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Investors have many great options available to them—including the opportunity to buy investment properties with a retirement account. David Moore with IRA Advantage looks at how to do just that. He outlines how to plan ahead to achieve your goals and avoid creating problems.

Planning Ahead with Your Retirement Account

As a scuba diver would say: plan the dive, dive the plan. We’re talking about using retirement money to buy real estate. This is not a new concept. It’s always been possible. Retirement accounts came into play in the mid-seventies and you’ve always been able to buy real estate. It’s just a well-kept secret.

This is how it happens:

1. Move your money from a custodial account – We’re going to move your money from a custodial account that does not allow you to do what you want to do to one that does.

2. Look at what you want to do with a property – As soon as we’ve established that custodial account, we’re going to -look at what you want to do with a property-.

3. Create an IRA-specific limited liability company – If it’s a situation where you want to take and actively manage the asset, you want the flexibility to buy what you want when you want, then we’re going to do what’s called a checkbook IRA. In the most basic sense, that means we’re going to create an IRA-specific limited liability company that we’re going to insert between the trust company and the ultimate investment. The investment the trust company makes on your behalf is in the membership interest of a limited liability company that you, the taxpayer, are actually the manager of.

4. Negotiate the purchase of the property – As soon as we’ve created this investment vehicle, you’re going to negotiate the purchase of the property just as you normally would, but you’re going to be doing it in the name of the limited liability company that you’re the manager of.

You need earnest money? You write a check for the earnest money. You go to close the property, you write a check. The best piece of advice I can give you is to understand that the property is not yours. Think of it as belonging to Susie down the street. As long as you consider it somebody else’s, you shouldn’t have any issues. If you start thinking that the property is yours, you’re going to have problems. For instance, any insurance on the property needs to have a policy in the LLCs name and EIN. You need to have every invoice submitted to that entity and paid by that entity. Nothing is going to be on your homeowner’s policy or anything else that you’ve got going on. It is not your property. The only time it will become your property is if you take that property as an in-kind distribution someday in the future.

How to Avoid Problems when Buying Investment Property with an IRA

Unfortunately it’s also easy to screw things up because when people hear they can do this, they get out over their skis. They want to go ahead and find a property. All of a sudden, they hear about this property they’ve got to get, so they go ahead and write the offer personally, and the broker will say, “Well, hey, the purchase sale agreement’s assignable.” Most of them are, so it’s not a problem. You go ahead, put the earnest money down personally, tie it up personally, and then you assign over the plan, and you think it’s fine.

That’s not okay. That’s a prohibited transaction. There’s a benefit to a disqualified party there. You have to do this in the name of the LLC or the trust company from the deal’s inception. You cannot personally tie it up and then transfer it over.

When you think you want to start shopping around, make sure you’re ready to do that. Inevitably, you’re going to find something at the most inopportune time. You would be surprised at how often we get a call after somebody has made an offer and then it’s got to be cleaned up somehow, and a simple assignment is not going to do the job.

How to Buy Your First Investment Property with a Retirement Account

So, even though it’s relatively easy and there are those two concerns and that’s it, be prepared. Be a good boy scout. Make sure the account is established and ready to go before you ever start negotiating. The tough thing is, especially in the stock market like we’re seeing right now (January 2020), that things are moving along pretty well. We might get accounts set up and you’ve got to decide how to fund that account, when to fund it, and it’s hard to know when to go to cash in the amount you want to use.

We’re not financial advisors, and we don’t give investment advice or sell investments. We just provide the investment vehicle. But any financial advisor is going to tell you diversify. So to mimic what they say, don’t move it all in a self-directed account for this reason: when we’re talking about IRAs and prohibited transactions, if you buy Wall Street Stuff, you can make a poor investment, but you really can’t commit a prohibited transaction. So, you’re not going to damage the integrity of that retirement account.

IRAs are a popular method of investment for retirement. But, as David notes, you need to focus on your investment goals and decide just what you want in order to make good investing decisions. His best advice is to pick up the phone and give us a call: 503-619-0223!