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Start Using Your IRA to Invest in Foreign Real Estate

use your ira

Carolin Azuarq

So, how has your IRA been performing over the past few years?  If you’re like most, you’ve probably seen minimal growth or even stagnant returns at best.  At worst, your retirement account may have lost money and/or been eaten alive by broker fees.

These difficult economic times have not been kind to what was once our most promising option for saving for retirement and reducing our taxable income.  Surely, Americans are telling themselves, there must be a better way.

Well, here’s good news. There’s another option.  Although it requires a bit more involvement and initiative on your part.

How To Take Control of Your Own Financial Future

Rather than relying on the standard options that have failed them in recent years, many Americans are taking control of their own retirement savings.  And with the subpar performance of traditional domestic investments, many are also looking overseas at emerging real estate markets, such as the many opportunities available in Central America.

Bonus: Take your future into your own hands. Learn how to invest abroad. Click here to get access to the free, 55 page report.

Investing in offshore real estate is a far cry from the boring Option A, B, or C type investment choices most custodians offer.  It’s exciting.  It’s outside the box.  It gives you complete freedom over your funds and your future.  And it offers incredible investment potential that no traditional option could ever rival.

Better yet, it’s all perfectly legal.

Where Traditional IRAs Went Wrong

Individual Retirement Accounts (IRAs) were first introduced in 1974.  Through these accounts, retirement funds were handed over to a custodian, a broker who would manage the account and invest the funds in various stocks, bonds, and mutual funds in hopes of increasing the value of the IRA.

The account would grow either tax-deferred or tax-free (depending on the type of IRA) until the individual reached retirement age, at which point he or she could begin taking distributions without facing a penalty.

Having Someone Else Manage Your Funds Isn’t Safe Anymore

While not the most exciting investment concept, there was at least an element of safety involved.  The account owner was protected from the responsibility of any decision-making, IRS reporting, or other administrative duties associated with the account, tasks that may be outside the comfort level of many Americans earning a middle class income in a field other than the financial industry.

But where there’s little risk, there’s often little reward. Many of these accounts have suffered at the hands of high fees, limited investment options, flat returns, and custodians who often based their decisions more on what brought in the highest commissions, not what was truly best for their clients.

Meet the Self-Directed IRA

Like you, many Americans have grown tired of seeing their hard-earned money underperform, particularly as retirement looms ever closer.  As a result, many are turning to non-traditional methods for saving for retirement.  And, thanks to the Self-Directed IRA (which now accounts for roughly 2% of all retirement accounts), they can still do so on a tax-deferred or tax-free basis.

The main difference between a traditional and a self-directed IRA lies within the duties of the custodian.  Rather than one who makes the decisions concerning the investment of the funds in the account, the custodian or trustee of a self-directed IRA is merely responsible for holding and distributing the assets, filing the required documents with the IRS, and little else.

The person responsible for the investment decisions in a self-directed IRA account is…well, um…YOU.  As the owner of a self-directed IRA, you hold the checkbook.  You write the checks.  You have the freedom and flexibility to invest your funds as you see fit, with no one looking over your shoulder.

Don’t Let the Self-Directed Option Scare You

To quote Voltaire, with great power comes great responsibility.  So, if you’re thinking the self-directed IRA option sounds a bit intimidating, well then you’re quite right. But it really is a manageable risk.  I’ll explain more later about how you can minimize the risks associated with controlling your own retirement account, particularly when it comes to the variety of investment options available to you.

Side 78

Side 78

Freedom: The Biggest Benefit to Self-Directed IRAs

That variety is perhaps an even bigger benefit to the self-directed IRA.  With traditional IRAs, investment option are generally limited to stocks, bonds, and mutual funds.  Account owners generally aren’t permitted to invest in things like real estate, business enterprises, or–heaven forbid–foreign CD’s or other offshore investments.

Note: I should clarify here that all of the above are perfectly legal and permitted by the IRS.  What prevents these investments from being allowed or recommended are the custodians themselves, not any government regulation. Keep reading to understand why that’s the case.

Why Brokers Can’t Offer Non-Traditional Options

With a traditional IRA, your funds are managed by an SEC-licensed investment advisor who has to answer as to what happened if your investments tank.  He’s not going to recommend or permit an investment into a non-traditional option where he’s not capable of performing the necessary due diligence, lest he risk losing his livelihood.

That’s not to say non-traditional options are too risky in general.  It’s just that the fees your broker is getting from your account aren’t enough to justify him spending the time necessary to research that type of investment, nor would his management approve such a recommendation if he were willing to propose it.

