Investing With Your IRA Money: What is an SDIRA and How Do I Use It for Investing in Real Estate?

When thinking about passively investing in real estate, many get stopped by the thought that they don’t have enough money. But there are some interesting places to explore for investment capital beyond your personal savings account.  One “hidden” source of capital that you may not discovered is your IRA or a 401k from a past employer.

Did you know you could use your IRA money to invest in real estate?  It’s an oft-overlooked source of investment capital, and savvy investors have been using their retirement funds to build wealth for decades. If you had a 401k account with a former employer or currently have any type of IRA, you are probably eligible to roll your assets into a Self-Directed IRA, or “SDIRA”. An SDIRA is an individual retirement account that gives you complete control over your investment choices, allowing you to invest in alternative asset classes like real estate or to make private loans, generating tax-deferred income or gains.  We believe there are a number of advantages to setting up an SDIRA and the few drawbacks, which we’ll break down for you below.

We’ll also share with you a genius strategy for growing your wealth based upon a simple formula discovered by Albert Einstein: The Rule of 72. We’ll show you how to turn a $100K investment into $3.2 Million!

Advantages of Creating and Using An SDIRA for Real Estate Investing:

Besides the obvious advantage of having access to larger pools of investment capital without dipping into your personal savings, there are several other substantial benefits:

• Higher Return Potential With Real Estate – By deploying your IRA capital into real estate, you can potentially enjoy higher returns than you would in a conservative stock market position that characterizes most IRAs. 
• Diversification – Expand and diversify your investment opportunities beyond just the stock market into real estate: an asset class that is collateralized with tangible value, weathers economic recessions better and gains value in the long run.
• Tax – Free or Tax Deferred Investing – With a traditional IRA investment you will not have to pay taxes on contributions or earnings until you start taking distribution in retirement or with a Roth IRA. Your earnings appreciate tax-free.
• Compounding Interest – Allows you to reinvest the interest you earned in your SDIRA, tax-free and thus continue earning even more money and repeating the process.  (see more below about how this works in reference to Einstein’s “Rule of 72”).
• No Restrictions –  The IRS does not restrict the type of real estates that may be invested in or held.
• Creditor Protection – You have strong creditor protection as most states shield an IRA from creditors outside of bankruptcy.

Disadvantages Of An SDIRA:

• Your SDIRA Cannot Directly Benefit You Today – You cannot buy property that you intend to live in or use as a vacation home. That said, at 59.5 years of age, these restrictions lift.
• Delayed Access – Like your normal IRA or 401K, you cannot access the money for day-to-day living until you reach 59.5 years of age. If you do, there is a sizable tax penalty.
• The “Prohibited Transaction Rules”  – Restrict you from loaning money to ‘lineal’ relatives and business partners. These include your spouse, children, parents or grandparents, etc. – they are all disqualified and cannot participate in your deals or lend you money.
• Expenses – An SDIRA account is slightly more expensive to administer relative to a traditional IRA account.

Einstein’s Rule of 72 – Grow Your Capital Like A Genius

If you want to really build significant wealth over time, and ensure a life of financial comfort for you and your family, invest your money using a time-tested law discovered by the great Albert Einstein:

              The Simple Formula:   72/Interest Rate = # of years to double your investment

Here’s an example of how this technique and formula works.

First you need to determine the interest rate that you will likely earn.  For this example, we’ll say you can reliably earn 10%, which is the low end of what is achievable investing in real estate syndications these days (If you want to learn more, read our article “How Much Can I Earn Investing in Syndications”). If  you take the number 72, and divide it by 10, you get 7.2. This is the number of years it will take you to double your money.  So, if you invest $100,000 @10% interest, after 1 year you get back $110,000, then immediately reinvest the $110,000 back into the next deal @10% – for another year, and continue the process, 7.2 years from now you’ll have $200,000.

Let’s take this example a step further. Let’s say at 30 years of age you have $100,000 in an IRA retirement account that you convert into an SDIRA for investment.  You invest it in a conservative real estate syndication earning 10% and keep investing it in similar deals at that rate over time.  In 7 years you’ll have $200K, in 14 years you’ll have $400K, in 21 years you’ll have $800K, in 28 years you’ll have $1.6 Million and in 35 years, at the retirement age of 65, you would have $3.2 Million! All without investing another cent beyond the initial $100K principal you put in and its earnings. 

Without doing a single hour of more work in your day job, you can invest your money and grow your retirement savings significantly. Thanks Einstein!

How Can I Set Up An SDIRA for Investment?

There are two options for opening an SDIRA:  you can place the money through a custodian company that specializes in SDIRAs or you can open up a checkbook IRA account and use that to invest.  Most traditional brokerages do not offer SDIRAs, so you will have to direct the funds from your current account to an IRA custodian that specializes in self-directed accounts. Which account type is right for you depends on your personal preference. We encourage you to do your research before deciding which is the best option.

The SDIRA Custodian we typically suggest that our investors use is IRAR Resources, and their website contains a lot of valuable information to help you get started:  https://www.iraresources.com/. 

If you are interested in learning more about this option or how you could invest some of your IRA money with Akras Capital, please feel free to reach out by clicking the Get Started button below.