Tag Archives: real estate investing

Some Helpful Tips For Investing In Real Estate Using Retirement Funds

Most people mistakenly believe that their retirement accounts must be invested in traditional financial related investments such as stocks, mutual funds, exchange traded funds, etc. Few Investors realize that the Internal Revenue Service (“IRS”) permits retirement accounts, such as an IRA or 401(k) plan, to invest in real estate and other alternative types of investments.  In fact, IRS rules permit one to invest retirement funds in almost any type of investment, aside generally from any investment involving a disqualified person, collectibles and life insurance.

One of the primary advantages of purchasing real estate with retirement funds is that all gains are tax-deferred until a distribution is made or tax-free in the case of a Roth account (after-tax). For example, if one purchased a piece of property with retirement funds for $100,000 and later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-deferred. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and in most cases state income tax.

The two most common vehicles for purchasing real estate with retirement funds is the self-directed IRA or an employer sponsored 401(k) plan.  However, most employer 401(k) plans do not offer real estate as a plan investment option and, thus, the self-directed IRA has become the most popular way to buy real estate with retirement funds.  Establishing a self-directed IRA is quick and relatively inexpensive and can be done in just a few days.  The most challenging aspect of investing in real estate using retirement funds is navigating the IRS prohibited transaction rules.  In general, pursuant to Internal Revenue Code (“IRC”) Section 4975, the retirement account holder cannot make a retirement account investment that will directly or indirectly benefit ones self or any disqualified person (lineal descendant of the retirement account holder and related entities), perform any service in connection with the retirement account investment, guarantee any retirement account loan, extend any credit to or from the retirement account, or enter into any transaction with the retirement account that would present a conflict of interest.  The purpose of these rules is to encourage the use of retirement account for accumulation of retirement savings and to prohibit those in control of the retirement account from taking advantage of the tax benefits for their personal account.

Aside from navigating the IRS prohibited transaction rules, the following are a handful of helpful tips for making real estate investment using retirement funds:

  • The deposit and purchase price for the real estate property should be paid using retirement account funds and not from any disqualified person(s)
  • All expenses, repairs and taxes incurred in connection with the retirement account real estate investment should be paid using retirement funds – no personal funds from any disqualified person should be used
  • If additional funds are required for improvements or other matters involving the retirement account-owned real estate investment, all funds should come from the retirement account or from a non-“disqualified person”
  • Partnering with yourself or another disqualified person in connection with a retirement account investment could trigger the IRS prohibited transaction rules.
  • If financing is needed for a real estate transaction, only nonrecourse financing should be used. A nonrecourse loan is a loan that is not personally guaranteed by the retirement account holder or any disqualified person and whereby the lender’s only recourse is against the property and not against the borrower.
  • If using a nonrecourse loan to purchase real estate with a self-directed IRA, the unrelated business taxable income (“UBTI”) rules could be triggered and a tax rate reaching as high as 40 percent could apply.  Note – an exemption from this tax is available for 401(k) plans pursuant to IRC 514(c)(9). If the UBTI tax is triggered and tax is due, IRS Form 990-T must be timely filed.
  • No services should be performed by the retirement account holder or any “disqualified person” in connection with the real estate investment.  Please see: Finally Some Clarity On What You Can And Cannot Do In Your Self-Directed IRA for additional information
  • Title of the real estate purchased should be in the name of the retirement account. For example, if Joe Smith established a Self-Directed IRA LLC and named the LLC “XYZ, LLC”, title to the real estate purchased by Joe’s Self-Directed IRA LLC would be as follows: XYZ LLC.  Whereas, if Joe Smith established a self-directed IRA with ABC IRA Trust Company (custodian), and the custodian purchased the real estate directly on behalf of Joe without the use of an LLC, then title would read:  ABC IRA Trust Company FBO John Doe IRA.
  • Keep good records of income and expenses generated by the retirement account owned real estate investment
  • All income, gains or losses from the retirement account real estate investment should be allocated to the retirement account owner of the investment
  • Make sure you perform adequate diligence on the property you will be purchasing especially if it is in a state you do not live in.
  • Beware of fraud if purchasing real estate from a promoter.
  • If using a self-directed IRA LLC to buy real estate, it is good practice to form the LLC in the state where the real estate will be located to avoid any additional filing fees.  Also, be mindful of any annual state LLC filing or franchise fees.

