Real Estate Investments and Reserves

When considering real estate investments with your self-directed IRA it is important to consider issues in addition to cost, income and risk. There are many ways to analyze the value of a piece of real estate but the carrying costs can be the most critical consideration.

It is essential to plan ahead; in addition to having enough money to make the initial purchase it is crucial the IRA has enough money in reserve to cover the carrying cost of the investment. Since the IRA owns the property, the IRA must cover all the expenses the investment will incur. If the investment is an income property there may be enough cash flow to cover future costs, property taxes, insurance, utilities, not to mention upkeep and repairs. An investment in land often has no income yet does have carrying costs.

There are always projected costs and there may be unexpected costs, be ready for them. Simply writing a personal check is the natural tendency for an IRA owner when an expense is incurred and there are no funds left in the IRA, this is a prohibited transaction though in some “emergency” cases it may be allowed. IRA growth and the IRA owner’s ability to make contributions are the only true sources for expenses when there are no reserves.

Plan ahead, be conservative and always maintain a safe margin of reserves.