How to Use a Self-Directed IRA to Buy Real Estate?

A self-directed IRA is an IRA that an owner must hire a custodian to hold the IRA assets and be responsible for administering the account and filing required documents with the IRS.  This is not commonly use, but owner does have more flexibility on the investments, besides the ordinary stocks, bonds, and mutual funds, they can invest in real estate.
The custodian fee for self-directed IRA that can hold real estate usually is higher than the regular IRA account, and not all the banks or financial institutions will do it.
Interested investors should seek legal advice, and tax advice from an accountant.  They should also be familiar with the rules for the type of IRA they are using.
If you are using your IRA to invest in real estate, you should keep in mind that:
  1. Account opening process is longer than regular IRA.  Custodian fee is higher.
  2. This is a long time investment.  You cannot take advantage of gains of your IRA investments until you retire.
  3. It is some work involved in managing the property.  All expenses, maintenance, taxes, and insurance are paid from IRA.  Investor should use a reputable and experience property management company to take care of the day-to-day duties.
  4. IRA is tax deferred, so rental income and capital gains from the property are tax deferred.

* Message from your Real Estate and Mortgage Broker, Andy, 408-218-2513

Understand how your ARM adjusts before taking out an adjustable rate mortgage

  • How soon your payment could go up – e.g. 7 year ARM, your initial rate will stay the same for 7 years before it changes
  • How often your interest rate will adjust – some could adjust monthly or every 6 months or different term according to your loan contract
  • How high the interest rate could adjust each time when it happens and how much is the impact on your mortgage payment
  • If there is a cap on how high your interest rate could go
  • If there is a limit on how low your interest rate could go
  • Don’t assume you will be able to sell your home or refinance your mortgage before the rate changes because value of your property could decline, your financial condition could change, therefore, you need to consider if you will still be able to afford the loan if the rate and payment go up to the maximums allowed under the loan contract

* Message from your Real Estate and Mortgage Broker, Andy, 408-218-2513

What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan?

With a fixed rate mortgage, the interest rate is set and fixed when you take out the loan and will not change.   Most common programs are 15 year-fixed loan and 30 year-fixed loan.

With an adjustable rate mortgage (ARM), the interest rate may go up or down. Usually ARMs will start at a lower interest rate than fixed rate mortgages. This initial rate may stay the same for months or years, depends on the program that you choose. When this introductory period is over, your interest rate will change according to the index that it ties with and the amount of your payment will likely go up.   Many ARMs will limit the amount of each adjustment by the index, and set a “cap” on how high your interest rate can go over the life of the loan and/or set a “floor” also limit how low your interest rate can go.

* Message from your Real Estate and Mortgage Broker, Andy, 408-218-2513