What Is a Self-Directed IRA?

The term “self-directed” means that alternative investments are accepted or offered by the IRA custodian. An IRA custodian is the financial institution responsible for record-keeping and IRS reporting requirements. The “self”-directed aspect kicks in at the end of each year when you must accurately valuate your investment and report the value to your IRA custodian.

How Can it be Used to Buy Real Estate?

The first step when using an IRA is to set up a self-directed IRA. Companies can provide individual investors with the ability to set up self-directed retirement accounts. Due to the complex nature of self-directed IRAs, it is helpful to have a custodian that will help provide some much-needed guidance as you navigate the IRS tax code.

Some IRA custodians have more complicated fee structures than others. Therefore, it is important to do your homework and examine all of the potential fees and expenses that will impact the overall return on your investment. In many cases, it is advisable also to establish a limited liability company (LLC) or other entity to hold the investment assets.

With self-directed IRAs, you must generate sufficient cash flow to cover all maintenance and repair costs to avoid needing to add cash each year.