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The Pros and Cons of Investing With a Real Estate IRA | Portland Property Management

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IRA, or an Individual Retirement Account, is a savings account that has tax advantages. You can also use it to save and invest money in the long term. Many people use the funds from an IRA to buy their own property. If you are interested in real estate investments, you can benefit from using an IRA instead of other options like a 401K. If you have an IRA (self-directed), you may also be able to experience the perks of this investment. 

However, before you make a decision, it is essential to understand the importance, role, and pros and cons of investing with a real estate IRA. 

What is a real estate IRA?

As the name suggests, a real estate IRA is an account you can use for investments, including real estate. It is a self-directed individual retirement account (SDIRA) that allows one to hold real estate as an investment. There are different types of IRAs, like Traditional, Roth, SEP, or SIMPLE self-directed IRAs, that you can open. 

IRA enables you to invest in single and multifamily homes, commercial and rental properties, mortgage notes, international property, land, and more. Moreover, since real estate investment is allowed in IRAs, you are not required to cash it out and pay taxes. According to a survey, about 18% of working individuals have an IRA. Contact a Portland property management services provider if you have difficulty understanding a real estate IRA.

How to use a real estate IRA to invest in Portland?

Even though you can buy real estate in your IRA, it might not be a beneficial move for everyone. Since there are multiple rules and lengthy processes involved, only people with prior real estate investment experience or house flippers must consider using this investment method seriously. Additionally, it is essential that the real estate purchased is strictly an investment and not used by you for personal purposes. 

The slightest mistake in this process can result in costly consequences. Therefore, it is essential to ensure that you follow the proper investment process and take all the help you can get from an experienced Portland property management services provider. Here is how you can invest with a real estate IRA in Portland:

  • Find a suitable IRA

Potential investors can choose from multiple types of IRAs, including Roth IRAs, Simplified Employee Pension (SEP) IRAs, traditional IRAs, and (SIMPLE) IRAs (Savings Incentive Match Plans for Employees). You need a self-directed IRA (SDIRA) to buy real estate with an IRA. You can find a good SDIRA provider in Portland to help you understand these options’ rules, benefits, and constraints. 

  • Select an account administrator

Since you cannot self-work on your IRA property yourself, you need to hire an account manager or a good Portland property management service provider to look after the asset. They can also help you manage the accounts for your property and make informed decisions about the real estate IRA.

  • Find a suitable property

While buying a property, ensure that you select the right one within the guidelines. Failure to adhere to the rules can result in fines and penalties. You can purchase real estate of any type, including residential like condos, single-family homes, multifamily properties, apartments, commercial properties like storage units, factories or office buildings, and raw land. 

Rules To Follow While Investing With A Real Estate Ira

Since mortgages are rare when using IRA to purchase a property, ensure that you follow all IRS rules. Here are some rules you can follow:

  • Use the Oregon real estate IRA to buy real estate for investment purposes only and not for personal reasons.

  • You must pay all expenses related to your property through the retirement account and not from your accounts.

  • The income generated by the multifamily property must go into the IRA.

  • You cannot use your IRA to buy a property for yourself or your family members.

Pros Of Buying A Property With An IRA

Even though real estate investment of any kind is risky, you can find lucrative results by investing in Portland. Here are some advantages of buying a property with a real estate IRA:

  • Tax Benefits

One of the main reasons investors use an IRA to purchase real estate is its tax benefits. Usually, gains received from real estate purchases are taxable. However, using SDIRA delays the taxes, and your contributions can grow tax-deferred, depending on your IRA account type.

For instance, under a Roth SDIRA, you can’t deduct the money you invest in the tax year you contribute. But your income will grow tax-free, and you won’t owe any taxes on earnings when you take distributions from the account in retirement.

On the other side, a Traditional SDIRA permits you to deduct the amount in the tax year that you make them. Income then grows tax-deferred, and any distributions you take in retirement are taxed. 

  • Can Invest In Alternative Investments

Traditional retirement investment has become common, and people are now looking to diversify their investment portfolios. Purchasing real estate seems viable as it gives you multiple asset classes. It also secures your retirement account due to the real estate appreciation rate. 

  • Potentially greater returns

Compared to traditional methods of investment like stocks and mutual funds, real estate has the potential to produce greater returns. It is a long-term investment option and can be a beneficial retirement option. Additionally, its returns are also tax-advantaged. 

  • Extra protection

Investing with a real estate IRA can save you from complete financial damage even when you are on the verge of bankruptcy. The funds in SDIRAs will be protected from creditors, ensuring your retirement amount is safe in the long run. Suppose you face any financial troubles and need to file for bankruptcy. In that case, you can exempt up to $1 million of your SDIRA funds according to the Bankruptcy Abuse Prevention and Consumer Protection Act. It means creditors can’t lay any claim to any of those fonts. 

Cons of Investing With a Property in IRA

Here are some downsides to investing with a real estate IRA in Portland:

  • Regulations

Buying a property in IRA requires you to follow stringent rules. Failure to follow them can lead to your SDIRA potentially being disqualified as a retirement account. It can also be subject to taxes and penalties. Therefore, it is essential to ensure proper guidance from an expert when buying and managing a property with an IRA. 

  • Lack of liquidity

The IRS requires the involvement of a certified IRA custodian to hold the account. They have the responsibility of approving the investment and releasing the funds. However, tremendous paperwork is involved with tracking these transactions’ accounts, which can take time. Sometimes, it may be slower than you expect, delaying when you urgently require cash. 

  • Unrelated debt-financing income

Even if you don’t need to pay taxes on your earnings in an SDIRA, there comes a situation where you do. For instance, if you purchased a property using some of your IRA funds, 50% of your income from the property will be considered unrelated debt-financing income (UDFI) and taxable since it is part of your purchase using debt. However, there are some exceptions to know when it comes to UDFI, so consult with a tax professional to learn how it can affect you.

Considerations Before Using Real Estate IRA

Buying real estate with a self-directed IRA can be strenuous, so it is essential to conduct thorough research and be aware of what it entails. You should be mindful of some considerations:

  1. Awareness of the different retirement account types and investing rules is essential. Even if your investment is tax-free before retirement, failure to follow the investing rules can result in you being disqualified and taxed. 

  2. If you withdraw money before retirement, you may have to pay income taxes and a penalty for early withdrawal. 

  3. On the other hand, if you withdraw funds from the IRA to pay for college, purchase a property, or pay medical or healthcare bills, you can avoid the 10% penalty. 

Many people consider investing outside IRA to be a more flexible option. However, not many people have sufficient funds to do so. Either way, investing in Portland real estate is a great way to earn profits and solidify your investment portfolio. If you find this process complex, you can also enlist professional help to make an informed decision. A qualified Portland property manager can also help you conduct a thorough research about real estate IRA and if you meet the requirements. 

Who will manage your properties?

hiring a property management professionalAccording to IRS regulations, if you invest in Portland real estate using an IRA, you are not allowed to work on the property yourself. You may also be unable to pay for your services when you self-manage. To avoid this problem escalating and causing potential issues, you can find a trustworthy Portland property manager to look after your asset

We at PropM can ensure that your investment or rental property runs smoothly. With our expertise and knowledge of over a decade in the Portland market, we can help you make the right decision that benefits you. 

We operate in Multnomah County and all over the Portland Metropolitan Area, including Portland, West Linn, Lake Oswego, Beaverton, Wilsonville, Tigard, Happy Valley, Hillsboro, Sherwood, Oregon City, Milwaukie, Clackamas, Gladstone, Tualatin.

Contact us at PropM for any further assistance with real estate IRAs.