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"Open-mindedness is essential for belief" - Napoleon Hill

Self Directed Real Estate IRA?

John C. Brandy, CFEd®



With the real estate market rebound the topic of Self Directed Real Estate IRA’s have gained in popularity.  To answer some initial common questions, the following are the steps I use for my own Self Directed Real Estate IRA.

Definition Of A Self Directed IRA

A Self Directed IRA is a flexible retirement tool that allows the account holder full diversification with investments into anything the IRS rules allow.  This includes things like Real Estate, private loans, precious metals, partnerships, and more in addition to basic stocks and bonds.  

This allows you to invest in things you would like to focus on specifically that brokerage firms may not include (i.e. Real Estate).  Many firms call their IRAs "Self-Directed" because you can choose between a selection of their offered investments, so it is important to make sure they are truly self directed.

How To Get There

Once you’ve decided you want to go the self directed route then follow the steps below.    


Step One: Decide The Account Home And Open It


The IRS says that your money has to be held with a "IRA real estate custodian". Any broker or bank can be a custodian, but only a few special companies understand how to be self directed.


I’ve linked here to one of the best of these where you can get more information.  Just know it’s not the only answer.


There's two kinds of Self Directed IRAs.

  1. “Plain Vanilla” IRAs - these make you prove that you have a legitimate business need for your money, such as closing documents or repair invoices.  They work.  They're more difficult to work with down the road.

  2. “Checkbook Control” IRAs - you have a checkbook with all the cash that you put in.  When you need money, it's there.  When you get money, like from your renter, you've got an account already.  This is what I do.


You could “checkbook” by either:


  1. Having a “turnkey” firm do all the back-end work, or

  2. Doing much of that yourself (cheaper), or

  3. Doing all of it yourself (cheapest).


Personally, I’d start with having a “turnkey” firm do all the back-end work.  This ensures it’s right.  Next time you can reduce costs f urther with options 2 or 3.


Step Two:  Identify Your True Goals For This Investment

It's one thing to have a position and another to have interests.  Your POSITION might be "I want to make money". Your INTEREST, on the other hand, is probably a lot more specific.  Maybe it’s having $300/month positive cash flow and at least a 4% growth rate.  That you can shoot for. You decide how much cash flow I want versus how much growth.  The reason it’s better than a POSITION   is because there might be more than one way to meet your INTEREST.

For instance, if you bought for $150,000 and it should go up 4% for 8 years, that's $205,000. But in that case you also get $28,800 cash along the way. If that's not good enough, then you look somewhere else. (By the way, that's a 29.26% return before realtor fees and closing costs to sell.)

Step Three: Decide Your Target Real Estate Market And Real Estate Firm


You're half done with this one already.  You know your cash flow goals and your growth rate goals so you've automatically narrowed down the markets that work.

Now, the real estate firm.  There's quite a few if you search for them.  Make sure they do these next couple of things too.

  1. They find the house and put it under contract so it's claimed. 

  2. They determine the repair costs to make it "rent-ready".

  3. They resell it to you at that cost plus their allowed fees.

  4. They find the property manager for you to handle tenants, screening and rent.

If that company doesn't have the right thing for you, find another.

Step Four: Choose Your Property


At this point, your real estate firm should be finding properties.  It's up to you to choose one, making sure you're paying a fair price and your credit is good.

Patience is the key to investing in anything.  It's okay to be worried right now.

Step Five: Hold For About Eight Years, Rinse And Repeat

The hardest part is not paying attention to the economy.

With housing, ignore for no more than say eight to ten years. The chance you have to fix something big by then gets higher.

If your market economy is good and house prices are up, you may sell earlier.

When you sell, "rinse and repeat". Once you start making money from someplace not your day job, you’ll see how to get yourself off the paycheck treadmill.


You'll want to do it in more places.  Maybe with more things. That's good.


Conclusion: You Want One Of These

Why? Taxes for one thing.  When you run your real estate business, and that’s what you will eventually have, you’ll sell a house and buy a different one from time to time.  That’s normal.

When you do, if you bought it with regular money, you have to pay capital gains tax on the profit.  Of course, there’s a way around that with a thing called a 1031 exchange, but it’s not the easiest thing you’ll ever do.

But when you buy a house with your IRA, you don’t pay any capital gains on the sale as long as you did it right and all the money came from and went back into the IRA.

You pay tax when you take the money out like with any IRA, but it’s a tremendously better deal.

Keep in mind that if you encounter someone who starts with any financial product instead of understanding you, they’re probably just a salesperson.

Stay focused on your goals.  Don’t depend on only one single income source.  Invest with someone who’s been there and really wants to help you get there too.

If you have any questions, feel free to reach out to me at john@openmindgenerations.com.

About the Author

John Brandy is a Certified Financial Educator (CFEd®) and a financial consultant who helps you achieve your retirement goals.  He is an expert in investing Self-Directed IRA’s into real estate and other businesses. Contact John if you have any questions about   using retirement funds to invest in real estate. He is happy to talk with you to discuss your particular investing goals.