How to Purchase Rental Properties with an IRA


Whether you’re retiring in a few years or you're a forward-thinking investor, real estate is one of the most common options. Many financial experts encourage employees to set up a self-directed IRA, an individual retirement account that allows them to invest in multiple assets like rental properties and nontraded businesses. Other IRAs differ according to their eligibility, tax advantages, and restrictions. However, the goal of every IRA remains the same - to provide tax benefits for savings accounts expressly set up for retirement. 

While the setup process is often straightforward, understanding how to purchase rental properties with an IRA can be difficult for some investors. Without the proper knowledge, you could make some crucial mistakes that limit your earnings in the long run. To help you achieve the best result, we've curated a detailed article to explain everything you need to know about IRAs and rental properties, including the benefits, if it's enough to fund your retirement, and how to get started.   

Benefits of Using IRA to Purchase Rental Properties

1. Lucrative Tax Benefits

One of the most significant advantages of using an IRA to purchase rental properties is that they have lucrative tax benefits. Since the United States government considers IRAs a form of pension, they are exempt from many tax deductions, particularly those belonging to workers above age 59. With typical real estate investments, property owners must go through the hassle of filling their Schedule E forms correctly and monitoring their expenses to leverage as many tax deductions as possible. But with an IRA, you don't have to consider such metrics and can still enjoy tax-free income from investments. 

2. The IRA is a Separate Entity 

Another benefit of opting for an IRA is that they have a similar setup to an LLC (Limited Liability Company). In other words, under the eyes of the law, you and your IRA are two different entities that can help you protect your assets. So, for example, if your rental properties aren't performing well or a tenant decides to sue for damages, your personal assets will suffer no losses. 

Likewise, if you make a risky business decision that doesn't pay off, creditors cannot tap into your IRA to offset your loan. This feature gives IRAs a highly sought-after level of protection to their holders and ensures your assets remain protected until you need them. 

3. No Out-of-Pocket Expenses

Many investors considering ways to fund retirement with investment properties are often held back by financial stability issues. Buying a house is a significant undertaking, and finding the discipline to put away enough funds to secure a rental is challenging. Also, finding the right financing can be tricky as different options are suited to unique investors in other circumstances. 

However, an IRA eliminates the burden of securing funding to purchase or maintain your investments. You can set up an automated system that channels some of your salaries to the IRA to cover such expenses. After part of the profit, your properties make funnels back to the account to offset repairs and renovations. As we highlighted earlier, since the law recognizes you and the IRA as separate entities, you wouldn't have to budget for property maintenance in your personal accounts. 

4. Diversification of Your Portfolio

A diversified portfolio is an excellent way to avoid putting all your eggs in one basket. Besides real estate, IRAs allow you to invest in various investment options, from mutual funds to stocks, bonds, and other non-traditional options. Diversification lets you spread your risk amongst different asset classes, which lowers your financial risk and ensures you continue to earn money even when the market frowns on one of your investments. In addition, if you already own property, investing in an IRA could be a chance to expand and tap into other locations performing better than your current one.  

5. Steady Long-Term Income

The final benefit of using an IRA to purchase rental properties is that it ensures a steady income source in the long run. Since the money the IRA makes funnels back to the account, it can be an effective savings plan that grows as you age. So when you finally retire, you have something tangible to fall back on. Thus, setting up an IRA today could be an excellent way to have peace of mind that you're already earning money for your future self. As such, it can take a load off you in the present, knowing you already have an ongoing annual contribution. 

Are Rental Properties Enough to Provide a Retirement Fund?

Understanding the pros and cons of investing with a real estate IRA can help you make an informed decision. However, most investors wonder if rental properties are enough to provide a retirement fund. 

While real estate is one of the most popular retirement options because of its stability and ability to outpace inflation and earn passive income, it still comes with considerable risks. Like every other investment option, it has its unique downsides. Dealing with tenants, maintenance, and filling vacancies are challenges that can make it difficult to manage a rental property. 

