With ultra low interest rates and falling prices, the terms for buying real estate have never been so attractive in the Kansas City market. So what opportunities exist if you are not looking to buy a home for yourself? Tougher standards by mortgage lenders has created an over supply of renters and a shortage of quality rental properties. Investing in rental properties might be a great option for you to build your wealth and diversify your investment portfolio at the same time, so that you are not completely reliant upon the ups and downs of the stock market.
There is a growing trend of buying real estate via a self-directed IRA. There are both benefits and restrictions to utilizing an IRA. One of the biggest benefits is that it can reduce tax liabilities in comparison to other investment profits. For instance, if you purchase a rental property using your self-directed IRA fund, the rent money can go back to the fund with taxes deferred. The same applies if you sell a home purchased with IRA funds and put the proceeds back into the fund.
There are several companies that can serve as a custodian for your IRA. The law requires you to have a custodian and this is the entity that conducts transactions at your direction. For instance, the custodian disperses all checks associated with your purchases and expenses. Custodial companies charge various fees for their services and it is important to compare these in deciding the best company to place your IRA.
The optimal way to utilize a self-directed IRA for purchasing real estate is to fund the property with cash rather than securing a loan. Many investors roll over 401K plans after leaving an employer into an IRA so that they have sufficient funds to purchase property. Investors can combine their IRAs with partners’ IRAs to purchase property as well. If a mortgage is needed, the lending standards are higher than a traditional home loan. The standard is 30 percent down and a higher interest rate will apply.
There are several restrictions on self-directed IRAs that include the following:
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The owner cannot live in the purchased property, and neither can a relative.
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The owner cannot directly pay for expenses associated with the property, including repairs, renovations. All payments must come from the fund custodian.
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If you have insufficient funds to cover the purchase or any other costs associated with the property, financial penalties will be incurred.
Please contact the Russell Home Team at 913-681-1383 if you are interested in more information regarding self-directed IRAs or if you are ready to begin investing in property.
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