Real Estate IRA: What Is It? Which Type Is Best?

A real estate IRA is just another name for a self-directed IRA. For those who are unfamiliar with self-directed IRAs, they are IRA accounts that let you invest your retirement funds into a wide range of alternative investments: from real estate to tax liens to cattle breeding ranches. There are only a few restrictions: namely that you can’t invest in collectibles or life insurance, and you and some members of your immediate family can’t personally receive benefits from your IRA investments. For the complete list of rules and regulations, talk with a custodian, self-directed IRA facilitator or an attorney familiar with IRA regulations.

Through a self-directed IRA or real estate IRA, one can invest in almost any type of real estate, domestic or foreign. In my personal experience, the only issue that I have ever faced was with foreign real estate, and the problem was with the country, not the real estate IRA. The country in which we were investing had never seen nor heard of a real estate IRA, and properly registering the title became a long and grueling process. To be fair, this was a developing country with a very unsophisticated and very manual property registration process. To date, it is the only country where I have encountered this difficulty, but if you use a real estate IRA to buy property in any developing country, then I would plan for delays.

Real Estate IRA: Which type should I get?

There are two types of real estate IRAs. The first is the traditional one, which is done through a self-directed IRA custodian. The biggest self-directed IRA custodian is Equity Trust. Setting up your real estate IRA in this manner will have the smallest upfront fees, but will include on going fees tied to the value of your IRA account. These can add up over time, especially if you have a large account. Keep in mind that there are also some time sensitive investments that may be difficult to invest in because of the approval process with the custodian. This is typically the best real estate IRA type for those who have less than $50,000, and who can spare the extra time.

The second type of real estate IRA is the checkbook control real estate IRA. As the name suggests, a checkbook control account has its own checking account and checkbook. The holder is designated as the representative and can issue checks at will. This does not, however, release the holder from the rules governing IRAs, and with more freedom comes more responsibility. In the other model, if you attempt to enter a prohibited transaction, your IRA custodian will likely stop you. In the checkbook control model, account holders must use their own discretion, and the penalties are severe if one enters into a prohibited transaction. There are several self-directed IRA facilitators who can create the accounts, the largest of which is Guidant Financial Group. The main benefit of the checkbook account is that you can react quickly to investment opportunities, and you can avoid a lot of hassle and additional paperwork. Most real estate investors know that the best opportunities don’t last long, so being able to react quickly is vital to success. This route is not cheap on the front end, but it has fewer ongoing fees, and the fees are not tied to account size. This can be a good option for investors with more than $50,000 or that are dealing with time sensitive investments.