How to Invest in Multifamily Real Estate with Your Self-Directed IRA

Nov 10, 2023

An Individual Retirement Account (IRA) is a savings account designed to encourage savings for retirement by offering unique tax advantages. Individuals use these funds to invest in a mix of stocks and bonds. Another investment approach that most individuals are unaware of to diversify past the traditional stocks/bonds is through the use of a “self-directed IRA.” This specialized IRA allows individuals to use their retirement funds to invest in other privately held investments such as commercial real estate, notes, crypto, and LLC memberships. 

One of the major benefits that make this such a powerful investment vehicle is the tax deferral advantages of the IRA. This includes income taxes, capital gains taxes, and dividends taxes experiencing tax-free growth on their investments. All income and gains generated by your IRA investment will flow back to your IRA tax free. This alone makes using an SD-IRA to invest in real estate one of the most powerful ways to build wealth. 

This SD-IRA allows diversification from stocks and bonds. Stock volatility can be detrimental to your retirement savings if a large part of your portfolio is devoted to them. Bonds can also be a good investment but can decline in value when interest rates are rising. The use of the SD-IRA allows investors to have a healthy mix to offset dramatic changes in the market. 

The IRS requires that the individual have a custodian, an entity specializing in self-directed accounts that manage the transaction, paperwork, and financial reporting compliance. They will be responsible to protect you from any rule violations. From there, the deal sponsor will handle the legwork and day-to-day operations for the investment property while the passive investor collects tax-free distributions by utilizing the self-directed IRA.

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