How to Invest Property With Your IRA

peeterv / iStock.com

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

Most people think of retirement accounts as a place for stocks, bonds, or mutual funds — but your IRA can also be a powerful tool for investing in real estate. With the right setup, you can use retirement funds to purchase property, diversify your portfolio, and potentially build long-term wealth.

However, investing in property with your IRA isn’t as simple as writing a check for a down payment. Strict IRS rules, special account structures, and potential tax pitfalls mean you’ll need to understand the process before diving in. This guide will walk you through the basics.

What Is a Self-Directed IRA (SDIRA)?

A self-directed IRA (SDIRA) is a retirement account that gives you the flexibility to invest beyond the usual stocks and bonds. With an SDIRA, you can put money into alternative assets — like real estate, precious metals, or private businesses — while still choosing whether to structure the account as a traditional or Roth IRA. Although a custodian is required to handle the account, you remain in charge of making the actual investment decisions.

Can You Use an IRA to Buy Real Estate?

You can use an IRA to buy real estate. However, it can’t be done through a traditional IRA or 401(k), but must be done through an SDIRA.

Property types include rental homes, land, commercial buildings, farmland and raw land. With an SDIRA, all income and expenses must stay within the IRA. You cannot use your personal funds to fund the SDIRA account. 

How to Invest in Real Estate with a Self-Directed IRA

Buying property with your IRA isn’t a casual process — it requires careful planning and following IRS rules closely. With the right approach, though, it can be a powerful way to diversify your retirement portfolio. Below are the key steps to help you understand how the process works, from opening the right type of account to managing property income and expenses.

Step 1. Open an SDIRA with an approved custodian

A regular brokerage firm like Fidelity won’t let you invest in an SDIRA. Instead, you have to work with a specialized custodian who is equipped to handle SDIRA transactions. When choosing a custodian, review their fee structure, expertise and references. 

Step 2.  Fund the account or roll over funds from another IRA/401(k)

The most common way to fund the account is a rollover from an old employer’s 401(k) or an existing IRA or other retirement account. You can make contributions to your SDIRA as long as it meets the IRS limits. 

Step 3. Choose the real estate you want to buy

The beauty of an SDIRA is that you can choose the real estate you want. The custodian will not vet the property for you. You can invest in a wide variety of properties, including single-family homes, multi-family units, commercial real estate, raw land, and tax liens. Keep in mind the property cannot be used for personal use. 

Step 4. Direct your custodian to purchase the property in the name of the SDIRA. 

This is an important step. The purchase property and deed must be executed with the SDIRA name. It cannot be executed in your personal name. 

Step 5. All expenses, taxes and income go through the SDIRA — not your personal accounts. 

There must be a strict separation between your personal funds and your SDIRA funds. All income generated by the property must be deposited in the SDIRA account. Thorough record-keeping is a good idea so that your custodian can report it correctly. 

Benefits of Using an SDIRA for Real Estate

There are at least four benefits of using an SDIRA for real estate:

• Diversification. This is one of the primary reasons why individuals invest in an SDIRA. Your SDIRA is not tied to the stock market, and investing in real estate allows you to stabilize your portfolio. 
• Tax advantages. With a traditional SDIRA, your rental income, property appreciation, and profits from a sale grow tax-deferred — you won’t owe taxes until you take withdrawals in retirement. A Roth SDIRA takes the opposite approach: because you contribute after-tax dollars, all future earnings and withdrawals are completely tax-free.
• Control. With an SDIRA, you control your investments. You have the green light to choose the property, location and investment strategy.
• Steady income. Rental properties give the opportunity for steady income. 

Rules and Restrictions to Know

Here are some rules you should be familiar with: 

• No personal use. You or your family members cannot use the property for vacations, living arrangements, or any personal benefit.
• Disqualified persons. You can’t buy from or sell the property to close relatives, including parents, children, or spouses.
• No personal funds. All expenses–like repairs, taxes, or maintenance–must be paid directly from the SDIRA. You can’t cover costs out of pocket.
• Profits stay in the SDIRA. Any rental income or sale proceeds must go back into the account; you can’t pocket the money personally.

Risks and Challenges of an SDIRA

There are certain risks and challenges that accompany an SDIRA. 

Complex Rules

The rules around SDIRAs can be tricky, and it’s easy to trigger a prohibited transaction if you’re not careful. For instance, living in a vacation home owned by your SDIRA or making repairs yourself counts as a violation. You also can’t use the account to lend money to your own business. If you’re ever unsure whether a transaction is allowed, it’s best to consult a financial professional before taking action.

Illiquidity

Real estate inside an SDIRA isn’t always easy to manage. Unlike stocks or mutual funds, property can take time to sell, which means your money isn’t as liquid if you need quick access to cash. On top of that, valuing real estate is more complex — and often expensive — since the IRS requires periodic appraisals to ensure accurate reporting. These factors can make an SDIRA less flexible compared to traditional retirement investments.

Management Burden

With an SDIRA, you can’t manage the property yourself — you’ll need to hire a property manager or management team to handle the day-to-day responsibilities. It’s important to choose people who are both reliable and experienced. Before committing, take time to check references, ask for recommendations, and interview candidates to ensure they’re the right fit for your investment.

Higher Fees

Custodians typically charge higher fees for SDIRAs because these accounts require more oversight than a standard IRA. They’re responsible for handling complex paperwork, detailed record keeping, and strict IRS reporting tied to real estate and other alternative assets.

On top of setup fees, you may also face annual maintenance charges, transaction fees each time you buy or sell property, and even costs for processing income or expenses tied to the investment. These extra expenses can eat into returns, so it’s important to compare custodians carefully and understand the full fee schedule before opening an account.

Real Estate IRA vs. Traditional Real Estate Investing

Take a look at a comparison table between an SDIRA vs. traditional real estate investing and decide which option is best for you. 

Who Should Consider Investing in Real Estate in an SDIRA?

• Experienced real estate investors. A real estate investor is comfortable handling complex transactions, managing investment properties and understanding market risks. 
• Long-term savers looking to diversify. If you’re heavily invested in stocks and bonds, you may want to balance your portfolio by looking for and investing in real estate. 
• People with existing IRA or 401(k) funds they want to roll over. Rolling over your  funds from your  IRA or 401(k) funds into real estate will prevent triggering taxes or penalties. 
• Those who want more control over retirement investments. If you want to be in the driver’s seat, an SDIRA gives you more control over your retirement investments. 

Share This Article: