How to Invest in Real Estate with Your Retirement Funds – Part II

This is a guest post from our friends over at Sense Financial. You can check them out here:

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid in full, and managed with reasonable care, it is about the safest investment in the world.” ~ Franklin Roosevelt

If you’re a real estate investor, you’re quite likely to be in favor of what Franklin Roosevelt said. In the previous part of this post on self-directed retirement plans, we discussed the benefits of investing retirement money in real estate.

But, how do you do that?

You can start by choosing a qualified self-directed, or SD retirement plan that allows alternative investments.

3 Options to start investing retirement money in real estate

Self-directed IRA or SD IRA

What is a self-directed IRA?

If you didn’t have a chance to read about an SD IRA, here you go.

It is a qualified retirement account that allows alternate investments, and offers investment discretion to the plan owners, depending upon the plan providers.

Self-directed IRAs have gained attention over the past couple of decades.  When choosing the plan, make sure to understand the transaction fee charged by the plan custodian and the average transaction processing time.

A self-directed IRA allows annual contributions of up to $6,500.

Potential investment options

  • Real estate
  • Private stock offerings
  • Joint ventures
  • Limited liability corporations
  • Leases and lease options
  • Precious metals
  • Public stocks/bonds/mutual funds
  • Promissory notes
  • Structured settlements and more.

What are its pros?

  • Ability to add alternate investments to your portfolio
  • Investment freedom
  • Plan owners can opt for self-management

What are its cons?

  • Requires custodian consent for making transactions
  • Transaction fee can affect your return on investments (ROI)
  • UBIT on leveraged real estate

IRA LLC (aka Checkbook IRA)

If you have an interest in real estate investing with your retirement funds, chances are that you already know the term IRA LLC or Checkbook IRA.

What is a checkbook IRA or IRA LLC?

A checkbook IRA is an investment vehicle suited for investors who want to have greater control. It is a special purpose LLC, which is owned by your IRA, with you being the manager of the LLC.

When it comes to contributions, a checkbook IRA stands equal to a self-directed IRA, allowing annual contributions of up to $6,500 (for both Traditional and Roth IRAs).

Potential investment options

  • Real estate
  • Private stock offerings
  • Public stocks/bonds/mutual funds
  • Promissory notes
  • Precious metals
  • Private lending

What are its pros?

  • Checkbook control eliminates processing delays
  • No transaction fee
  • Complete investment discretion

What are its cons?

  • The cost to setup and maintain the LLC
  • UBIT on leveraged real estate

Self-directed Solo 401k Plan

Self-directed Solo 401k retirement plans have gained popularity over the last decade, thanks to its flexibility and ease of maintenance, but they are among the least known of the available self-directed plans.

What is a self-directed Solo 401k plan?

A self-directed Solo 401k plan is a qualified retirement plan that allows self-employed professionals to contribute towards retirement while allowing complete discretion over their investment decisions.

Self-directed Solo 401k retirement plans stand above its peers in terms of annual contributions, allowing plan owners to make annual contributions of up to $60,000 in 2017.

Potential investment options

  • Real estate
  • Tax liens/deeds
  • Mortgage notes
  • Precious metals
  • Private lending
  • Private businesses
  • Traditional stock, bond, and mutual fund investments
  • And more!

What are its pros?

  • High contribution limits
  • Complete discretion over investments with checkbook control
  • Tax-free investing with built-in Roth sub-account
  • Participant loans
  • Exempt from UBTI and leveraged real estate
  • Cost efficient – no custodian, transaction or asset based fees

What are its cons?

  • Not for everyone, available for self-employed and small business owners only

A step-by-step guide to investing retirement money in real estate

Step 1: Open self-directed retirement account and fund it through qualified rollovers or regular contributions. Choose a plan provider that allows alternative investments.

Step 2: Just like a regular real estate transaction, choose a property for your SD retirement plan. It is important that your choice of investment (residential or commercial real estate) aligns with your retirement goals.

Step 3: Once a property is selected, you can pay directly with your retirement account by writing a check. Your SD retirement plan will hold the title of the property and you will sign on its behalf.

Note: You can finance the property with a non-recourse loan.

Step 4: Any maintenance or repair cost associated with the property must be paid by your retirement account only. Similarly, any income generated by the property must be redirected to the plan itself.

Step 5: Any income or gains received from the property enjoy tax-deferred growth for several decades. You can make qualified withdrawals after retirement by paying the due taxes.

Note: If you purchased the property with a Roth account, your withdrawals are tax-free.

3 Important rules you must understand

  • Prohibited transactions: When using self-directed retirement accounts for real estate investing, be aware of prohibited transactions. According to the IRS, “a prohibited transaction in an IRA is any improper use of an IRA account or annuity by the IRA owner, his or her beneficiary or any disqualified person.” Make sure that you do not involve in a prohibited transaction, as it will result in unwanted taxes/penalties and even disqualify your SD retirement plan.
  • Non-recourse financing: The IRS allows funding real estate transaction within a self-directed retirement account with non-recourse financing only. As per the current IRS rules, the plan owner cannot personally guarantee any loan or extension of credit to his/her IRA. Keep in mind that using non-recourse financing with a self-directed IRA or checkbook IRA will attract UBTI/UBIT taxes. The only exception is in the case of a self-directed Solo 401k account, which will escape these taxes, courtesy of the Unrelated Debt Financed Income (UDFI) rules under IRC 514(c)(9).
  • Retirement plan income: Any income generated by self-directed retirement accounts should go back to the accounts themselves. Similarly, any expenses incurred by real estate held within these accounts should be paid by the account only.

After taking a close look at SD retirement plans and their ability to generate returns while offering diversification, it is quite safe to mark them as efficient investment vehicles. However, you may need to have a decent understanding of the rules governing investing retirement money.

About Brandon Hall

As founder and CEO of The Real Estate CPA, Brandon is focused on growing a CPA firm that provides real estate clients with an awesome experience. Brandon was named 40 under 40 by CPA Practice Advisor in 2018. Brandon leverages his personal real estate investing and his Big 4 Accounting experience to offer unique insights to his clients. Brandon enjoys CrossFit and Kiteboarding when he's not crunching numbers.


  1. J.D. Herlihy on November 2, 2017 at 1:09 am

    Interesting articles on using retirement funds. Interested in hearing your thoughts on using ROBS to use your retirement funds for initial investment in a real estate investment operation? I am planning on this strategy so that I can create a company and be able to eventually draw a salary, rather than have the money simply accrue in my retirement fund.

  2. What Does Mf Mean on November 19, 2017 at 12:31 pm

    Nice article. Its realy nice. Many info help me. dont stop the super work!

  3. Kris W on November 27, 2017 at 2:46 pm

    In my mind, prohibited transactions and financing considerations can be significant hurdles to investing through an IRA, but these were only touched upon in this post. It would be nice to see a post that goes beyond the basics on this topic.

Leave a Comment