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The Pros and Cons of Investing with a Real Estate IRA

An individual retirement account, or IRA, is a savings account with tax advantages that individuals can use to save and invest money long-term. A real estate IRA is one way people can invest money and own real estate within their retirement plan. If this sounds interesting to you, let’s go over the pros and cons of investing with a real estate IRA. 

What Is a Real Estate IRA?

Several types of IRAs exist, including traditional IRAs, SEP IRAs, Roth IRAs, and SIMPLE IRAs. Each of these IRAs has different rules regarding taxation, eligibility, and withdrawals. For example, a real estate IRA isn’t a separate or distinct account type. However, you need a self-directed IRA to invest in real estate assets. 

That said, when you invest in real estate with an IRA, there are several considerations. For one, it must be a self-directed IRA, which is independent of any brokerage, bank, or investment company. However, if you purchase real estate using an IRA, you’ll still need an entity specializing in self-directed accounts to manage the transaction, paperwork, and financial information. 

Additionally, it’s important to note that you and your IRA are two separate entities. For instance, your IRA owns the property; you don’t. Furthermore, your property can’t be a vacation home, office, or secondary residence, and you can’t purchase it from a “disqualified person.” A “disqualified person” would include your spouse, family members, service providers of your IRA, or any entity that owns more than 50% of the property. 

Finally, you cannot sell, exchange, or lease property you already own to your IRA. These transactions are prohibited. Next, let’s go over how an IRA works. 

How Do You Purchase Real Estate With an IRA? 


Buying real estate with an IRA isn’t easy. First of all, it’s hard to get a mortgage to purchase property within an IRA. You’ll likely have to pay in cash, which can affect your rate of return later on. Additionally, IRA account holders need to have enough money in their self-directed IRA to cover taxes, insurance, utilities, repairs, etc. 

For instance, if your investment property needs a new roof, you can’t fix it yourself. Instead, you have to pay for a contractor with your IRA funds. As such, it’s best to hire a property management company in Philadelphia to help manage and maintain your investment properties. 

Since you don’t technically own the investment property, your IRA does, you don’t get the tax benefits that come along with it. And, since you paid cash to obtain the property, there are no mortgage payments to deduct during tax time. As a result, you also won’t get the benefits of tax deductions or depreciation. 

If your investment is a rental property, you also don’t get to collect rental income. Instead, every bit of the money gets reinvested into your IRA. However, when you eventually withdraw the money at retirement, you’ll also get your rental income. 

Why Invest In a Real Estate IRA?

Now you may be asking yourself, why invest in a real estate IRA? With so many rules and minor drawbacks of this investment method, it’s hard to see the benefits. Well, there are several reasons why people like this type of investment. For one, the tax benefits that come with an IRA are incredible. 

Additionally, it’s a great way to diversify your retirement portfolio. Real estate has historically appreciated over time, which is great since an IRA is a long-term investment plan. It also helps that you can buy rental properties with your IRA, meaning you can earn a steady income from rents. That said, your income from your properties grows tax-free within your IRA. 

Finally, when you invest in real estate with an IRA, you can buy, sell, flip, and accumulate as many properties as you want. Buying properties to sell, rent, or flip is a great way to secure an excellent retirement fund. Next, let’s review the disadvantages of investing in real estate with an IRA. 

Disadvantages of Investing In Real Estate With an IRA

As stated above, quite a few challenges come with investing in real estate with an IRA. For instance, you have to set up your self-directed IRA with a custodian, which is a company or financial institution that can provide guidance on IRS requirements. This isn’t necessarily a disadvantage, but you can’t buy real estate without one, which costs money. 

Next, you can’t claim deductions for things you typically would if you owned real estate. For instance, you can’t claim property taxes, mortgage interest, depreciation, and other property-related expenses. Additionally, all the expenses for your real estate must be paid for with your IRA funds, and you can’t do repairs or renovations yourself. Instead, you have to pay someone to complete them for you, like a management company. 

Finally, you can’t live in the investment property, and it’s also off-limits to your spouse and relatives. That said, if you buy real estate with an IRA, you have to be extremely careful about all of these rules and requirements. 


Considerations for Investors

Purchasing real estate with a self-directed IRA isn’t for everyone. First, you must be well aware of the different retirement account types and the investing rules. Keep in mind that although your investment is tax-free before retirement, if you don’t follow the rules of investing, you could disqualify the IRA and create a taxable event. 

Additionally, if you withdraw money before retirement, you’ll likely have to pay income taxes plus a penalty for withdrawing money early. However, if you’re taking out money to pay for college, a first home purchase, medical expenses, health insurance, or disability, you may be able to avoid the 10% penalty. 

Although investing in real estate with an IRA can be a viable retirement plan, some investors prefer buying properties outside a retirement account. Investing outside an IRA gives you more flexibility and freedom with your properties and allows you to reap the tax benefits right away. 

Whether you invest in properties within your IRA or outside a retirement account, real estate is a great way to earn profits and solidify a large retirement fund. However, it’s best to work alongside professionals to help you get the most from your investments. Make sure to do your research on IRAs and real estate, and seek help when necessary. 

Managing Your Properties

When you buy rental properties with an IRA, you can’t manage them yourself. Instead, you must find a trustworthy property management company to look after your investments and ensure everything runs smoothly. Finding a reputable management company is half the battle. Luckily, you don’t have to look far. Bay Property Management Group in Philadelphia has the expertise and knowledge you’re looking for. 

Need Help Maximizing Your Rental Portfolio?

BMG is a top-notch company that offers comprehensive rental management services to landlords and real estate owners throughout Baltimore, Philadelphia, Northern Virginia, and Washington DC. Our services include tenant screening, maintenance, rent collection, eviction services, rental registration, and more. 

Contact Bay Property Management Group today if you’re in need of rental management services. Send us an email with your property details, and we’ll be delighted to work with you to achieve your investment goals.