How to Purchase Rental Properties with an IRA

Whether you’re retiring in a few years or you’re a forward-thinking investor, real estate is one of the most common options. Many financial experts encourage employees to set up a self-directed IRA, an individual retirement account that allows them to invest in multiple assets like rental properties and nontraded businesses. Other IRAs differ according to their eligibility, tax advantages, and restrictions. However, the goal of every IRA remains the same – to provide tax benefits for savings accounts expressly set up for retirement. 

While the setup process is often straightforward, understanding how to purchase rental properties with an IRA can be difficult for some investors. Without the proper knowledge, you could make some crucial mistakes that limit your earnings in the long run. To help you achieve the best result, we’ve curated a detailed article to explain everything you need to know about IRAs and rental properties, including the benefits, if it’s enough to fund your retirement, and how to get started.   

Benefits of Using IRA to Purchase Rental Properties

1. Lucrative Tax Benefits

One of the most significant advantages of using an IRA to purchase rental properties is that they have lucrative tax benefits. Since the United States government considers IRAs a form of pension, they are exempt from many tax deductions, particularly those belonging to workers above age 59. With typical real estate investments, property owners must go through the hassle of filling their Schedule E forms correctly and monitoring their expenses to leverage as many tax deductions as possible. But with an IRA, you don’t have to consider such metrics and can still enjoy tax-free income from investments. 

2. The IRA is a Separate Entity 

Another benefit of opting for an IRA is that they have a similar setup to an LLC (Limited Liability Company). In other words, under the eyes of the law, you and your IRA are two different entities that can help you protect your assets. So, for example, if your rental properties aren’t performing well or a tenant decides to sue for damages, your personal assets will suffer no losses. 

Likewise, if you make a risky business decision that doesn’t pay off, creditors cannot tap into your IRA to offset your loan. This feature gives IRAs a highly sought-after level of protection to their holders and ensures your assets remain protected until you need them. 

3. No Out-of-Pocket Expenses

Many investors considering ways to fund retirement with investment properties are often held back by financial stability issues. Buying a house is a significant undertaking, and finding the discipline to put away enough funds to secure a rental is challenging. Also, finding the right financing can be tricky as different options are suited to unique investors in other circumstances. 

However, an IRA eliminates the burden of securing funding to purchase or maintain your investments. You can set up an automated system that channels some of your salaries to the IRA to cover such expenses. After part of the profit, your properties make funnels back to the account to offset repairs and renovations. As we highlighted earlier, since the law recognizes you and the IRA as separate entities, you wouldn’t have to budget for property maintenance in your personal accounts. 

4. Diversification of Your Portfolio

A diversified portfolio is an excellent way to avoid putting all your eggs in one basket. Besides real estate, IRAs allow you to invest in various investment options, from mutual funds to stocks, bonds, and other non-traditional options. Diversification lets you spread your risk amongst different asset classes, which lowers your financial risk and ensures you continue to earn money even when the market frowns on one of your investments. In addition, if you already own property, investing in an IRA could be a chance to expand and tap into other locations performing better than your current one.  

5. Steady Long-Term Income

The final benefit of using an IRA to purchase rental properties is that it ensures a steady income source in the long run. Since the money the IRA makes funnels back to the account, it can be an effective savings plan that grows as you age. So when you finally retire, you have something tangible to fall back on. Thus, setting up an IRA today could be an excellent way to have peace of mind that you’re already earning money for your future self. As such, it can take a load off you in the present, knowing you already have an ongoing annual contribution. 

Are Rental Properties Enough to Provide a Retirement Fund?

Understanding the pros and cons of investing with a real estate IRA can help you make an informed decision. However, most investors wonder if rental properties are enough to provide a retirement fund. 

While real estate is one of the most popular retirement options because of its stability and ability to outpace inflation and earn passive income, it still comes with considerable risks. Like every other investment option, it has its unique downsides. Dealing with tenants, maintenance, and filling vacancies are challenges that can make it difficult to manage a rental property. 

Besides these drawbacks making it hard to account for your monthly takeaway, estimating if your rental property can fund your retirement is not an exact science. The type of rental property you have and your lifestyle expenses can weigh heavily on how much you need to maintain your quality of life.  

Thus, many financial experts recommend diversifying your portfolio to mitigate risks and earn more money. Besides, you can always improve the performance of your rental properties by hiring a professional property management company to oversee the daily activities of being a landlord.