That’s why it’s up to you.  As the decision-maker for your account, you can invest in almost anything you desire: mobile homes, storage units, gold bullion, small businesses, land, homes, and more.

There are a few things that aren’t allowed, such as life insurance and collectibles (e.g. stamps, coins, and artwork).  But for the most part, your options are virtually unlimited.

Why Real Estate Is a Great Option for Self-Directed IRAs

While many investors are still a bit leery of investing in real estate, due to the devastating demise of the housing market in recent years, the fact remains that real estate is still a great long-term investment.

It’s totally permissible as a holding for IRAs, and it isn’t limited only to domestic properties.  It can also include raw land, farm land, commercial properties, property renovations, and rental properties, both in country and abroad.

The reason many investors are turning to the latter option is due to the incredible values available overseas.  With lower costs for land and houses, international real estate is an excellent option for those who want to maximize their investment return.  Foreign properties also have far fewer restrictions and regulations on everything from zoning issues to paint colors.

Think Long-Term

And, while you can’t live in the home until you reach the appropriate age to begin receiving distributions from your account, many Americans are choosing to purchase rental properties overseas that will one day become their very own retirement homes.

Then, upon reaching retirement age they can take advantage of their own tropical dream home, purchased tax-deferred or even tax-free, where they can also enjoy other benefits like an ideal climate and lower cost of living.

Invest in Something You Can Really Feel a Part Of

If freedom is the biggest benefit of owning a self-directed IRA, then involvement would have to be one of my favorite perks of being an international real estate investor.

When purchasing land overseas, you can buy raw land in some remote location and just sit on it for a few decades hoping it’ll appreciate.  But that’s not what I recommend.  It’s incredibly difficult as a foreigner, for one thing.  For another, it’s just too risky a move.

Partner with a Trusted Professional

By investing in projects headed by skilled developers, you gain several important benefits.  For one, you can benefit from their knowledge of the area and the market.

Secondly, you can actually build relationships with both the developers and the locals, as you work together towards a common vision.  You also have the ability to influence the community or the development that you’ve invested in and sit back and watch its continued growth and success.

A Different Kind of Proposal Meeting

Take for example, Boca Chica Island, the latest Adventure Colony that my business partner and I have developed.  Those who invest with us in this project aren’t just buying a piece of land in a place they’ll never see.

We encourage our prospective buyers to spend a few days experiencing the island–our treat.  We want them to get to know us and understand our vision for the project.

We won’t pass around a prospectus.  But we can tell you all about the years of research that we’ve poured into analyzing the market and carefully selecting the areas we choose for our developments.  

Or you can download our free investment ebook, Pay Dirt, if you want to learn more about our strategy for investing in land in Central America.

Even more importantly, our prospective clients have each of our cell phone numbers. When they call, we answer.  How many of your mutual fund managers can say that?  When you have control of your IRA, you can choose where you invest and go with people you trust.

Viva Tropical

Viva Tropical

So How Does All This Work?

There are understandably a few extra steps involved when choosing the self-directed IRA option and using those funds to purchase real estate.  Here’s the process in a nutshell.

  1. Thoroughly research your options before making any decision.  Talk to an accountant, an attorney, and a real estate agent to get a good handle on the whole picture.  Make sure you understand the tax ramifications, as well as the rules for the type of IRA you have (e.g. Simple, Roth, Traditional, SEP, etc.).  Take into consideration any applicable contribution limits or penalties that may apply.

  2. Choose an administrator who has experience handling self-directed IRAs.  These won’t be the typical brokerage firms you’re used to hearing about, as there are relatively few who offer this service.  Pensco and Equity Trust are two examples.  Do your homework.  Gauge their experience with IRA-related real estate transactions, and ask for references.

  3. Once you’ve selected a custodian, move your account from your current institution to your new self-directed IRA.  This will be handled as a roll-over and can take up to a few weeks to process.

  4. Solicit the services of a local attorney in the country where you plan to purchase property.  Again, we recommend doing thorough research before selecting this individual.  Make sure he or she has experience with these types of transactions.

  5. Select the property you wish to purchase.  This is the fun part!  Keep in mind your goals for the property, whether you plan to use it solely for growing your retirement account or whether you one day hope to enjoy it for personal use, and tailor your search accordingly. A qualified local real estate professional can help to simplify this process and work with you and your attorney to keep the hassles to a minimum.

