As we see more people starting to realize that Real Estate can be an attractive proposition as an investment, we consistently get the question “How to use your IRA for real estate” . This video is a simple walk-through from  Mark Kohler about the strategy.  Whether the intent is to use your IRA for Real Estate which you will buy & hold for rental income, or if you want to use your IRA for Real Estate which you’ll renovate and resell (FLIP), Real Estate is attractive.  But Real Estate requires capital, and most individuals’ greatest source of capital is locked up in “pretax” IRS’s and 401k plans which would incur penalties and taxes to the tune of 20-50% if liquidated….. so here’s the basics of how to use your IRA for real estate.

Finding out how to use your IRA for Real Estate is one thing, but understanding If you should use your IRA for Real Estate is more important.  

Learning how to use your IRA for Real Estate for a house FLIP  has fewer tax consequences than for rental. In fact, using a tax shelter to invest into another tax shelter is quite unwise (kind of like investing IRA dollars into an annuity).

Before rushing off to invest into Real Estate, make sure you’ve been doing Dave Ramsey’s 7 Baby Steps -paying off debt, building 3-6 months of cash reserves, investing 15% of your income into growth stock mutual funds, then for college, then payoff your home and FINALLY investing into real estate….

That last sentence just made most of you readers glaze over because you are probably trying to figure how to use your IRA for real estate – not to get a lecture on financial priorities; but hear us out on the financial steps you should do before using your IRA for real estate.

Higher Priorities Than Investment Real Estate

First: Payoff Debt: You better payoff your debt before you start investing in Real Estate.  You are definitely putting the cart before the horse if you’ve gotten excited about entering into real estate investment if you still have a car payment, credit card debt, student loans, or any other debt besides your primary home mortgage.  The best way to payoff debt is by using a debt snowball method like Dave Ramsey teaches.

Second: Cash Reserves: Get 3-6 months of cash set aside & even more in your checking for cushion.  If you know anything about life, you know that Murphy’s law will apply – Whatever could go wrong, more than likely will go wrong.  Having real estate investments requires even more cash on hand to handle the bumps in the road.

Third: Invest 15% into growth stock mutual funds (or etf’s) OK, this is the one that probably makes the reader of an article like this want to click away.  But Real estate, in our opinion, needs to be a secondary investment  because it does not benefits from the magic of COMPOUND INTEREST.  While real estate can appreciate in value, provide consistent income which has low correlation to the markets, and amazing tax benefits; it lacks the magic of compounding interest.   Compounding interest is magic – and even a volatile market can experience tremendous gains if you’re wise with your investment. The way to be wise is to consistently invest by using “dollar cost averaging” through automatic deposits. This is because periodic investments will purchase shares at a “discount” during market down cycles because investing is all about how many sharesy ou own – then hoping the shares increase.

So if your hunting “how to use your IRA to purchase real estate”, we encourage you to wait until you’ve paid off debt, built up 3-6 months of cash reserves, and started investing 15% of your income into Growth Stock Mutual funds; THEN you should invest with a very detailed and informed plan.

All that being said, if after you learn how to use your IRA for real estate, you do invest, contact us at Nuance Financial to do a TAX analysis for depreciation & cost segregation.  We have a Minnesota Cost Segregation partner that can help with cost segregation on investment real estate with a purchase price above $250,000 – and the Minnesota cost segregation general quote is free from our partner