Pros and Cons of Using a Self-Directed IRA for Buying Real Estate

pros and cons of self directed ira real estate

Ron Sage
Tulsa Franchise Owner

It was about the time I first started researching how to take full advantage of my self-directed retirement account that I also began to consider the benefits of investing in real estate. I’d been gearing up to leave my corporate job for years and was relieved that the end was finally in sight. Before I jumped ship, however, I consulted with a friend of mine who’d been successfully buying, renovating, and selling or renting his investment properties for more years than I’d been sitting at a desk. I’ve always been glad I did. Not only did that long-ago conversation change the course of my real estate investing career for the better, but it also kept me from using my self-directed IRA in a way that could have sunk my investments and my retirement savings.

Last December, when two of my colleagues, Ron Sage and Eddie Gant, offered a conference panel discussing the pros and cons of using a self-directed IRA to buy real estate, I made sure I was in attendance. Both Ron and Eddie are independently owned and operated HomeVestors®’ franchisees, like me, and both agree that, in this business, you never stop learning. But, what you don’t want to do, of course, is get thumped by too many hard knocks that diminish your chances of making a good living. The folks at HomeVestors feel the same, which is why the annual conference—where longtime pros like Ron and Eddie moderate and speak—is a big draw. The panel piqued my interest even further. So, I asked the guys if they’d dive a little deeper into the topic of using self-directed IRAs to build an investment property portfolio

pros and cons of self directed ira real estate

Eddie Gant
Houston Franchise Owner

You Can Use Your Self-Directed IRA to Buy Real Estate

What was great about talking with each of these guys is that, not only do they work in different markets, they both came to real estate investing from different angles. Ron, originally from California, moved to Tulsa, Oklahoma in 2004 to work with a HomeVestors® franchise. That’s how he learned to buy, renovate, and sell property before branching out on his own in 2011. Within just one year of starting his own professional real estate investing business, he was recognized by HomeVestors as being among the top growing franchises. And, he’s been on the fast track ever since.

Eddie, on the other hand, started flipping houses in Texas as a HomeVestors®’ franchisee in 1999 after walking out of his corporate office and jumping headfirst into real estate with zero investing know-how. With a degree in civil engineering, years of experience in marketing and construction materials sales, and a strong entrepreneurial drive, he and his wife agreed that they would, somehow, figure it out. Eddie’s bought, rehabbed and sold more than 1,300 houses since then and now also owns a hard money lending company and a real estate brokerage. He also speaks regularly on the topics of asset-based lending, property acquisition techniques, and wealth building.

Despite their disparate backgrounds, both Ron and Eddie brought a passion for the industry and a ton of elbow grease to their new careers and these traits helped them become the successful real estate investors they are today. Always looking to do better, both men at one point turned towards their old corporate 401k plans, wondering if the accounts could be utilized in ways that might benefit their real estate investment business objectives. As it turns out, they could. And, yours can, too. 

How to Begin Leveraging a Self-directed IRA for Real Estate Investing

Unlike more traditional investment vehicles, a self-directed IRA allows you to choose from a broader range of investments to include in your account. So, rather than sit idly by while your money, hopefully, earns a decent rate of return on stocks and bonds, you can choose to invest in a range of options including precious metals, foreign currency, and real estate. And, despite the risks of investing in residential property, real estate, in particular, typically provides a much higher rate of return in a shorter amount of time. Contrast this, Eddie says, with investing in stocks like Coca Cola that yield, maybe, a two to three percent return for the entire year. So, having this option is advantageous—especially if you’re a professional real estate investor who wants to grow your business.

And, of course, rolling your old 401k plan into a self-directed IRA is fairly easy, but choosing a custodian for your account takes a bit more work. Selecting a firm that understands, supports, and expertly advises on your investment strategies is job number one. But, Eddie adds, communication is also key:

One of the things I looked for, and insisted on, is a good customer service experience. Over the life of your business, it’s inevitable that you’re going to have an issue or two. So, you’ve got to be able to get someone to return your email or your phone call quickly, to get back to you when you need it. Customer service is big.