  6. Sign a contract for purchase and send it to the custodian for review. Once approved, the custodian can release the funds to the title company who’s handling the transaction.

  7. Transfer ownership of the property.  The details of this step could vary greatly depending on the details of your particular situation.  If purchasing the property entirely with funds from your IRA, the property would be titled in the name of the account. You could also purchase it partially with personal assets and the remainder with funds from the account.  However, keep in mind that the ownership percentages would also need to be reflected in the reinvesting of any income as well as the paying of any expenditures such as repairs.

  8. Hire a property manager to handle the day-to-day dealings associated with the property, particularly if it’s a rental.  Since there are so many restrictions on how involved the account owner himself can be with the property, it’s best to involve a third party as a buffer.

Some Important Considerations for IRA Real Estate Transactions

Just as there are a number of extra steps involved with investing in real estate using a self-directed IRA, there are also a lot of concerns that are unique to these types of transactions.

  • IRAs are individual accounts.  As a result, involving your spouse or other family member would require a joint ownership between your individual retirement account and the other entity(ies) of your choice.  The good news is you can literally own the property with as many other entities as you want.

  • You can’t always convert an IRA through your current employer into a self-directed IRA.  While it’s always possible with a prior employer, check with your HR department to see what your options are at your present company.

  • Traditional mortgages aren’t available for real estate in an IRA.  If you don’t have the money to buy the property outright you’ll need to consider a partnership or other joint arrangement.  If you must borrow money, it will be a non-recourse loan using the property itself as collateral.  These are often difficult to find and have higher interest rates.  In addition, any income earned on the debt-financed percentage of the property is subject to Unrelated Business Income Tax (UBIT), though there are perfectly legal techniques (UBIT Blocker Corporations) for mitigating these taxes.

  • You will not be able to deduct the depreciation on real estate in an IRA.  While this is typically a write-off for rental properties, the deduction does not apply in this case.  However, any rent being collected is also not taxed until distributions begin, so the two may offset.

  • All repairs, taxes, and other fees must be paid from the IRA.  This includes everything from property taxes to homeowners’ dues.  As a result, you’ll need enough liquid funds in the account to cover any costs.  While most IRAs allow a maximum annual contribution (generally $5,000), it might not always be enough to cover any expenses.  You also can’t do your own repairs, as your “sweat equity” is considered a contribution.

  • Likewise, all income generated by the property must also remain in the account. This includes rental income, as well as capital gains from the sale of a property.  This money, along with any additional contributions, stays there, tax-deferred (or tax-free if it’s a Roth), until you reach retirement age. This is especially beneficial if you anticipate being in a lower tax bracket at retirement.

  • Neither you nor your family can benefit in any way from the property owned by the IRA.  For example if you let your daughter live o’in the property or if you get rental income from it directly, you could invalidate the status of your IRA account and become subject to penalties. Likewise you yourself can’t live in the property, lest the entire value be deemed as a distribution.  Upon reaching age 59 ½ (or earlier with a 72T election), you may begin taking annual distributions. The property could subsequently be retitled each year to reflect the new ownership percentage.

  • You alone are responsible for maintaining adequate records to document your use of funds and investment returns.  Your custodian will complete an account valuation and report the necessary information to the IRS.  However, as the one who holds the checkbook, you carry the burden of proving where any money went.

  • Beware of scammers.  Many people grow desperate as they approach retirement age and start to panic because they don’t have enough money saved. This makes them more likely to invest in schemes they know little about. This, combined with the fact that there’s little oversight of self-directed IRAs with alternative investments, makes them ideal vehicles for con artists selling bogus investments.  Investigate all potential deals carefully, especially if they sound too good to be true.

You’re One Step Closer to Controlling Your Future

As you can see, using a self-directed IRA to purchase real estate abroad requires a great deal more know-how than simply reading over a quarterly account statement from your current custodian.  The risks are much greater.  But the rewards can be as well.

Just think of the possibilities.  You could buy a bungalow in a popular tourist destination that could generate rental income until you’re able to retire to it permanently.  Or how about a secluded lot on a private island where you’ll one day build your dream home?

Your options are limited only by your imagination, and the red tape at your brokerage firm.  What are you waiting for?  Free your IRA from the bondage of traditional thinking, and take financial control of your own future.

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2 thoughts on “Start Using Your IRA to Invest in Foreign Real Estate

  1. 1

    The best article I’ve read here !
    Thank you.

  2. 2

    Seeking information on how to use my self directed IRA at age 66

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