Using Your IRA to Invest in Real Estate

Did you know that you can use your IRA to invest in real estate? In a traditional IRA, you invest in a fund comprised of stocks, bonds, and other common types of investments chosen by a plan administrator. With a self-directed IRA, investors have the freedom to pick the exact assets that they’d like to hold in their account. That can include REITs (real estate investment trusts), or even entire properties.

In order to add real estate to your self-directed IRA, you will need to work with an IRA custodian, which is a person or company who will manage your IRA. Not all custodians are created equal, and they will differ on the types of investments they can handle, so you may have to talk to a few of them to determine if they are experienced with REITs or using an IRA to purchase property.


REITs vary in size and nature but tend to be comprised of large commercial and residential properties. While REITs are often traded on the stock market, they don’t reflect ownership of a company like a stock does. When you invest in REITs, you’re purchasing pieces of buildings. This means they will be subject to the same booms, busts, and fluctuations of real estate, including the ability to hedge against inflation. In times of high inflation, when rents and property values increase, the value of REIT shares will also increase.

Buying property

When you buy a property using your IRA, the IRA is the buyer acting on the investor’s behalf. Purchasing real estate through an IRA usually means being a cash buyer, because securing financing to purchase property inside an IRA isn’t easy. Therefore, the buyer’s IRA balance will have to be high.

The IRA custodian completes the purchase by wiring the funds, including all closing costs, from the buyer’s account to escrow. The IRA now owns the property. The title to the property will read something to the effect of “John Doe Trust Company Custodian [for benefit of] (FBO) [Your Name] IRA.” Once you rent out your property, the lease agreement with the tenant is signed by the self-directed IRA custodian, and rental payments are made payable to the SDIRA account. Similarly, any operating expenses must be paid out of the IRA.

When you purchase real estate using an IRA, it’s important to know that you will have a lot less leeway to use the property than if you bought the property with cash or traditional financing. You can’t use it as a home office, vacation home, a second home, or a place for your children to live. The reason for this is that IRA’s have a firm “no self-dealing” rule, which prohibits you from using an IRA asset in any way that benefits you personally. That includes borrowing money from your IRA, selling property to it, or you or your family spending the night in your property. 

The no self-dealing rule also bars even minimal first-hand involvement with your property. For example, if your property needed a minor repair, you may be tempted to fix it yourself. Unfortunately, the IRS considers this “furnishing services” to the IRA, which is strictly prohibited. The penalties for this are pretty steep. The entire IRA would be considered distributed to you, and therefore taxable, plus you’ll owe a penalty. Of course, this also means that you’ll need enough capital in your IRA to cover any repairs or other expenses your property incurs. To avoid violating the “self-dealing” rule, always keep in mind that your IRA owns and operates the property. So if you need to have work done on your property, your IRA must pay someone else to do it.

When your property generates rental income, all of that income goes straight back into your IRA. Because you do not personally own the property, you can’t access any of the income. Of course, you will eventually get the money when you make withdrawals from your account at retirement.

The Bottom Line

If you do decide to buy property using your IRA, you will have the advantage of collecting rent from your tenants and letting it grow tax-free in your IRA. Having said that, purchasing property through an IRA is an especially risky prospect. If you encounter significant repair or maintenance costs, you might need to make additional contributions to your IRA, which could also subject you to penalties for contributions that exceed the annual contribution limits. If you decide this is for you, make sure that you have a self-directed IRA custodian who is experienced with real estate transactions.

Calculating Return on Investment

If you think you’re ready to purchase a real estate investment property, you want to do an ROI analysis before you move forward. ROI, which stands for return on investment, is a simple calculation. It’s the monthly net profit divided by your monthly expenses. That number is multiplied by 100 to reflect the return on investment as a percentage:

(Net Profit / Cost of Investment ) X 100 = ROI

Though it seems like a simple equation, the real work is in getting the most realistic numbers possible in order to get a true look at your ROI. We hear stories all of the time from beginner investors who buy property based on an incorrect calculation of the ROI. So below we have listed the top 3 mistakes we see people making in their calculations. 

Mistake #1: Using Estimates Instead of Actual Numbers

Your ROI calculation should be based on actual numbers because estimations can be hugely misleading. Again, these estimations are good only as guidelines when looking at a potential income property. But when doing an ROI analysis, always use actual numbers to make an educated investment decision.

Mistake #2: Failing to Account for All Expenses

Many times, real estate investors forget to include some important expenses when they’re calculating their ROI. Some commonly forgotten about expenses include vacancies, property taxes, insurance, repairs, capital expenditures and management fees. If you forget to include all expenses, then your math and ROI will not be correct. 

Mistake #3: Not Knowing what a Good ROI is:

The truth is that there isn’t a clear-cut answer for figuring out a good ROI for a rental property. That being said, there are some rules of thumb most real estate investors use since certain ROIs may not be worth it. In more specific terms, you’ll want to aim for your rental ROI to be 5% or more since this percentage means that you’ll earn a higher rate of return compared to typical retirement accounts. Getting a 5% to 10% return for rental properties is pretty reasonable. The higher the better, just make you are thorough in your calculations.