Renovating Properties in Your Self Directed IRA

Renovating Properties in Your Self Directed IRA

Originally, most people who opted to invest in real estate would choose a property which was already being rented and producing money. However, today with the influx of cheap houses on the market there has been an increased interest in people using their self-directed IRA to buy and renovate properties. All expenses which concern your property, including renovations, are paid for using your IRA. Or if your account balance is low, an IRA mortgage can be obtained to finance the purchase. After the renovation, the purchased property can then either be rented out or put back onto the market to be sold.

If you have a truly self-directed IRA, or checkbook IRA, then renovation of your property is easier. This was made possible through the Limited Liability Company which is owned by the IRA and over which you then have direct power. Subsequently, you have control over your checkbook and, therefore, can make any changes you want, whenever you want. This also means that you do not have to contend with transaction fees each time you wish to undertake a new piece of renovation. However, you are still obliged to follow IRA rules. Even though you are responsible for the checkbook, as opposed to the custodian, you must ensure that no transactions directly or indirectly benefit you. For example, you cannot use free labor to perform renovations. Nor can you use your own company or that belonging to a family member to undertake any work on the property.

Your IRA must be able to finance both the property and any renovation costs. If you lack the capital, however, a common way to finance the transaction is with an IRA mortgage. This type of mortgage is a non recourse loan that is secured only by the collateral--in this case, real estate. With this form of loan, if you were to become bankrupt your creditor could take your property, but cannot ask for any further money, even if the value of the property does not cover the full amount of the loan. Because the IRA mortgage is non recourse, you do not have any personal liability with regards to the money you borrow.

One advantage of an IRA mortgage is that you are left with more money to invest in real estate. For example, you may decide to purchase a house worth $150,000, but find that you also need $50,000 for renovations. You can take the money for the house from your IRA then procure the renovation costs from an IRA mortgage. This is a great way to leverage your IRA. This is because you do not pay for the whole cost of the property, but any profit you make goes directly to your IRA. In summation, an IRA mortgage enables you to renovate a piece of property, increase its value and then profit from it. If you decide to sell your renovated property, all proceeds made through it return, tax free, into your self-directed IRA. If, instead, you choose to rent your property, then all payments are made to your IRA and deposited directly into your account.

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