How to Buy Real Estate With Your IRA or 401(k) — A Step-by-Step Guide
Use your retirement savings to build long-term real estate wealth without sacrificing tax benefits.
Did you know you could buy a villa in your IRA or 401 (k)? Well, maybe you did, but do you know what steps to take to actually do it?
I’m going to explain the rules and the 7-steps you need to take to pull it off.
Now, let’s get rid of a few myths.
1: I want you to know there’s no tax or penalty to get this process started. Don’t listen to your broker or investment adviser who is trying to talk you out of this.
There is no penalty when you transfer an IRA to a different IRA account.
You’re simply just moving your brokerage IRA to a self-directed IRA, actually, where their fees are less.
We do not take a percentage of the directed IRA when you go out and self-direct your IRA.
We just have an annual account fee. Then you go out and make millions if you’d like.
Remember, your IRA is going to buy the real estate, not you. So, we’re going to probably use an LLC to give you some asset protection, but you get to control the checkbook. You get to control the LLC, make decisions, and your retirement account is now investing in that real estate down the street or across the country.
And one other thing, why are we doing this, people? It’s because we want a better rate of return.
We know interest rates are going to be coming down. Inflation is already on its way down, and real estate prices are going to be going up.
We are in a market to buy right now, and our retirement account may be floating around at 5% or 10%. That’s fine, but let’s take control of it. Invest in what you know.
If you already have a feel for what type of real estate you like, let’s get you investing your retirement account in that type of real estate.
So, I want you to have more control, get a better rate of return, and actually know what you’re investing in.
Step 1: Do an inventory.
What I mean by that is find out what accounts you do have now and how much they’re worth. This is a good thing to do on a regular basis anyway.
Create a little spreadsheet and start looking at the retirement accounts that you have: IRA, maybe Roth, traditional 401 (k). Get the account number, where they are, and how much is in them, and maybe a little note of what you’re invested in. This is going to be a revelation in and of itself.
Now, when you go to self-direct, you don’t have to invest all of it in real estate.
You get to pick and choose, and you’re going to find out how much I have to play with here? Do I have enough to do what type of deal? Let’s do the inventory first and see how much you have to work with.
Step 2: Decide on what type of real estate you want to invest in.
I want you to be intentional. I want you to have a plan. And when you do that, you’re going to make better decisions.
Do you want to invest in raw land, short-term rentals, long-term rentals, storage units, ranch and farmland, even mineral rights, water rights? Recrying aloud, you could buy a downtown LA high-rise or Mississippi swamp land.
It’s all real estate, and if you’ve got an angle on it, let’s get your IRA or 401 (k) in that position.
Step 3: It’s now time to open your new self-directed IRA account.
Remember that inventory you did, the money sitting over there in some brokerage account or multiple brokerage accounts, but we’ve got to have an account to move that money into that allows you to self-direct.
Well, my partner set up a directed IRA 7, 4 years ago, and we’re now the fastest growing trust company in the industry with over a 1000 five-star ratings, regulated by the feds, the state, everything.
So, you’re going to take that money and open a new account, a directed IRA, where from there you’re going to self-direct it. You get to decide where that money goes.
A new account’s like 500 bucks or less, and the annual fee is about the same. We don’t take a percentage of any money you make or the value of the account. This is where you start saving money, too.
So, you go online, open up an account based on the account you’re going to transfer over.
- So, if you have an IRA, you’re going to open an IRA account.
- If you have a Roth, you’d open a Roth account.
- If you have a solo 401k, you open a custodial account for that 401k.
So, any of those retirement accounts can be self-directed.
So now we’re as easy as one, two, three. You’ve identified your money. You’ve identified what type of real estate you want to do. And you’ve opened your account.
Step 4: Decide on how much you want to deploy in real estate.
Will 20 grand be enough for a down payment on the project? Do you need 50 grand, 100 grand, 200 grand? What’s the plan? What’s the idea that you want to invest in?
And guess what? You can pull retirement account money within your family. Have them open an account and say, “Let’s do this together. Let’s go out and form an LLC and get the money together that we need to go do the real estate project that we want.”
You can even get a loan from banks that loan to IAS, not even relying on your credit. It’s called a non-recurring loan.
And here’s a pro tip. If you’re going to go do a rehab or maybe furnish a short-term rental, make sure that you bring over enough money to your accounts to not only fund the project, but to make sure you get it launched and down the road with enough reserves to really make it happen.
- And the next part of this step is to actually move the money. Really straightforward.
The team at directed IRA, with our chat line and phone, always has a real human in the US picking up that line, and will help you transfer those funds from your old brokerage account into your directed IRA account.
And remember, no tax, no penalty. It’s still your retirement account. You just have a new broker-dealer. It happens to be a directed IRA that listens to you and you only.
Step 5: Where are you going to do this real estate deal?
What I want to know is why that’s where you’re going to set up your LLC to hold that real estate.
You don’t want to hold real estate in your own name. And you don’t want your retirement account to hold that real estate in its own name either.
You’re going to be making decisions on behalf of the project.
You don’t want personal liability. And again, you might be pooling money from other accounts of your own, your family, your friends.
And so, you want an LLC to take control of this project, to have its own bank account, its own EIN.
By the way, this is not an LLC you’d set up online at LegalZoom. It’s going to have a lot of IRS rules and provisions to help you not commit a prohibited transaction.
Because in this LLC, you can’t compensate yourself, pay for your own cell phone, or pay for your own travel.
This is your IRA’s money, and there are some rules you want to follow in that process.
A couple of other pro tips. You get to be the manager of this LLC. And we’re going to set up the LLC in this state where the real estate’s located, not in Wyoming or Delaware or Nevada. And the law firm is going to be there to help guide you through what those rules are.
In this process, once you decide where you’re going to invest in real estate, an LLC just makes sense, a limited liability company, of which you get to be the manager. And the team at Directed will probably encourage you to have a consult with our law firm, which we’ve been doing the same strategy for 20 years.
We’ll walk you through the steps and make sure it’s handled right and all of your questions are answered. Very affordable.
They’ll quote you the price if it’s needed, and you’re off to the races.
Step 6: You’ve got your LLC set up. Now it’s time to fund the account.
So, the LLC is going. You’ve opened a new bank account, and you call the IRA and say, “Send my money over there.” And they would wire whatever you want, the money you need that you’ve decided to deploy in that LLC to go buy your real estate.
Again, you could be the manager of this account, write the checks, hire contractors, hire bookkeepers, lawyers, realtors, anybody you need to get the project done.
You just can’t go out there and put on a tool belt and work on the project. One of those prohibited transaction rules you’ll learn about.
Step 7: Let’s bring it all together and go buy that real estate.
Let’s bring together those dreams of a legacy and a retirement, and the ability to be involved in it and understand what you’re investing in. That’s the beauty of self-directing.
You’re bringing together your personal knowledge and the things you love doing with now an ability to see that bank account and that future retirement grow.
So, to get started, you’ve got the seven steps. And this can just happen within a few weeks once you make a decision to move forward.
That’s the one thing I want to encourage you to do. No matter where you do business on this spectrum, whether you use our company or not, take action to take control of your retirement account.
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