The question comes from someone who currently has a regular IRA with $25,000 in the account. 

For starters, if you want to use IRA for real estate investing, the first step is moving your IRA to a recognized custodial company that specializes in handling self-directed IRAs.  The one I’ve used for years (and recommend to others) is Equity Trust Company.  There web site is http://www.trustetc.com.  To get started with them, you need one of there redirection of investment forms. 

That company doesn’t have anything do with selecting an investment.  They merely act as a 3^rd part trust to handle the money. 

It turns out that this person already has there account with Equity Trust Company.  They were going to invest the money in real estate but then found out that they had to have non-recorse financing.  On a non-recourse loan, the bank required 40% down and 8,000 left in the bank to cover the investment. 

Let me explain non-recourse financing.  It means that the borrower is not on the hook for the investment personally.  Usually when you go to bank they require you to personally sign for the loan.  But you can’t sign personally for the financing when it involves an investment from your personal IRA because it is a retirement account.  That’s the way the laws have been written about about personal retirement accounts.  You can loose the money in that investment, but your losses can’t go beyond that. 

The way I see it, you have one of three possible choices:

1) You could just accept the banks terms.  That means you could buy a property for up to $62,500.  You would put $37,500 down.  The bank would also require you to keep $8,000 in your account just for safety sake.  As I said in the other article, you would probably not want to keep this as a rental property due to the lack of tax advantages from this type of investment. 

2) You could buy a property for less than $25,000 in total price so you could avoid the bank altogether.  You could do a wholesale flip or buy a property to finance out to another buyer. 

3) You could invoke some type of seller financing.  Just like with the bank, you must set up a non-recourse loan.  With this type of loan, you have no restrictions on how much of a down payment you MUST make.  In other words, you could buy a $100,000 or $200,000 property as long as the seller was OK with your down payment amount. 

4) You could loan money out of your IRA to someone else in the form of a secured mortgage.  Just remember that you can lend that money to pretty much anyone except yourself, your wife, or your kids. 

What other ideas do have for investing this money?  Write a comment if you can come up another option. 

The 2nd smartest investment I’ve made has been using a ROTH self-directed IRA to get into the lending business.  It was acutally a big mistake…at the time, I thought I was going to end up loosing my hind end on the deal.  Here’s what happened. 

I had a little bit of money I’d rolled over from a 401K plan.  By the way, if you are leaving your job in which you have a 401K, this is a very smart move as long as you don’t do something stupid with the money.  We decided to go ahead and pay the income tax on the money ONE TIME when we rolled it.  When you do so, it converts to a ROTH account.  That money can never be taxed again when you draw it out later in life. 

IRS does have specific rules regarding how you can use your self-directed IRA.  For example, you can’t loan yourself money to do a deal (or your company, etc.).  You don’t ever want to do something that might disqualify your account by breaking the rules because later on down the line you could be hit with a tax on the whole account.  And that would just ruin your whole day.   

You can buy real estate with that money.  It’s not really a great idea to buy rental property with this type of account because you don’t get any of the great tax benefits you do with a regular rental property.  

You can buy a property and flip it with that money. And That’s what we decided to do with the $30,000 or so we had in this account.  

So we found a property that we decided would make a good "retail" flip.  We bought the property, got it ready, and listed it.  And waited for it to sell.  And waited some more.  A year later, we were still waiting.   

We decided we needed to change our game plan.  We decided to sell the property for $50,000 on owner financing.  What that did for us was allowed us to capture the $20,000 increase in price.  An on top of that, we charged 10% interest on the loan. 

It didn’t take long to find someone willing to put $5,000 down on the house since we were willing to carry the financing.  

That was several years ago.  The money just keeps coming in like clockwork.  We loan out the money that comes back into the account to other investors for there deals.  In doing so, the interest accumulates interest.  

We wouldn’t even need to add more money to this account for it grow to several hundred thousand dollars within 20 years.  

However, we’ll keep contributing to it so that it reaches at least the million dollar mark within that timeframe.  

Do you have a retirement fund like this in which you’d like to earn a great rate of return?  If you are in Oklahoma, contact me about that and I may be able to put you onto the right track with that at scott at financiallyfreelandlord dot com.   

In his article "Self-Directed IRA Investing: Invest to Protect Your Retirement" , IFAZ blogger points out that self directing your IRA funds can make a lot of sense given the current market conditions.  After all, many have watched their IRAs lose 50% or more of their value. 

Many years ago I made the decesion to never again have any of my money in the stock market.  It seemed that every decision I made in terms of investing in stocks was a wrong move.  I decided to keep my money in a vehicle that I could at least somewhat control instead of being totally at the mercy of some publically traded company and the whims of the market. 

I took that money, bought real estate, and then sold the property on terms.  This is giving me a huge return on my money because I nearly doubled the price of the real estate I sold, plus I’m charging 10% interest.  I haven’t actually calculted the return I’m getting, but I can tell you that it doesn’t take that much of a starting investment over 20 or 30 years of that type of investment to have a mult-million dollar IRA account at the end of that 20 ro 30 years. 

So, going back to quesitons my student had about her IRA.  Sorry, but takin cash flow out of your own IRA is a no-no.  That is definitely a prohibited transaction, and the IRS can revoke the tax benefits of that account (ouch!). 

Buying rental property in an IRA is not a good financial move.  For example, you can’t take depreciation on a property you own in the IRA.  There are other down sides, but let’s just leave it at that.  My recommendation is to buy some real estate in the IRA that you will finance out (i.e., the IRA will get the note and mortgage), or simply lend out the money as if you were a hard money lender.