July 27, 2023

Self-Directed IRA Rental Property Basics

Written By: Daniel Gleich

Key Points 

  • If you’re looking to invest in rental property, you can choose your ideal property by conducting thorough market research and seeking guidance from professionals.
  • Investing in rental property with a Self-Directed IRA offers tax-advantaged growth potential.
  • Consider a Checkbook IRA for seamless everyday transactions and greater control of managing your rental property's finances.
  • When you’re ready to purchase a rental property, you can complete the purchase through your Self-Directed IRA custodian for a streamlined transaction process.

Investing in rental property can be a rewarding way to generate passive income and build long-term wealth. But what if you could take it a step further and position your rental property investments to be tax-advantaged? That's where a Self-Directed IRA comes into play. With a Self-Directed IRA, you can invest in various alternative assets, including real estate. Here’s how it works for investing specifically in rental property.

Choose Your Perfect Rental Property

First, it’s time to find your rental property! The choice is all yours as a Self-Directed IRA will allow virtually any type of real estate investment. It’s important to conduct thorough market research and consider factors such as location, rental demand, and potential returns. It’s considered best practice to seek guidance from real estate professionals or investment advisors. A Self-Directed IRA empowers you to invest in properties that fit your investment strategy.

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.

Open and Fund a Self-Directed IRA

The big step to investing in rental property through a Self-Directed IRA is to open and fund your account. At Madison Trust, the process is simple and straightforward. Our experienced team will guide you through the necessary paperwork and ensure your account is set up correctly. You can fund your account by transferring money from an existing IRA to your new Self-Directed IRA. Or, you can make an initial contribution.

Consider a Checkbook IRA for Seamless Everyday Transactions

Managing rental properties involves day-to-day transactions, such as collecting rent, paying maintenance expenses, and hiring contractors. A Checkbook IRA can streamline these transactions and provide you with greater control of your rental property. To set up a Checkbook IRA with Madison Trust, you’ll first open and fund your new Self-Directed IRA as described above. Next, we will assist you with establishing an LLC or trust for your IRA. Then, you’ll open a checking account in your LLC’s or trust’s name. This allows you to manage everyday transactions directly from your Checkbook IRA’s checking account, without having to go through your custodian as you would in a classic Self-Directed IRA.

Complete the Purchase Through Your Self-Directed IRA Custodian

When buying real estate through a Self-Directed IRA, you can ask the realtor or title company to list your Self-Directed IRA as the buyer. This will help ensure your property is held within your Self-Directed IRA. Once the contract is signed, you'll submit it along with an Investment Authorization Form. Your custodian will review and countersign the contract, and then issue a check or wire the funds from your IRA to the escrow agent. Additionally, you'll need to submit the necessary closing documents, such as the Settlement Statement/HUD, Draft of the Deed, and Title Policy, if applicable. At Madison Trust, our Self-Directed IRA Specialists are here to guide you every step of the way.

Keep Property Management in Mind

Property management is crucial for successful rental property investments. It's important to note that when investing in rental property through a Self-Directed IRA, you and your family cannot personally use the property until it's distributed from the IRA. All transactions related to the property, including rent collection, expense payments, and contractor hiring, should be facilitated through your Self-Directed IRA custodian. If you opt for a Checkbook IRA, you can enjoy more direct control of managing your rental property's financial aspects. Alternatively, you may consider hiring and paying a professional property manager to handle the day-to-day management tasks and transactions. It’s also important to remember that you must pay the property manager from your Self-Directed IRA.

Investor stacking coins in an increasing trend next to a small version of a house, indicating that the Self-Directed IRA rental property investment is successful.

Investing in rental property through a Self-Directed IRA can provide you with significant financial benefits. By leveraging the tax-advantaged nature of Self-Directed IRAs, you can build a portfolio of rental properties with the potential for long-term wealth creation. Whether you're a seasoned real estate investor or just starting out, Madison Trust is here to support you throughout the process. Open a Self-Directed IRA today and unlock the potential of adding rental property to your retirement portfolio.

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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