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Self-Directed IRAs Gaining Popularity for Real Estate Investors in North Texas

Experts say that paying attention to the details is the safest and best bet to use the lesser-known investment resource

While the single-family real estate market in North Texas continues to experience limited volatility, real estate investors are continuing to look for creative solutions to expand their portfolios, even when the interest rates and lending markets are tight.

“When interest rates are on the rise, landlords have more opportunities with tenancy as the buying pool tightens up due to either people no longer qualifying at higher rates for what suits their taste or a general willingness to hold out until the market loosens up for them. However, the opportunities for landlords to acquire more properties are also limited by interest rates. Using self-directed IRAS as a funding source is gaining popularity among my clients, but I always suggest that they particular attention to the details to make sure that it is a successful venture from the get-go,” says Jennifer Vokolek, a realtor with Realtor 4
Life DFW at RE/MAX DFW Associates in Frisco, Texas.

A self-directed individual retirement account (SDIRA) is a type of individual retirement account (IRA) that can hold various alternative investments normally prohibited from regular IRAs. In addition to the standard investments (stocks, bonds, cash, money market funds, and mutual funds), an investor can hold assets that aren’t typically part of a retirement portfolio. For example, one can buy investment real estate to hold in your SDIRA account.

“This type of account allows for diversification from cattle to crypto under one umbrella,” shares Nicole P Bacot, CISP and IRA Specialist with Quest Trust Company. “The account owner can use their education in what they’re an expert to invest with the total control to pick.”

“Like any good investment opportunity, there are rules to know so that you don’t get in trouble with the taxman,” says Vokolek.

Focusing specifically on those that pertain to real estate:

  • Prohibited Transactions: You (the IRA holder) can’t sell, lease, or exchange the property with or to any disqualified person. Disqualified persons include the IRA holder’s spouse, lineal descendants/ascendants or their spouses, any heirs or beneficiaries of the IRA, investment managers, any entity that you have a 50% stake in, and the account trustees).
  • Property Management: You can self-manage the property; however, you can’t directly pay for any materials, supplies, or labor for maintenance or repair of the property nor can any disqualified person be paid to manage, care or repair the property. You nor any disqualified person may live on the property.
  • Property Payments: You can’t directly pay for any service, care of the property, or repay any loans. All billing filters through or to the trustee including rental payments. No payments can be made from a check or bank account of any disqualified person.

“One way to obtain that first property if your account balance isn’t quite to the number needed or to expand the actual number of ownerships is by using both the SDIRA and a non-recourse loan combo to purchase,” explains Vokolek.

Non-recourse finance is a type of commercial lending that entitles the lender to repay only from the profits of the project the loan is funding and not from any other assets of the borrower. Such loans are generally secured by collateral.

Bacot points out, “To some, this will seem not just out of the box but down-right risky with all they about the real estate market. To those, this may not be for you … consider this: with each payment made by the tenant your SDIRA is being replenished AND you have the asset in ownership. Think of it as a double dip in value growth. Plus, at age 59.5, their rent into the account can be distributed back as income.”

Using real estate to build retirement wealth is not unheard of, however, using retirement savings to build a real estate portfolio is.

“North Texas real estate investors have discovered this creative way to make the market work for them, opening up a world of investment opportunities in an unpredictable market,” concludes Vokolek.