How to Use a Self-Directed IRA to Invest in Real Estate: An Interview with Sean McKay
In recent years, more investors have been exploring creative ways to diversify their retirement portfolios. One powerful tool that has gained momentum is the Self-Directed Individual retirement account (SDIRA). Unlike traditional IRAs, which typically limit investment choices to stocks, bonds, and mutual funds, a Self-Directed IRA allows individuals to invest in a broader range of assets, including real estate. To understand how to effectively harness the potential of an SDIRA for real estate investment, we spoke with Sean McKay, a seasoned expert in SDIRAs and real estate investing.
What is a Self-Directed IRA?
According to Sean McKay, "A Self-Directed IRA is a retirement account that gives individuals the power to control their investment decisions. Unlike traditional IRAs, which are managed by financial institutions, SDIRAs allow you to invest in a variety of assets beyond stocks and bonds. This includes real estate, precious metals, and private equity."
Why Invest in Real Estate Through an SDIRA?
Investing in real estate through an SDIRA presents various advantages, as McKay elaborates: "Real estate can provide significant returns, both through appreciation and rental income. Additionally, by leveraging an SDIRA, you can enjoy tax-deferred growth, meaning you won’t pay taxes on your gains until you withdraw funds from your account, typically during retirement."
How to Get Started with a Self-Directed IRA for Real Estate
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Choose a Custodian: The first step in setting up an SDIRA is selecting a custodian. McKay advises, "Look for a custodian that specializes in SDIRAs and understands the intricacies of real estate investments. Be sure to research their fees, services, and reputation."
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Fund Your SDIRA: Once you’ve selected a custodian, you’ll need to fund your account. This can typically be done through contributions, rollovers from other retirement accounts, or transferring funds from an existing IRA. McKay notes, "Ensure you understand the IRS contribution limits and rules related to rollovers to avoid penalties."
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Identify Investment Opportunities: With your SDIRA funded, the next step is identifying potential real estate investments. According to McKay, "You can invest in various types of real estate: single-family homes, multi-family properties, commercial real estate, or even raw land. Just ensure that any investment fits within IRS guidelines."
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Conduct Due Diligence: Before making an investment, thorough research and analysis are critical. “It’s crucial to assess the potential risks and returns of any property,” McKay emphasizes. “Consider factors like location, market trends, and rental demand.”
- Make the Purchase: Once you’ve chosen your property, your custodian will facilitate the transaction. “It’s important that all transactions are conducted through the SDIRA,” McKay clarifies. “This includes paying for the property, managing it, and collecting rents—all must come from the SDIRA to maintain tax advantages.”
Things to Avoid When Using an SDIRA for Real Estate Investment
As with any investment strategy, there are pitfalls to watch out for. McKay warns: “Avoid using your SDIRA to invest in properties that you or your family members will use personally. The IRS has strict rules against ‘self-dealing’ to ensure that all transactions are at arm’s length.”
Additionally, McKay cautions against overlooking operational costs: “Remember, your SDIRA must cover all expenses related to the property, including maintenance, property taxes, and insurance. These expenses cannot be paid out of pocket.”
Final Thoughts on The Power of SDIRAs
Sean McKay highlights the broader implications of using an SDIRA: “Not only does a self-directed IRA allow for greater investment freedom, but it also empowers people to take control of their financial future. With proper planning and diligence, real estate can be a fruitful avenue for retirement savings.”
In conclusion, investing in real estate through a Self-Directed IRA can be a smart strategy for those looking to diversify their retirement portfolio. With the right guidance, knowledge, and resources like those shared by Sean McKay, investors can unlock a range of opportunities that may significantly enhance their financial future. Whether you’re new to real estate or a seasoned investor, an SDIRA could be an attractive option worth considering.
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I am still a little confused. If I make my 401k to a Self Directed IRA can my Self Directed IRA loan to my Real Estate LLC? I don't want my IRA to own the property because I won't be able to get any cashflow from it.
OK…I bought a duplex with my SDIRA about 10 years ago. Now I'm 65…how do I get this out of the IRA without paying a big chunk of tax? Can I do something with a 1031 exchange? Thanks, for any ideas.
Hi there – one more thing, Coach! During Covid, I have been interested in learning more about real estate investing and have been literally devouring your podcast daily – there is so much great information! I'm trying to take your advice about getting started without allowing myself to become overwhelmed and enter analysis paralysis! As someone approaching retirement (59 – yes, some of us are late bloomers!), I'm not going to be able to retire early if I just get started investing in real estate now, but I found this self-directed IRA topic extremely informative for diversification and I'm now researching that angle. What I would love to hear from you in a future podcast is an interview with someone who got a really LATE start on the investment side who has some strategies to share for those approaching retirement – at the traditional retirement age – say 65-70. I'm very curious about whether the self-directed IRA move to help finance a property through another investor is a smarter choice than getting into investment properties directly on my own. Hearing from someone who has navigated that space at a later age would be really helpful! Thank you so much for sharing such great advice and wisdom through all your channels!
Hi Coach – great podcast! I went to the American IRA website and downloaded the Guide to Self-Directed IRAs. I think you mentioned that you would share Sean's email address in the show notes, but I don't see it. Are you able to share? I would love to discuss my situation with him and consider this move. Thank you!
Coach, I'm M.K in your recent course. I'll post there to, but I currently have one home in a SDIRA, Roth. We just set one up for my wife, transferred funds into it and are in the process of buying a home in her account. I sent an email to you. I hope you can take us up on that request. Thank you!
Great interview, thank you Coach!
Great content, Coach. What do you use as a proof of funds when making an offer using someone’s IRA?
Great video Chad, and very interesting topic. I heard about this from one of your other podcasts and reached out to Sean a while ago (referencing you of course). I understand that they aren't allowed to match people with such IRA's with those of us who want to borrow. Is there any way to find people that are looking to lend against their IRA's? If so, maybe another topic for a video podcast sometime soon? I look forward to your videos each week and am enjoying your Property Analysis course happening now – learning a lot !
Hey Carson, I really like your style. I can tell you are a numbers guy. I know your course is closed. Do you do any paid 1-on-1 coaching? Please email me aj.mida@exprealty.com
Great info Coach. Though about using my IRA but never knew about using other people's IRA. Thanks Coach and Sean.
Awesome and timely for me Coach!