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IRA Real Estate Investing, It’s Easy!

Author: Haydn Zeis, February 14, 2020

No one tells you that converting an Individual Retirement Account (IRA) into a Self-Directed IRA (SDIRA), to invest in real estate is easy, but it is! You just need to be careful to follow the rules and understand how money can flow in and out of the investment vehicle. Investors often use SDIRAs when they’re seeking to raise their returns and diversify their investment portfolio with real estate. Typically, brand name financial institutions don’t offer SDIRAs, they offer Self-Managed IRAs (SMIRAs), which are quite different, and the names are often used interchangeably, which is wrong.

The goal of this article is to define a SDIRA and show you how money can move in and out of it.

Self-Directed IRA Defined

A SDIRA is a type of IRA you can use to invest in alternative investments; it’s controlled by you, the investor, and it allows more freedom to choose where your money is invested. Investing with a SDIRA requires you to place your capital with a third-party custodian who is responsible for putting the capital where the investor wants it to go. Real estate is the most common asset class for SDIRAs, but other asset classes such as precious metals and speculative business ventures can be invested in as well.

SDIRA gets confused with SMIRA. SMIRA has limited investment options. Although, the investor may choose where they want their capital to be placed, they’re limited to traditional IRA categories such has stocks, bonds, mutual funds, etc.

The Process

Below you’ll see an infographic; its purpose is to help you visualize how a SDIRA works and how the money flows within it.

Think of a SDIRA as a town. You’re the architect, you design it to be self-sustaining by initially funding it in exactly the way you want and elect a Mayor who oversees the town as the third-party custodian. Then you leave and let the town grow! There are a series of roads into and out of town:

One-Way Streets Into Town

Rollover Avenue: This is a one-way street into town, where money can come in by rolling over an existing 401K or other retirement account.

Income Deferral Boulevard: This street allows personal income to flow one-way into the town, tax deferred

Rental Income Road: This is my favorite road! Rental income comes into the town tax deferred! SDIRA rental income cannot be commingled with personal funds.

Two-Way Street Into and Out of Town

Income Property Circle: This road is the only two-way street. When you built the town, you initially funded it from Rollover Ave. With these funds, you direct Mayor Custodian to purchase your desired real estate investment, like a share in a real estate syndication or a variety of other properties, which come back to town as an asset titled to the SDIRA. If the asset is ever sold, the proceeds must come back to town to be reinvested.

One-Way Streets Out of Town

Rental Expense Way: It’s important to know that you cannot use any money outside the town to pay for rental property expenses. Once Mayor Custodian (or a property manager hired by the Custodian) has the cash from rents, they’ll use Rental Expense Way to pay contractors or other relevant parties for rental expenses.

Distribution Lane (Sometimes called Required Minimum Distribution Lane): Think of this road as being under construction until you turn 59 ½. Once you do, you can start reaping the rewards of your investment.


People who want to get higher returns or diversify their portfolio can use retirement money to invest in alternative investments of their choice. To do so, they need to find an investment opportunity, establish a self-directed IRA with a third-party custodian, give them the funds, and tell the custodian where to invest the funds. Once the IRA investment is set up, you can’t touch the money without penalty until age 59 ½ . Remember, you’re not making the investment personally, your IRA is the investor. You must treat yourself and your IRA as two separate entities.

Haydn Zeis - Principal

Lonicera Management, LLC

February 14, 2020

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