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

Investors who look beyond the traditional menu of retirement account offerings to self-directed IRAs can find a new level of investment opportunity. Because the accounts can directly purchase, manage, and sell real estate, account owners can harness the power of real estate investing while still enjoying the same tax benefits that make traditional IRAs an investment staple. Here’s what you need to know about how to invest in real estate with a self-directed IRA.

Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More

What Are Self-Directed IRAs?

Traditional and Roth IRAs have long been the meat and potatoes of retirement planning to reduce the individual tax burden. Contributions to traditional IRAs occur on a pre-tax basis, lowering taxable income with the contribution. On the other hand, Roth IRA assets do not incur taxes at withdrawal. 

Self-directed IRAs (SDIRAs) enjoy these same benefits, but there are more investing options available to SDIRAs than traditional IRAs. The account custodians limit traditional IRAs to assets like stocks, mutual funds, bonds, and certificates of deposit. SDIRAs, however, can include a much wider range of assets, including real estate.

Imagine socking away an income-producing property in a Roth SDIRA and watching both the income and property appreciation grow tax-free until retirement!

How to Open a Self-Directed IRA

Whereas traditional IRAs can be opened in minutes online through online brokerages and banks, finding a custodian for a SDIRA requires more research, because they are a more challenging product for the institution to hold. 

When shopping for a SDIRA custodian, know that each institution will pick and choose which assets they permit in the accounts. For example, SDIRAs can contain precious metals, cryptocurrencies, foreign currencies, and closely-held businesses. Given that variety, some companies choose to specialize in some assets over others. 

That’s why it’s important to carefully vet each company before opening an account. Doing so eliminates the risk that the company is fraudulent, but it also gives the prospective investor an idea of the perks and costs associated with SDIRAs across the board.

The fees are likely to be much greater than with traditional retirement accounts as well. For example, fees may be annual and based on the value of assets. In addition, some companies charge fees for each transaction. Knowing how much of your investment goes to account maintenance is crucial for maximizing earnings.

Adding Real Estate to Your SDIRA

After opening an SDIRA, the account owner’s next step is to purchase real estate on behalf of the account. Of course, the SDIRA can be home to traditional IRA favorites like REITs and real estate ETFs, but the ability to directly purchase and invest in real estate (including real estate syndications) is the real appeal of these accounts.

After the SDIRA is funded, the real estate purchase transaction can proceed much as any other transaction. The most significant difference, and the guiding principle of these accounts, is that the transaction is conducted on behalf of the account itself. On the purchase contract, paperwork, and deed, the name of the buyer will be something to the effect of “123 Trust Company Custodian FBO [for benefit of] [Your Name] IRA.”

While conducting the transaction, all funds used must come directly from the SDIRA. Doing something quick and seemingly innocuous, like writing a personal check to pay a small fee, can disqualify the property from its tax-advantaged status. 

Many SDIRAs offer a feature called checkbook control, which facilitates easy payments from the account. Accounts without checkbook control require that the owner initiate a fee, usually through their online account, which is then processed by transaction facilitators.

Risks of Investing in Real Estate with a Self-Directed IRA

SDIRAs can offer excellent investment potential, but that opportunity does come with risk. Consequently, investors adding real estate to SDIRAs must be sure they are well-informed and can tolerate the risk involved.

Account Custodians Do Not Act As Advisors

Ultimately, account owners must remember that SDIRAs are self-directed. Ultimately, the account owners are responsible for researching and deciding on any proposed investments. The account custodians do not serve as investment advisors.

When using traditional IRAs, investors commonly rely on professionally managed funds that serve as a backstop in areas where the investor has less knowledge. Unfortunately, no such security measure exists with SDIRAs. 

Avoid Disqualifying Assets 

The IRS levies many rules on all retirement accounts, and those same rules apply to SDIRAs. But when a SDIRA includes real estate, it creates a scenario where there is more opportunity to run afoul of the many regulations against an owner or close family member from using the assets for their own benefit.

The most concerning risk is that an account owner could unintentionally disqualify the account, meaning it would be considered entirely distributed. The owner would then be responsible for paying any early withdrawal penalties on the entire value of the account. 

For example, a frequent error made by owners is doing simple property repairs on their own. It makes logical sense to avoid a handyman’s bill, but it is one of many rules that can impact these accounts.


Investing in real estate with a self-directed IRA gives investors a fantastic opportunity to maximize profits by taking advantage of IRA tax provisions. However, to avoid losing that profit, account owners must carefully comply with all IRS regulations that ensure IRA assets remain separate from the account owner.

Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More

Related Posts