Real estate IRAs

by Eric Chang on March 25, 2011

real estate IRA

Steady rent revenue…

Plus appreciation too…

All accruing in your IRA tax-free/tax-deferred.

Think beyond typical bank CDs, stocks, bonds, or mutual funds. Did you know you can invest in real estate via a self-directed IRA?

I first heard of the concept from my old boss at RE/MAX Today, Richard Williamson. He introduced it at an office meeting as a little-known investment vehicle that he felt would interest those of our clients with sizeable retirement funds. Income properties in the Bay Area—unlike unpredictable securities—generate stable rent revenue. And real estate does appreciate over time. Real estate IRAs seemed to make sense.

However, that discussion took place in 2006—the height of the market—and I was skeptical of the math. I was working on the mid-Peninsula, whose atmospheric prices didn’t jibe with the concept. At the cheapest, would an investor be willing to drop $800K on a ramshackle San Mateo duplex for $4000 in monthly rent? Surely better returns could be had elsewhere.

Then the issue resurfaced a few months ago. I had been looking in Oakland with one of my investors. When he later learned about real estate IRAs, we’d refocus on finding a property to put into his. We soon looked in West Oakland—duplexes and triplex in particular. Properties there with moderate deferred maintenance could be had for around $200K…upper-$200Ks for move-in condition ones. (At the height, they were commanding $500K to $600K+.) Plus, we could expect total monthly rent of $2700 to $3000.

In today’s market, the math makes sense.

duplex listed at $250,000 – currently rented for $2850/mo
duplex listed at $194,000 – projected rent of $2800/mo


A common misconception is that real estate IRA purchases must be all-cash. Though options are limited, it is possible to finance a sale. Most who specialize in these transactions are hard money lenders. There are only a couple of FDIC member banks in the U.S.—NASB and First Western Federal—that do real estate IRA loans. Like all exotic loan products, you can expect the rate—either fixed or adjustable—to be high. LTVs start around 40 percent. Underwriting guidelines seem arbitrary. One lender didn’t like the way one property “looked”; another wanted earthquake insurance. Plus, as I understand it, rental income will be subject to Unrelated Business Income Tax, proportionate to the percentage financed. (Check with your CPA.)

One of the first steps in building your real estate IRA is finding a qualified IRA custodian to set up your account. Entrust is one such company with local offices. It is through the custodian that monies are disbursed and collected. The purchase’s initial deposit or future repair work, for example, are paid through the custodian. Rent checks go there too. Remember, you don’t directly own the investment property. It is vested in your IRA.

My client will be closing soon on a West Oakland duplex for his IRA. It has been a very educating process. With the current market ripe with investment opportunities, I’m making a point of telling all my clients about this.

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