer not to get involved in the first place and try to stay away from international real estate. 

However, that does not mean there are not any good foreign investments. Quite the contrary. Plenty of investors have seen success with judicious international investing. If a Self Directed IRA account holder wishes to pursue that path, then they can do so by setting up an IRA LLC. The way it works is the account holder will set up a specialized LLC that is designed to work with retirement funds. (This is usually done by an IRA LLC facilitator.) They will also open up a Self Directed IRA account with a custodian. Once both are set up, the IRA will invest in the newly formed LLC by contributing funds to it. This is no different than an IRA investing in any company (e.g. IBM), just in this case the company is a small LLC.  Once the LLC is funded, it can purchase any asset without having to go through the custodian. The account holder uses the LLC to purchase the foreign property, and via this process, the property becomes an IRA asset.  

With this kind of investing, the investor must be very careful to perform proper due diligence. This will often entail travelling to the foreign property and only dealing with people that they know and trust.  

Getting started 

If you’re interested in pursuing a piece of international real estate, the first step is to speak with a Madison specialist. Tell them about your investment idea, and they’ll be able to give you an informed opinion about whether it will work in a Self Directed IRA. You can schedule a complimentary call here