Using retirement funds to buy real estate can offer retirement account holders a number of positive financial and tax benefits, such as a way to invest in what one knows and understands, investment diversification, inflation protection, and the ability to generate tax-deferred or tax-free (in the case of a Roth) income or gains. The list of helpful tips outlined above should provide retirement account investors looking to buy real estate with a guideline of how to keep their retirement account from running afoul of any of the IRS rules.  However, retirement account holders using retirement funds to invest in real estate must be mindful of the broad application of the IRS prohibited transaction and UBTI rules and should consult with a tax professional for further guidance.

Post courtesy of Forbes.

Real Estate Investing: How to Make Money in the Current Housing Market

Forecasters say that mortgage rates above 4 percent are here to stay. With that in mind, it’s important to realize what high mortgage rates mean and how they affect your current and future real estate investments.

As a seasoned real estate investor and house flipper, I’ve seen a lot of changes come and go in the housing market. I’ve come to realize that even the toughest and hottest housing market can still leave investors reaping the rewards.

Right now, prices for houses are higher due to the extremely low supply of homes. Very few homes are being built, especially in the low end-range. While it may seem like it’s slim pickings in terms of real estate investing, there are still good deals available; it just takes time and savvy investing smarts to find them.

Even though there are fewer listings in today’s market, rising prices present opportunities for people to sell homes that need work. While there are opportunities in both buyers’ and sellers’ markets, my advice when it comes to real estate investing is to always leave yourself plenty of room for unknown costs or changes in the market. That way, you can flip in good, bad or even mediocre markets. The trick is never assuming prices will increase and accounting for all costs. Investors get in the biggest trouble when markets change and they bought based on estimated future appreciation.

Real estate agents have also felt the effects of the current housing market. Along with the market changes and higher rates, real estate agents are competing in a smaller pool of homes. There are many buyers and prices are rising. Normally this makes a good seller’s market, which is good for agents, but this market is different because there are so few homes for sale. (Agents love a seller’s market, but not when there are no homes to sell!) They are suffering under fewer sales and less money, causing many to drop out of the business altogether. The bright spot for investors is that agents still in the game have much more time on their hands and investors may be able to find hungry agents who have both the time and the drive to find them deals.

As far as worrying about the current political climate, I don’t think the market will change much based on new policies. If anything, lending guidelines will get looser, making it easier to get loans. Prices are higher, but if you invest wisely based on ratios and profit margins, you can make money with low or high prices. It can be tougher to get cash flow on rentals in a hot market, but there are many markets in the U.S. that are still great for rental property investing. I think supply and demand are the biggest factors when looking at housing prices, and supply is not going to increase for single-family homes any time soon, so bear that in mind.

While rising mortgage interest rates can hurt buyer demand and buying power, you can still make money in real estate no matter what the market is like. It takes a huge jump in rates to significantly affect buying power.

Furthermore, I don’t think rates will cause a housing crash, either. The last crash happened because of inflated demand caused by loose lending guidelines. The builders over-built, and it all started to crumble when everyone realized how many people who should have never gotten a loan in the first place got one they really couldn’t afford. This time around, the people who are getting loans have much stronger financial capabilities and stability. There is also not the over-building that caused issues we saw in the past. So, even if there is a crash, many investors will do just fine. In fact, the last crash created more tenants and increased rents in some areas, while prices decreased. The trick is creating equity by purchasing below market, buying with cash flow, and not over-leveraging.

Regardless of the current interest rates, people will always buy and sell homes, which means there will always be opportunity to make money flipping or as a landlord.

Post courtesy of RISmedia.com