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Tips For Using a Self Directed IRA to Buy Real Estate


Tips For Using a Self Directed IRA to Buy Real Estate

Real estate can be a great investment for your Self Directed IRA but not everybody is interested in dealing with the hassles of tenants, upkeep, and repairs. Trust deed investing may be what you’re looking for. It is a good idea for investors to consider using their self directed IRA to invest in trust deeds because it allows the ability to earn tax free, passive income in a secured lending arrangement.

Using funds from your Self Directed IRA to invest in trust deeds is a great way to make a profit for your future because earnings accumulated in IRA retirement accounts are frequently tax-deferred or, in some cases, tax-exempt from federal and state income taxes. This can be a great help when you are in the process of retirement planning.

First of all, a trust deed investor is a person seeking a competitive rate of return by loaning private funds on real estate. In short, you’re the bank. The loans are secured by real estate. Trust deed investors make a higher interest yield than would typically be obtained by a regular bank and is secured by the borrower’s equity in the real estate transaction.

A trust deed financial agreement between a borrower and private investor in which the promissory note is backed by a deed of trust recorded on the property. The borrower promises to pay an agreed upon interest rate on the loan and must repay the initial amount at a specific time. If the borrower defaults on their loan obligations, the IRA owner will take possession of the home once the property goes through foreclosure. While investments inherently involve risk, trust deeds may offer an IRA owner the opportunity to recoup a portion or all of their original investment through the sale of the property.

Different types of real estate such as residential and commercial, can be held in the form of a trust deed. Regardless of the type of property, there are three basic methods of trust deed investing according to Self Directed IRA Services:

  • Direct  or Brokered Trust Deeds
You find the prospective borrower on your own or use a broker to find the loan for you. When held in an IRA, you must appoint a servicing agent to handle your loan servicing needs.
  • Fractionalized Trust Deeds
You invest with multiple investors, often on a larger loan, and each investor receives a proportionate share of the interest payments.  When held in an IRA, you must appoint a servicing agent to handle your loan servicing needs.
  • Pooled Mortgage Funds
You invest in a fund, issued under an offering memorandum, which is managed by a professional lender.  The manager does all the work of finding the loans, underwriting the deals, performing due diligence, assessing the risk, servicing the loans and distributing payments to the investors.

Investing in real estate is becoming an increasing option for investors with a Self Directed IRA who are thinking about retirement and who also want to take advantage of the return of potential in the real estate market. For the most part, real estate is a nontraditional investment for retirement-account purposes and there are few options for investors to use direct real estate investments for retirement accounts, excluding real estate-related funds. According to Investopedia, “less than 2% of retirement accounts are invested in real estate, the emergence of IRAs for which the primary – and possibly only – investments are real estate products is beginning to change the situation.”

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