Ron agrees that being able to get a hold of someone fast is important to maintaining a positive, profitable relationship with the custodian of your account, especially since other, equally critical issues have to be dealt with on a regular basis, too. He explains:

Investing can be paperwork intensive and the IRS could ask for your records at any time. So, a company’s ability to keep accurate records, as well as consult on how you can best dot your I’s and cross your T’s, is very important. And, because this level of account management can also get expensive, you want to ensure you understand the fee structure, are comfortable with it, and actually use the advantages it buys you. 

So, just as you would perform due diligence on an investment property you are thinking about buying, you should do your research on the custodial company you’re thinking about using to manage your self-directed IRA. 

Ways to Use a Self-directed IRA to Invest in Real Estate

You also need to give some serious thought to how you can use your IRA for funding real estate deals. One size does not necessarily fit all when it comes to creating and implementing a real estate investment plan that involves leveraging your retirement funds. What works for one investor may not work for you. And, because your range of investment options can include everything from banknotes to commercial buildings, finding opportunities that fit your unique appetite for risk are possible—and, well worth your money to seek out.

In fact, after Ron and Eddie each rolled their respective 401k plans over into self-directed IRAs, they went about planning for their use to buy property differently. Ron, for example, used some of the funds in his account—which only amounted to approximately $15,000 at the time—to formulate a real estate investment strategy that focused on wholesaling in low-priced Tulsa neighborhoods. There were multiple benefits, he says, of making that decision. “First, by utilizing the IRA, I didn’t have to short my business on cash flow. So, I could build my retirement and my company at the same time. Plus,” he adds, “it forced me to invest in areas I would not have normally bought in.” Now, wholesaling still remains a centerpiece of Ron’s business model—he closes on anywhere between 50 and 60 deals a year—and he continues to use his IRA, which helped to expand his business in the first place, to fund a portion of those.

Eddie, whose initial funds were closer to $150,000, decided to focus on using his self-directed IRA specifically as a wealth-building tool. Though, he admits, he didn’t realize that would be his goal until after he flipped his first house using money from the IRA. But, when he realized how much money he could make flipping houses compared to the much slower growth from traditional investments, he says, “It was an eye-opener.” Now, he ensures that at least a small percentage of the homes he buys, rehabs, and sells are funded from his retirement account each year. In 2018 alone, he and his wife, Debbie, closed on 11 out of about 70 deals using the self-direct IRA. 

Pros and Cons of Using Your Self-directed IRA to Buy Property

How you use your self-directed IRA to buy real estate matters more than how much money you have in the account to begin with. This would appear to level the playing field between new investors with little access to funding and those more established or with much deeper pockets. That said, Eddie cautions against the use of a self-directed IRA until you gain more experience buying houses to renovate and sell or rent out. Here’s why:

An experienced investor is going to make wiser investment decisions, whether or not they’re using their own cash. Therefore, they’re also more likely to use their self-directed IRA more effectively. The less experienced investor, on the other hand, may make a bad decision or two and get hurt where it counts. And, the last thing you want to do if you have limited funds in your IRA is lose it on your first deal. So, you need to know what you’re doing before you risk your future retirement. 

Ron is emphatically in agreement with Eddie on this, pointing out that there are several aspects to the business that every investor should learn before putting any amount of their retirement funds at risk. He explains:

Of course, you want to make sure you know how to buy a house at the right price so that you don’t lose on the investment when you sell. But, you also want to make sure you’re not investing in the wrong property in the first place and locking your retirement funds up. You need to learn how to keep cash flowing into your business and acquire enough inventory to support those efforts because, if you lose money and it’s from your IRA, you’re not getting that back.

