December 6, 2023

Investing in Residential Properties with a Self-Directed Real Estate IRA

Written By: Daniel Gleich

Key Points 

  • You can grow your retirement savings through residential property investments with a Self-Directed Real Estate IRA.
  • Investing in residential real estate allows you to diversify your retirement portfolio, earn typically steady rental income, and hedge against inflation.
  • By choosing a reputable and knowledgeable Self-Directed IRA custodian like Madison Trust, you'll receive guidance at every step of the process - from opening your account to placing your investment.

If you have experience with residential real estate or are simply passionate about it, a Self-Directed Real Estate IRA (also known as a Real Estate IRA) should be on your radar. With a Real Estate IRA, you can invest in rental units, multi-family properties, vacation homes, and other residential properties while saving for retirement. Let’s dive deeper into how you can use the power of investing in residential real estate to save for your dream retirement with a Real Estate IRA.

What Is a Self-Directed Real Estate IRA?

Self-Directed IRA investor on computer with increasing trend graph and small houses next to him, to show that his investment is growing in a tax-advantaged retirement account.

A Self-Directed Real Estate IRA (or simply a Real Estate IRA) is another name for a Self-Directed IRA, which is a type of Individual Retirement Account that gives you the freedom to invest beyond Wall Street products. With a Real Estate IRA, you can invest in a variety of alternative assets, including residential real estate. You don’t have to stick to investing in stocks, bonds, and mutual funds. The opportunities are nearly endless.

Types of Residential Properties

With a Real Estate IRA, you can invest in virtually any type of residential property you’d like. Here are several examples you might want to consider:

  • Rental Units
  • Vacation Homes
  • Fix & Flips
  • Multi-Family Properties 
  • Single-Family Homes
  • Condos
Row of real estate investment properties, displaying that a retirement portfolio can be diversified by investing in real estate with a Self-Directed IRA.

Types of Real Estate IRAs

When it comes to Real Estate IRAs, there is no one-size-fits-all solution. It’s up to you to choose the ideal account for your unique retirement goals and investing preferences. Here’s a brief overview of your options:

Just like a standard IRA, you contribute pre-tax dollars, potentially reducing your current taxable income. Since your retirement funds grow tax-deferred in this account type, you won't incur immediate taxes on rental income, capital gains, or other earnings.

With a Roth Real Estate IRA, you contribute after-tax dollars. All your earnings, including rental income, capital gains, and dividends, grow tax-free.

A Real Estate IRA with Checkbook Control gives you the chance to make everyday transactions on your own in real-time, round-the-clock, without a custodian. It’s a great option for transaction-heavy assets, such as a residential rental property.

Specifically designed for business owners and self-employed individuals, a SEP Real Estate IRA allows you to make contributions as the employer. These contributions are tax-deductible for your business in the amount of 25% of your employees’ net compensation or at max $66,000 in 2023. This allows you to reduce taxable income and save for retirement at the same time.

A SIMPLE Real Estate IRA is a tax-deferred account for small business owners with less than 100 employees who don’t offer other retirement plans. It may also be an option for self-employed individuals and sole proprietors. With a SIMPLE Real Estate IRA, you can help yourself and your employees save for retirement.

Benefits of Residential Real Estate Investments

If you decide to invest in residential real estate through a Real Estate IRA, you can enjoy the following perks:

Benefits of a Self-Directed Real Estate IRA Infographic: (1) Asset Diversification Opportunities - Investing in residential real estate allows you to diversify your retirement portfolio with investments beyond Wall Street. Additionally, you don’t have to invest in one type of residential real estate property. Mixing it up with multiple residential properties can typically reduce risk and potentially maximize returns. (2) Receive Tax Advantages - Real Estate IRAs offer either tax-deferred growth (Traditional Real Estate IRA) or tax-free growth (Roth Real Estate IRA) of your retirement funds. With whichever account type you choose, you can enjoy the benefits of investing for your retirement within a tax-advantaged account. (3) Steady Rental Income - Residential properties provide a valuable opportunity to receive a generally reliable stream of rental income. This rental income flows back into your Real Estate IRA and can grow to help you set yourself up for the retirement of your dreams. (4) Hedge Against Inflation - Throughout history, when the dollar's buying power decreases, real estate tends to increase in value. This is why investing in alternative assets, like residential real estate, typically helps individuals hedge against inflation. (5) Invest in Your Area of Expertise - With a Real Estate IRA, you have the flexibility to invest in residential real estate that aligns with your areas of expertise, personal values, and interests. Because you're investing in what you know and believe in, this may lead to the potential for greater returns on your investment. (6) Property Appreciation - Throughout history, real estate often appreciates in value over time. When you decide to either sell or distribute your residential property, you would likely be selling it at a higher rate than when you purchased it, allowing you to enjoy the capital gains.

How Can I Invest in Residential Real Estate with a Self-Directed Real Estate IRA?

It couldn’t be easier to invest in residential real estate through a Self-Directed Real Estate IRA. Here’s what you can expect from our easy process.

Residential real estate investment house with front lawn.

Choose a Residential Property

Do your research and figure out what type of property you’d like to invest in. You may consider researching the local real estate market, what types of properties tend to have higher growth potential, and how seasonality might affect your income stream.

Open and Fund a Self-Directed IRA at Madison Trust

You’ll complete our online application to open a Self-Directed IRA. Then, transfer or roll over funds from an existing retirement account, such as an IRA or 401(k) or make an initial contribution. If you'd like to finance your investment, you can do so through this non-recourse lending program.

Real Estate IRA investor being handed the key to a residential real estate property.

From here, you can choose to purchase your property in one of two ways:

Fund an Earnest Money Deposit

The Title/Escrow Company should prepare a Purchase Contract with the buyer listed as “Madison Trust Company, Custodian FBO [First Name, Last Name, MTC Account #]. 

You should sign the contract in the capacity that you have read and approved the documents. 

Then, submit the signed Purchase Contract and our Investment Authorization Form to Madison Trust. Madison Trust will review and countersign the Purchase Contract as custodian of your IRA and will issue a check or wire to the escrow agent from your IRA using the submitted Investment Authorization Form.

Fund Full Purchase

Submit the rest of the closing documents which include the Settlement Statement/HUD (signed), Draft of the Deed, and if applicable, the Title Policy. Also, submit a second Investment Authorization Form instructing Madison Trust to complete the purchase by issuing a check or wire to the title/escrow company. The title company will then submit the Deed to the local County Clerk’s office for recording, who in turn will return it to Madison Trust for safekeeping.

Real Estate IRA investor standing and smiling in front of a real estate investment property held in his Self-Directed IRA.

Start Your Residential Real Estate Investing Journey Today

For more information about investing in residential properties through a Self-Directed Real Estate IRA, schedule a discovery call with Madison Trust. We look forward to hearing from you!

Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

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