Raw Land Investing with a Self-Directed IRA: A Practical Overview
by J.P. Dahdah, Chief Executive Officer Vantage Self Directed Retirement Plans
First, let’s get over the initial confusion that you may have regarding the title of this article. Yes, you can buy any type of real estate asset with a Self-Directed Individual Retirement Account (SDIRA) or 401K. It is not only completely legal (and has been permissible by the US Government since 1974), but you are not subject to any IRA distribution taxes or penalties for doing so. The first step is to establish a Self-Directed IRA with a company that specializes in alternative investment custodial services (i.e. Vantage) versus their stock market focused brokerage firm counterparts. The entire process of establishing a Self-Directed IRA takes about two weeks by the time you have opened an account and funded it via an IRA transfer or rollover. Self-Directed IRA fees are relatively inexpensive, typically $250-400 annually, so maintenance fees shouldn’t prevent you from having one.
Now that you know that investing in raw land with your IRA savings is an option within a Self-Directed IRA, let’s review the basics of how it works within various raw land real estate strategies.
The most practical way to perceive a Self-Directed IRA is as a tax-favored funding vehicle for your retirement goals. Since IRAs are accounts designed for long-term wealth creation, any asset strategy that encompasses a long-term time horizon is a perfect fit to be held within them (think illiquid assets). Raw land strategies complement IRAs perfectly for this reason.
Three common land strategies implemented by self-directed IRA investors:
- Buy and Hold: Raw land investors are typically expecting high price appreciation over the course of many years so a buy and hold strategy works extremely well since the IRA will only need to cover minimal property tax expenses and not much else over the course of the investment. This option can be executed by an investor who has enough cash in their IRA to purchase 100% of the parcel he/she desires or via a partnership by which the IRA investor allocates a portion of their IRA money into the deal for a fractional ownership of the parcel. Once the parcel of land is sold in the future, all proceeds must be returned to the Self-Directed IRA account(s) on a tax favored basis.
- Land Flipping: This strategy is a great fit for IRA account holders who have a lower account balance (i.e. less than $75,000) and/or are seeking high short-term capital appreciation. The United States is covered with under-valued yet highly desirable land. Most of these parcels are found slightly beyond city limits where real estate development hasn’t yet reached, but is imminent. With a relatively low investment, land can be purchased and quickly flipped for lucrative returns. Best of all, since the investment is being funded by a Self-Directed IRA, no short-term capital gains will be due on the realized profits. That alone can increase your return on investment by as much as 35%!
- Raw Land Development: This strategy is typically implemented by investors who truly understand how to add value to a piece of raw land by way of obtaining beneficial land use rights, entitlements, easements, utility improvements and segmenting into various parels to position the land for additional development. The execution of this strategy is more complicated and requires investors with specialized expertise and a higher capital commitment.
Let’s cover how expenses are handled within Self-Directed IRAs. All expenses due on a piece of raw land must be paid directly out of the Self-Directed IRA in direct proportion to its ownership in the land deal. For example, if your Self-Directed IRA purchases 100% of a parcel of land, your IRA must pay 100% of the property taxes and any other subsequent expenses that may arise for the piece of property. Therefore, it is important that you budget accordingly and ensure that your IRA has enough money to not only buy the property, but also maintain the property.
Self-Directed IRAs aren’t for everyone, but they are the perfect solution for any investor who has an investment appetite for any asset beyond traditional stock market investments and who is willing to take personal responsibility over their retirement savings.