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Using Retirement Money for Real Estate Investments

Written by Jeff Rose on July 1, 2012 in Retirement  |   No comments

With the recession dragging into its fifth year, many people are seeing little to smile about when it comes to their retirement savings. Year after year, the money they invested in the hope that it would grow into a nice nest egg has remained stagnant—or…

retirement real estate investingWith the recession dragging into its fifth year, many people are seeing little to smile about when it comes to their retirement savings. Year after year, the money they invested in the hope that it would grow into a nice nest egg has remained stagnant—or even dropped in value.

As a result, some investors are looking for alternative ways to grow their retirement savings. One such plan involves using money already in a self-directed retirement account to invest in real estate. Investors are hoping that there are good bargains in the collapsed real estate market and chances for real growth as the economy recovers.

But is it a good idea to gamble your retirement savings on real estate? The answer may surprise you.

How to use retirement money to invest in the real estate market

Many people do not realize that it is perfectly legal to use money in a self-directed IRA to invest in real estate. You can buy a home to flip quickly for a profit, a rental unit to bring in a steady flow of income, or even a commercial property. As long as the profit you make goes back into the IRA account, you do not have to pay capital gains tax on the amount until you take the money out of the IRA for your retirement, ideally years in the future.

Advantages of investing in real estate with retirement funds

For some investors, adding real estate to their portfolio is a great way to diversify their investments and protect against the volatility of the stock market. There are a number of advantages this. Right now, with prices depressed from the burst of the housing bubble, there are a lot of good deals to be had. If you have enough time to wait out the housing slump, an investment today can grow into a nice profit in the future.

If you are handy with tools, you can also try growing your retirement fund more quickly by buying a fixer-upper property, renovating it, and then selling it quickly, putting the money you make back into your IRA.

Risks of investing in real estate with retirement funds

Of course, there are also a number of risks associated with investing your retirement savings in real estate. First of all, even at today’s prices, real estate is expensive. It can take a large percentage of your retirement account to purchase a home or other property, leaving you at risk of losing a lot if your investment does not pan out.

Also, owning real estate requires more work than simply investing in the stock market or buying a mutual fund. If you buy a property to flip, you will need additional funds for repairs and renovations. You will either have to do the work yourself or hire someone at additional cost. Owning a rental property also requires effort and money. As a landlord, you will need to oversee (and pay for) repairs to your property, and you always run the risk of not being able to find a renter.

Another risk is on the tax front. IRAs can also be subject to unrelated business taxable income (UBTI), which can still take away a chunk of the profits. That’s why it’s suggested to meet with a tax professional before implementing this strategy.

Using retirement money to invest in real estate may be a good idea if you are already familiar with buying and selling real estate as well as using a self-directed IRA to grow your savings. If the real estate market is new to you or your current retirement account is not very large, you may want to consider a less labor-intensive and expensive method of investing.


Jeff Rose is a certified financial planner and author of the blogs Good Financial Cents and Soldier of Finance.  Learn more about his Roth IRA Movement that has inspired over 140 personal finance advisors to educate young adults on the importance of saving. 

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