Besides these drawbacks making it hard to account for your monthly takeaway, estimating if your rental property can fund your retirement is not an exact science. The type of rental property you have and your lifestyle expenses can weigh heavily on how much you need to maintain your quality of life.  

Thus, many financial experts recommend diversifying your portfolio to mitigate risks and earn more money. Besides, you can always improve the performance of your rental properties by hiring a professional property management company to oversee the daily activities of being a landlord. 

How to Get Started in Purchasing Rental Properties with IRA

1. Setup an SDIRA

An SDIRA is short for self-directed IRA, a retirement account that gives owners more flexibility and investment options. Like other IRAs, in 2023 account holders can contribute as much as $6,500 annually or up to $7,500 if they're above 50.

To set up a legal SDIRA, you must find a financial institution willing to act as your custodian. The most popular solutions for people are banks and credit unions, but you can also set up an account with trustworthy third-party services. Whichever institution you choose, ensure you verify they are a state or federal bank or trust company (such as Mainstar Trust) or on the IRS-approved non-bank list of custodians.

Besides ensuring they have the correct verification and licensing, you should thoroughly research the entity before entrusting them with your future. Look for reviews on the internet, ask for recommendations within your circle, and check with your state's regulatory body. 

2. Transfer Funds to Your SDIRA

After choosing a custodian, the next step is to transfer funds from your existing IRA, or rolling over funds from a qualified retirement account, if applicable, to your SDIRA. Many employees already have a 401(k) account or other retirement account set up for them by their employers. Thus, you'll need to tap into that reserve to fund your self-directed account. Your savings should be enough to cover an upfront house purchase, with some leftovers for maintenance like updates and repairs.

If your money isn't sufficient, you could make contributions from your account to fund the expenses. Alternatively, your SDIRA can also take out a loan to finance the purchase with some limitations. Still, you must ensure that your annual contributions can offset costs like the mortgage, ongoing maintenance, and custodial fees.

3. Find an Eligible Property

Purchasing a property with an IRA comes with specific rules that account holders must adhere to. Stepping out of line could result in steep fines and the disqualification of your IRA, which could deplete your retirement fund. Although most investors opt for residential properties, you can also purchase other real estate types. Commercial properties and raw land are great examples. However, once you have a house, you should ensure that:

  • You are not a resident of that property as your primary residence, place of work, business site, or vacation home.
  • Nobody related to you rents the property for personal or business use.
  • You don’t use your money to fund repairs or maintenance on the property after purchase. All expenses on the property should come through the SDIRA you’ve set up. 

4. Use the SDIRA to Manage Your Property

After setting up your SDIRA, all operating expenses towards maintaining the property must go through that account. Everyday expenses you have to account for include advertising, tenant screening, legal fees, salaries and wages, repairs, routine maintenance, utilities, insurance premiums, and HOA fees.

As you fuel money through your SDIRA, remember that all profits must remain within the account to receive the tax benefits of the IRA. However, if you wish to tap into the funds before your retirement, know there may be penalties depending on your age and the type of IRA  you own. But if you're already 60 and yet to retire, you can collect money from your SDIRA without fear of penalties.  


Life doesn't have to be a hassle after retirement as long as you plan. IRAs are an excellent way to save for your future without worrying about tax deductions or out-of-pocket maintenance. They're also an opportunity to diversify your portfolio and earn steady long-term income. However, it's still advisable not to rely on a single income source to fund your retirement. If you follow the simple steps we outlined on purchasing rental properties with an IRA in this article, you'll be on your way to financial freedom. 

Navigating the intricacies of these accounts can be tricky, so if you need more guidance, ask an expert. A professional property management company with proficiency in real estate can discuss your best options to fund, maintain, and grow your rental business. 

Author Bio  

Patrick Freeze is a licensed real estate broker and Baltimore native with over a decade of experience in the real estate and property management industry. He graduated from Dickinson College before starting Bay Property Management Group in 2009. Bay Property Management Group is the ultimate property management company, specializing in a wide range of properties, including single-family houses, portfolios of rental homes, and apartment buildings. Through experience and top-notch customer service, BMG is helping make property ownership the profitable and pleasurable experience it should be.