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Try Investing Through a Self-Directed IRA

Individuals who are starting out as real estate investors are often concerned about lack of investment capital. With relatively limited funds, they don’t want to plunk down the whole amount on one property, or they’re worried about having enough money in reserves to take care of all the expenses related to the investment property.

With a self-directed IRA, there are several ways to invest in real estate without the backing of a Rockefeller. In fact, for as little as $5000 in your self-directed retirement plan, you could invest in the following real estate-related assets:

Private REITs, real estate partnerships

A real estate investment trust (REIT) or real estate partnerships provide passive income (similar to a stock) and the financial advantages of directly investing into income-producing properties. Private partnership structures enable you to invest your money with full-time real estate industry professionals, and you’ll earn your ROI based on your percentage of participation. Find a solid, proven management team or operator with a successful investment record, who provides full transparency into all financial activity, access to funds, and underlying assets related to the investments. (You can make stock investments in publicly traded REITs and real estate partnerships.)

Lease options

A lease option enables you to control property with little upfront money—and you can choose to purchase it later at a predetermined price. However, be prepared to carry the monthly holding costs, the ability to carry the costs if you don’t have a rent-paying tenant, and the need to save for the future purchase option. You must also have enough cash on hand in the self-directed plan to cover maintenance, utilities and other expenses, since all income and expenses on any asset must flow through the self-directed IRA.

Tax liens.

A lien is created against a home in the event the property owner does not pay real estate taxes on time. This becomes debt that accrues interest, which must be paid off when owner refinances or sells the property. Tax liens are bid on at real estate auctions and can be a profitable investment if done right. As with all self-directed investments, do your research, thoroughly understand the investment, and make sure you understand the possible downsides (flooded market, fraud, lack of lien diversity).

Wholesaling houses

Wholesaling may involve flipping real estate contracts or wholesaling properties with quick closings using transactional funding. This type of investing takes some hustle to be profitable but you can get into this with a small amount of money up front for operational and educational costs, deposits, buyers lists, and more.

As you build up your self-directed retirement plan, you can consider more sizeable investments, including multi-family housing, farmland, warehouses, vacation properties and other real estate assets. Just remember that any kind of investment requires that you, as the investor, conduct your due diligence on the actual asset or regarding any operator, REIT, seller-landlord or other individual or entity with whom you are investing.

Read more about self-directed real estate IRAs or download a real estate starter kit that takes you through all the necessary steps to make an investment once you’ve opened your account. As always, our specialized team is here to answer your questions. Contact Next Generation at 1.888.857.8058 or NewAccounts@NextGenerationTrust.com.