How To Use Your IRA/401K To Buy Real Estate

Use your IRA, 401(k) To Buy Real Estate
By Bruce Kaplan

Many of our clients have planned for retirement by investing in traditional individual retirement accounts, 401(k)s or simplified employee pension IRAs. Most of these vehicles are composed of mutual funds, stocks or bonds that are recommended by your custodian (stockbroker or financial adviser.) Some of our clients have expressed dissatisfaction with the rate of growth of their retirement accounts, or for different reasons wished they could diversify into other wealth-building vehicles.

You may be surprised to know that you can diversify your retirement accounts and buy real estate or even a business using a perfectly legal tool called a self-directed IRA. Self-directed signifies that you, and not some third-party stockbroker, choose your IRA investments. Most of these custodians do not want you to know you have an option to buy real estate or businesses for your IRA, and can enjoy all the benefits of those asset types have to offer.

Now, I know some of you are going to say real estate has not been such a great investment over the years during certain periods. Like the stock market, the real estate market took a hit for a few years starting in about 2008 (as did the whole economy). However, right now, there are some extraordinary opportunities in commercial real estate because interest rates are so low. There is also a big price discrepancy between existing buildings and the cost to build new, rendering many existing buildings good investment at decent cap rates (8%, 9% or 10%). These can become part of your retirement portfolio using a self-directed program.

If you are so inclined, you can look up Section 408 of the Internal Revenue Code, which permits individuals to buy land, commercial property, condominiums, residential property (you can’t personally live in it) and a few other things with funds currently held in many common forms of IRA, including traditional IRAs, Roth IRAs and SEP IRAs. You cannot, however, use IRA funds for your personal residence or vacation home.

We have seen clients who are not happy with their traditional IRAs or 401(k)s find a specialized custodian and roll over their accounts to allow for direct purchases of commercial real estate, such as income producing office, retail and industrial properties. One such client bought a foreclosed multi-tenant office building in Cary. The income and appreciation accumulate, tax-deferred, until it is taken out. If the real estate is held in a Roth IRA, all proceeds are tax-free when taken out at retirement.

If you don’t have enough cash in your self-directed IRA to buy an entire property by yourself, you can co-invest with friends and relatives as tenants in common. The property deed would specify what percentage of ownership your IRA held in the property. In addition, if the group doesn’t have enough cash to buy the property outright, your group, usually operating under an LLC, can obtain a loan. You are not permitted to personally guarantee that loan, however. It must be what they call a non-recourse loan. Or that loan can be personally guaranteed by one of the others in the group who is not buying it as a part of his retirement plan.

Depending on the self-directed IRA plan you choose, there is an initial out-of-pocket fee and the total setup fees range from $1,200 to $1,700. You can set up a checking account at a local bank of your choice and have complete control over that account.

More and more people are taking advantage of this self-directed retirement plan. You owe it to yourself to take a closer look.

Note: For information on self-directed IRAs, pick up a copy of “The Ultimate Self-Directed IRA” by Jeff Astor. You can order it on Amazon.

Bruce Kaplan is a senior broker associate with Premier Commercial Realty in Lake in the Hills.  Contact Bruce at 847-854-2300 x20 or email