How To Buy An Investment Property With Your IRA, Retirement Funds

Are you ready to become a real estate investor and purchase your first rental unit…but, your money is tied up in your retirement accounts?

No worries, the self directed IRA to the rescue!

Using a self directed IRA you can buy something other than stocks, bonds and mutual funds, REAL ESTATE! Raw land, houses, condos, commercial properties and even mortgage notes — you can use an IRA to broaden your portfolio.

While home prices still haven't hit bottom nationally, demand is starting to grow, especially for distressed properties on the low end of the market.

Large scale investors, like hedge funds and other private equity firms are rushing in with cash on hand, and that gives them the upper hand in competition for these properties.

So how does an individual investor, without extra cash lying around, get in? 

Retirement funds!

It may sound risky, but with strong rental demand and relatively little supply of single-family homes, it could be far less risky than the stock market. That's because your gains are largely coming from rental income, not home appreciation, which is why this works so well in today's market.

The catch is that you have to do it through what's known as a self-directed IRA. Not a lot of firms do this, but some do: Guidant Financial, Sterling Trust, IRA Resources and PENSCO are a few. The firms act as custodian of your self-directed IRA, holding the property and dealing with all associated expenses.

“I’m generating close to $80,000 on $140,000 investment after expenses, it’s pretty much a no brainer,” says Pregel, who used a self-directed IRA.

This type of IRA does carry restrictions. The property must be used purely as an investment, with all the income going directly back into the IRA. The owner may not occupy the home or even use it as a vacation property. The owner can manage the property, doing maintenance and supervising the renting, or can hire a rental management company which would be paid for out of the IRA.

It is also possible to get a mortgage through the IRA, but it has to be what's called a non-recourse loan.

"It’s a loan that can only seek the property, the collateral, as its sole recovery, if the property goes into default, so you as an individual can’t sign up to guarantee the loan," says Rodriques. The IRA is not just purchasing the property, but it is responsible for liabilities and payments.

All this may sound complicated, but some say it's worth the extra time and energy. With a rising number of foreclosed properties coming to the market this spring, and banks far more willing to do short sales on troubled loans, opportunities are everywhere!

By: Diana Olick
CNBC Real Estate Reporter