Real Estate IRA

Pros and Cons of Self Directed IRA

Real estate is the most popular asset for those who open a Self Directed IRA. However, like any asset, it may not be the best fit for every investor. This is especially true in the arena of retirement investing. Let’s take a look at the pros and cons of using a Self Directed IRA to buy real estate, and whether it’s a good fit for your portfolio.

The Takeaways

  • An IRA LLC is required to adhere to all standard retirement regulations.
  • As opposed to a brokerage IRA, an IRA LLC has to be wary of interacting with Disqualified Persons.
  • The IRA LLC account holder must be cognizant of sweat equity and not perform any services for the IRA LLC that are deemed prohibited.


A Self Directed IRA may have more flexibility than a standard retirement account, but in essence, the two are the same. They both allow for tax-advantaged investing. They are also similar in the fact that once you make a contribution, your funds are locked up until a number of years down the road. This is great for real estate investing. When your Self Directed IRA purchases real estate, you don’t have to be concerned for its most noted downside: illiquidity. Your retirement account can comfortably hold the property for a long time and take advantage of long-term growth. Then, when the time comes to sell, you will have plenty of opportunity to position the property for maximum return.

One of the major income sources for real estate investors is rent collection. Rent is unique in that it provides monthly cash flow for a Self Directed IRA investor without the tax implications that are inherent to other cash flow assets. If your IRA owns an active business (like a grocery or restaurant) you would normally be liable for UBIT. This is a tax that tax-exempt entities are required to pay if they are running a profit generating business. However, rental income is considered passive and not liable for UBIT. Thus, real estate in a Self Directed IRA can potentially provide you with a double shot of profitability. The value of the property itself will likely appreciate, and you will also be able to accrue rental income without the hassle of UBIT.

One of the cornerstones of a successful investing strategy is diversification. An investor should spread their funds over a variety of assets in order to hedge the various markets and, on the whole, come out with a profitable return. A Self Directed IRA allows investors to truly diversify by purchasing alternative assets like real estate. It’s true that an investor can diversify within the stock market itself, but that will still leave their account vulnerable if the market as a whole takes a downturn. A more robust diversification strategy incorporates both market products and alternative assets. Using a Self Directed IRA to purchase real estate is normally the easiest way to accomplish this kind of diversification.

If you invest with a standard brokerage IRA, then your profitability will be limited by the amount in your retirement fund. However, if you use a Self Directed IRA to buy real estate, then you can potentially use leverage to increase the profits. Real estate is unique amongst most investment assets in that it can easily qualify for a loan (like a mortgage) to assist in the purchase. This means that not only will you be profiting on the actual percentage of the property that was purchased with your Self Directed IRA, but you will also profit from the percentage that was made possible by the loan. Obviously, you still have to pay back the loan at the predetermined rate of interest, but overall, you should end up more profitable because of the increased value of the asset.

When you purchase a property with a Self Directed IRA, you have acquired a unique hedge against inflation. Real estate prices typically grow with inflation. Similarly, rent usually follows inflationary trends as well. This allows for the profitability of your retirement investment to stay consistent. If you have utilized a non-recourse loan to purchase the property, then you’re even better off. In most mortgages, you will be paying a fixed monthly amount for the duration of the mortgage. This means that as time passes by and inflation grows, the value of your property increases while the relative value of the mortgage payments will decrease. In this situation inflation has worked in your favor.

The above are all specific advantages for buying real estate with a Self Directed IRA. For these (and other reasons) real estate remains the number one alternative asset. Let’s now discuss the “cons”. Although real estate has a lot going for it, there are a number of reasons why it may not be the best match for your retirement account.


What is great about a standard brokerage IRA is that you can get into it with almost any amount. That’s not the case if you’re buying real estate with a Self Directed IRA. To purchase a property, especially one with multiple rental incomes, you need to have enough to cover the down payment and initial operating costs. These include any rehab the property may need, insurance, and possible maintenance. Altogether this could come out to a significant amount of money. Depending on the size of your retirement account, this may mean going all in. As with any investment, you should always consult a financial professional to determine the feasibility of the investment.

This is not a big consideration for those who have previous real estate experience. However, that is just not the case for many Self Directed IRA account holders. A large percentage of them use the self-directed platform to buy their first investment property. Like any asset, you shouldn’t jump in without getting educated. This can include:

  • Speaking with real estate professionals to learn how to gauge the value of a property.
  • Talking to contractors to get a sense of the rehab that may be necessary.
  • Reading up on all the financial and legal items that will affect your investment.

If you don’t think you have the time to get educated, then maybe buying a property outright is not the best idea. There are other real estate alternatives available which do not require the same learning curve such as private placements or a REIT.

Owning a property – especially one with tenants – can be time consuming. There is scheduling maintenance, property upkeep, and taking care of administrative concerns. Anybody who owns a house knows the work that goes into it, and this holds true for real estate purchased with a Self Directed IRA. Some investors get around this by hiring a property management company. Although it makes the process much easier, it does come with a price tag which may not necessarily coincide with your investing goals. Here it pays to speak to somebody who has already used a Self Directed IRA to buy a property and find out practically what it requires in the long run.

If the property you buy with your Self Directed IRA is income producing (i.e., monthly rental income,) then you have probably taken that revenue into account when calculating the value of the property. What you may not have considered is the ability to find solid and consistent tenants. Depending on the nature of the property, you may be looking for one family who you feel is a good long-term option, or you may be looking at a number of smaller tenants to occupy smaller spaces. Turnover is a reality in the multi-family market, as are the challenges of maintaining high occupancy numbers. A local real estate agent may be able to give you guidance on a specific piece of real estate and whether or not it will be in demand for rentals.

When the time comes to start taking RMDs (Required Minimum Distributions), stocks are easy to cash out. Usually, one can liquidate a stock just by pushing the “sell” button. Real estate purchased with your Self Directed IRA is a totally different story. Like with any property, cashing out means selling the property to another owner. That process can be lengthy at times and may not be the best option if you foresee an immediate need for cash. However, not every retirement investor has to deal with a selling process. If you would prefer to keep the investment property for yourself, then you can claim it as a distribution. This involves filling out the appropriate paperwork and paying the relevant taxes. It’s also possible to distribute part of a property to yourself via a process known as an in-kind distribution.

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