As you gain more investing experience, and find success using your self-directed IRA to buy property, you’ll eventually be better equipped to try your hand at other real estate-related investment opportunities. Eddie, for example, has also used his self-directed IRA to purchase real estate notes, buy raw land, and invest in rental properties. Ron has expanded the use of his IRA to carry short-term, high-value notes on the properties he’s sold to other investors. Neither might have been able to increase their investing reach over the years if they’d rushed into throwing their IRA funds into potentially career-crushing money pits in the early days—something, unfortunately, new investors sometimes do.

When you do gain enough experience to confidently leverage your self-directed IRA for investing in real estate, you’ll also gain more control over your business and your financial future. Portfolio diversification, the potential for increased returns, and decreased exposure to market volatility aren’t anything to sneeze at. But, having the control over how your retirement funds are invested, in addition to how your day-to-day work life unfolds, is something that we value above all. “As entrepreneurs,” says Ron, “we are all about being in control of our destiny. Both real estate investing and using our self-directed IRAs to help fund it allows us to maintain that control.”

You’ll also want to keep a few cautions in mind though, according to Ron and Eddie, once you start using your self-directed IRA to buy property. Among those at the top of their list are:

  • You might limit your ability to leverage other financing resources, like hard money loans for real estate investors, because you can’t offer a personal guarantee through an IRA and many lenders will require it.
  • You can’t take advantage of certain tax advantages, like depreciation and interest write-offs, if you hold a property as a rental.
  • You may run the risk of creating a taxable event if all of your ducks—and paperwork—aren’t in a row when the IRS comes calling.

Of course, the ins-and-outs of these risks should be discussed at length with your account’s custodian and a certified public accountant before using your self-directed IRA to buy property, even if you’re an otherwise experienced investor.

These risks, however, shouldn’t necessarily keep you from using your self-directed IRA to purchase real estate, especially in light of the benefits. Instead, they illuminate the importance of working with experts you trust and of increasing your own skill set as an investor before making any move with your retirement money. “Success in this business,” Eddie says, “always comes down to making wise decisions.” That includes buying low, selling high, and surrounding yourself with the right team. It sounds cliche, but it’s not; it’s business.

Going Big for Your Business With the Right Support Team

Just as I do, both Ron and Eddie credit HomeVestors with giving us the tools and team we needed to grow our real estate investment businesses with confidence. That includes everything from HomeVestors proprietary valuation tool, ValueChek™, which helps you correctly evaluate properties, to a network of regional franchisees that nudge you in the right direction when you need it. You also get one-on-one mentoring from your own seasoned Development Agent to help you minimize the possibility of making bad investment decisions. HomeVestors even provides financing to independently owned and operated franchisees for qualified purchases and repairs, so that getting the money you need to buy, renovate, and sell properties is almost never a problem. According to Eddie, you get all that you need to go big:

Honestly, that’s one of the advantages of being in the HomeVestors family—having a kind of big brother to look over you who’s as interested in your individual success as you are. In truth, you have a lot of big brothers and sisters at HomeVestors that you can lean on, learn from, and get educated by. That’s why, after talking with them, my wife and I knew that owning a franchise was right for us. It was our ticket to do this big. After all, we weren’t leaving our corporate salaries to go small.

Ron nods and says he’s with Eddie on this:

There’s a kind of Fellowship in the group that you can rely on. If, for example, you really really need to call somebody, you can reach out to your Development Agent or anyone else at HomeVestors for that matter. Plus, you learn so much by going to conventions, talking to your fellow franchisees, and also stepping on a few landmines. Trust me, after you’ve been at this for a while, you’re going to have battle scars. But, hopefully, you can heal and move on. And, HomeVestors is certainly always there to help you do just that.

And, the HomeVestors team can be there for you, too, whether you’re a new investor who’s just learning the ropes or a more experienced one who’s looking at different avenues for funding deals. The HomeVestors team is here to help and support your efforts toward success. To find out how you can join us as an independently owned and operated franchisee, call HomeVestors today.

Each franchise office is independently owned and operated.

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