I purchased a studio vacation rental in Kihei using my IRA. It was a short sale so I think I got a pretty good deal on it.
Here are a few things I’ve learned.
- Most people think that they can’t buy real estate with an IRA. Well you can’t do it with ANY IRA or 401K account. But you can buy real estate or invest in almost anything else…as long as you follow the IRS rules.
- I had left my Lockheed 401K in their savings plans for years after leaving the company. It performed like most IRA’s do… up and down with the stock market. Last December, I decided to move it to a Self-directed IRA. I chose to use Equity Trust as my IRA custodian. There are a few primary ones out there. I chose Equity Trust based on recommendations from other investors and assessing the cost structure of the various plans. This was a very similar process to moving any 401K to an IRA. Paperwork on both sides, they mail you a check made out to the new custodian and you deposit it in your new account.
- There are several types Self-directed IRAs and/or 401K’s that you can set up. If you previously had it in a Roth IRA, you will set up an equivalent Roth Self-directed IRA. Basically you want to stay in the same “tax-status” as your previous money was in. You may have an option to move from a regular IRA to a Roth IRA if you pay the taxes. There is a lot of information on the Equity Trust site and I found the service people to be very patient and helpful.
- Once the account is set up and funds are verified, you can start looking for investments. You can invest in stocks and bonds. Luckily (because the stock market has been hard hit since December), I just let my money sit in a money market while I looked for real estate to invest in.
- I decided to do a “cash buy” but you can get a non-recourse mortgage. I don’t know much about these or the process. I’m sure it requires a significant down-payment and appraisal because the lender want to ensure that their equity in the property is secure.
- Once you have found a property, you get it under contract. Ideally, the Purchase Contract lists your IRA Custodian as the buyer. You sign the paperwork and submit it to the Custodian (Equity Trust) with a request to disperse the earnest deposit. It takes a few days, but you can wire funds directly to the escrow company.
- Make sure you deal with a escrow company that has worked with IRA’s before. It will make your process much smoother! I used Island Title who I would highly recommend for this (or any escrow) process. Vicki Steffan helped me every step of the way. Each state has different requirements for what the “custodian” needs to sign versus what you can sign. It is pretty easy here in Hawaii. I could sign all the interim approval docs and then Vicki submitted the final deed, title docs and estimated (FINAL) statement to them with request for final funding. They called me to verbally verify the funds amount.
- Remember that the custodian doesn’t care about the property or contracts… they just make sure you follow the IRS rules and that they have the right paperwork.
- Basically the IRS rules state that it is an investment and I (and my immediate family members) are non-participating investors. I am not able to take a commission on the sale. I must hire any work done and pay them through my IRA. In my case, I’ll hire a property manager, designer (to furnish the property for vacation rental), handyman and electrician to fix a few things.
- Any rents collected, will be deposited directly back to my IRA by my property manager. Likewise, any bills need to paid from the IRA.
- Hopefully, I’ll make a decent return on this. It is a studio condo in Kihei right across the street from the Marine Sanctuary where I volunteer. It was a short sale and was in fairly good condition. The complex needs some work but has a nice pool and tennis courts. The complex has a lot of return visitors who like nice clean, quiet and cheap places to stay.