Question #1 – Can you use IRA money to buy real estate of all kinds or are you limited to certain investment types?Except for a few prohibited transactions, you can use your self-directed retirement account to invest in just about anything. There are certain steps that you need to take, in order to make this work for you. Here’s a brief look at the necessary steps.First, you need a self-directed account. Most companies do not offer the self-directed approach. They may allow you to select from a variety of different stocks, money markets, mutual funds, etc. But, they do not allow you to go outside of those traditional investment selections. It’s a shame, too, because with today’s market, people are risking their financial future by sticking with the “tried and true”.You should compare the options offered by the custodian, as well as the fees that they charge. You want a large company, with plenty of experience that charges a reasonable annual fee and a small fee for setting up the account. You want to avoid companies that charge per-transaction fees. They can really add up. Once you’ve found the right custodian, there are a few more important questions to answer.Question #2 – Can you use IRA money to buy real estate currently owned by you or a close family member?Although this is a commonly asked question, the answer is “no”. It would be considered self-dealing or an indirect benefit and it would disqualify the investment as tax-free or tax-deferred. You could be penalized the entire purchase price. It’s best to keep your deals at “arms length”, so that you are not “personally” involved in the transaction.Question #3 – Can you use IRA money to buy real estate and then use the property to earn rental income for the account?Yes! This is one of the most popular choices. The account will purchase the property and pay all fees associated with the purchase; closing costs, necessary repairs, maintenance payroll, etc.All of the income must be paid directly to the account. Tenants should be advised concerning “whom” to make the check payable to. It would read something like this; Pay to the order of Company Custodian FBO (for the benefit of) Joe Smith’s individual retirement account.Question # 4 – Can you use IRA money to buy real estate if you have no experience in the housing market?Yes, you can. You can either learn by trial and error, as I did, or you can get involved with a company that makes it easier for you, as I am now.Right after you rollover into a self-directed account is one of the best times to get started. Typically, your account has more cash at that time, so liquidating stocks and other assets is unnecessary. Today would not be a good time to liquidate stocks.Question #5 – Can you use IRA money to buy real estate and earn a higher rate of return?The answer is definitely, probably twice as much, as long as you make the right choices. Given today’s market with all the foreclosures there may never be an opportunity like the one that is now presenting itself for wealth accumulation.
I have had several conversations with Canadians this last year that are dreaming of heading south to California and other states to both beat the cold and to invest in real estate. The strong Canadian dollar (or should we say weak U.S. dollar) combined with a hurting housing market in the U.S. is providing Canadians with arguably as good of a time as any to buy real estate in the U.S. in the last 30 years.If you are looking to move, invest, or purchase a second home, you should first have a basic grasp of the key differences between buying real estate in Canada versus buying real estate in the U.S.Regarding Taxes: When it comes to taxes I will never profess to be an expert. This is too critical and the best is to contact a CPA (Certified Public Accountant) to talk about your situation and issues that you might need to look out for. Here in Santa Barbara, CA., I would be happy to recommend my father, Mike Schmidtchen at 805-963-0881. He has been a local CPA for roughly 30 years.With that said, here for example are 2 key points that might be different than in Canada.1) Here in the U.S. 1031 exchanges allow for capital gains taxes to be deferred from an investment property and rolled into another investment property several times over. From what I understand, this apparently is very different in Canada where this option is not allowed.2) For a primary residence here in California, you are able to right down the interest paid on your mortgage as well as property taxes.Regarding Lending: With the crisis that has gone on in the last 12+ months here in the U.S., lending practices are changing weekly. So if you are looking to finance a property here in California, check back home in Canada as well as with a local lender in the U.S. to see about the options you may have. The most recent that I have heard is that you would need at least 30% for a down payment and proven liquid funds for 6-12 months that would cover your payments.Regarding Escrow: After you have talked with experts on taxes and lending (or if you are in the fortunate position to pay cash) and you have ultimately decided to look into a real estate purchase here in California, then here are some basics about the escrow process.1) Escrow is simply the term we used to describe the time from when your purchase offer has been accepted to the time that you close sale on the property. Here in the Santa Barbara, CA. area, a “normal escrow” is around 30-45 days.2) When writing up a purchase contract, you will need proof of funds (bank statement, letter from a lender etc.) that covers your down payment as well as earnest money (roughly 3% of the purchase price). Your Realtor will then provide you with the paperwork that is needed to write the offer.3) Upon acceptance of your offer, your earnest money is cashed and deposited into a neutral 3rd party escrow company within 3 business days. So this is money that you will readily need available.4) As a buyer, you have 2 major contingencies, the loan contingency and the physical inspections contingency. Generally these last 14-21 days from acceptance of your offer. During this time you will receive numerous disclosures about the property from the seller as well as other general disclosures. Also, during this time you will do a home inspection of the property and then based on the results of this and the disclosures you will hire experts to look into any negative issues/concerns about the property, go over potential requests for repairs, etc. Ultimately, this is the time to negotiate if needed and make sure you feel comfortable about the home you are buying. If you do not feel comfortable or can not reach terms with the seller under the contingency period, you can cancel escrow and your earnest money is returned to you.5) Upon releasing contingencies, you will sign loan documents (if needed) generally within 4-6 days before the close of escrow. Money from you for the down payment or the entire purchase is generally needed within 36-48 hours before the close of escrow date.Regarding Costs: As a buyer here in California, the costs you will incur are for escrow fees, lending fees, home inspection fees etc. There are no fees to work with a Realtor for the purchase of your property. Commissions to Realtors are 99% of the time paid for by the seller. For example, with a purchase price for a property of $1 Million, you are looking at estimated costs of $2300-$3200 at the time of close.Regarding Property Taxes: Here in California, Proposition 13 has set property taxes as 1.02% of the purchase price of your property. So again with a purchase of $ 1 Million, you are looking at roughly $10,200 for the year which is again a tax right down. Property taxes can be paid in full once a year or in 2 installments, due December 10th and April 10th.