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August 14, 2023

Using a Self-Directed IRA to Buy Rental Property: 5 Things to Know

Key Points 

  • Combining the income potential of a rental property with the tax advantages of a Self-Directed IRA can be an appealing investment strategy.
  • It’s important to understand the home buying process, financing options, tenant considerations, property management, and the benefits of checkbook control when using a Self-Directed IRA for rental property investments.
  • Broad Financial provides expertise and support to help you navigate the intricacies of investing in a rental property with a Self-Directed Real Estate IRA.
Coins stacked in an increasing trend graph next to a miniature house to show real estate investment growth.

Investing in a rental property offers the potential for both income generation and long-term appreciation. When combined with the tax advantages of a Self-Directed IRA, a rental property becomes even more appealing for retirement investing. To set yourself up for success, it's helpful to understand the fundamentals of using a Self-Directed IRA to buy a rental property. Here’s what you need to know:

1. It's Generally Like Any Home Purchase, But with a Few Key Differences

Self-Directed IRA account holder on computer and investing in real estate with the Self-Directed IRA custodian as the buyer for the benefit of your IRA.

The process of buying a rental property with a Self-Directed IRA is similar to purchasing any other property. However, there are a few differences that you should be aware of to ensure a smooth transaction. Once you have chosen the home you want to buy, you will need to list your Self-Directed IRA custodian as the buyer for the benefit of your IRA. This is because the property is being purchased and owned by your IRA, rather than by you personally.

Your Self-Directed IRA custodian can assist with the necessary paperwork and ensure compliance with IRS regulations. Additionally, the custodian will handle important financial aspects, such as wiring the earnest money deposit (EMD) to open escrow and initiate the closing process. This collaborative approach ensures that your Self-Directed IRA is seamlessly integrated into the home buying process, providing you with peace of mind and a simplified experience.

2. All-Cash Is Common, But Non-Recourse Is an Option

When using a Self-Directed IRA to buy a rental property, completing the purchase outright with the funds in your IRA is one possibility. However, if you prefer to leverage your purchasing power, it's possible to explore financing options such as a non-recourse loan. A non-recourse loan is a type of loan that is secured by the property itself, and the lender's recourse is limited only to the property. In the event of default, the lender cannot go after the IRA owner’s personal assets or their other IRA assets.

A non-recourse loan allows you to diversify your portfolio by investing in larger real estate deals you may not have been able to invest in without a loan. If you’re interested, learn more about how to invest in real estate with a Self-Directed IRA non-recourse loan.

Model house and a percentage sign next to it to signify a real estate investment bought with borrowed funds from a Self-Directed IRA non-recourse loan.

3. Be Aware of - But Not Discouraged by - Disqualified Tenants

One of the key benefits of owning rental property within a Self-Directed IRA is the ability to generate rental income. While you generally have the freedom to choose who you rent your property to, there are a few disqualified persons to note. Your parents, grandparents, children, children-in-law, and grandchildren, cannot be tenants of your rental property held within your Self-Directed IRA.

Top stories of an apartment complex with the blue sky as the background to show that you can use a Self-Directed IRA to buy a rental property.

This restriction should not discourage you, as the primary purpose of investing in a rental property is typically to rent it out to tenants. By targeting the right tenant demographic and conducting thorough tenant screenings, you can perhaps attract responsible and reliable renters and maximize your rental income potential. Investing in lucrative rental markets with a relatively strong demand can increase the likelihood of finding qualified tenants and achieving optimal returns.

4. Manage Your Property Properly

With a classic Self-Directed IRA, all expenses are paid from your IRA and must flow through your Self-Directed IRA custodian. Remember, when you first purchase a property, your custodian for the benefit of your IRA will be listed as the buyer and owner. The custodian will also be responsible for wiring the earnest money deposit. This effectively names your IRA as the owner of the property rather than you personally owning the property. From there, any real estate expenses are paid from your IRA, at your direction, and the transactions are facilitated by your custodian.

Some investors choose to hire a property management company to deal with the day-to-day maintenance of their rental property. Working with a property management company can be a great way to lessen the burden of physically attending to your properties, communicating with tenants, and so on. If you go this route, typically the property manager will collect rent and send any profits to your Self-Directed IRA custodian to deposit into your IRA.

Real estate maintenance man cleaning the roof of an investment property owned by a Self-Directed IRA.

5. Consider a Self-Directed Checkbook IRA

Since rental properties tend to have a lot of everyday expenses and transactions, many people look to what's called a Checkbook IRA and use it as a Real Estate IRA. With a Checkbook IRA, you have the ability to handle rental property costs directly, without having to go through your custodian for day-to-day expenses.

A Checkbook IRA requires you to establish an IRA LLC or IRA Trust, followed by a checking account in the name of your newly established entity. The checking account enables you to write checks and send wires to pay expenses. This level of control can be particularly advantageous when it comes to managing rental properties, as it simplifies the process of paying expenses, collecting rent, and executing property-related transactions.

Real estate investor pointing a a beautiful property on a tablet, as they are looking to buy real estate with their SDIRA.

Investing in rental property through a Self-Directed IRA offers a unique opportunity to combine the income potential of real estate with the tax advantages of an IRA. By understanding the home buying process, financing options, tenant considerations, property management, and checkbook control, you can maximize the benefits of using a Self-Directed IRA to buy a rental property. Learn more about Broad Financial’s unique Self-Directed Real Estate IRA and speak with one of our specialists about opening your account today!

Disclaimer: Broad Financial LLC does not provide legal, tax, or investment advice. Please consult with your tax or legal advisor before making investment decisions. 


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