Adam Bergman

Founder, Tax Lawyer, Author

The Different Ways People Invest in Real Estate

Before getting into retirement accounts specifically, it’s worth seeing the whole landscape, because the right path depends on how hands-on you want to be and how much capital you’re starting with.

Buying property directly is the most familiar route. You save up a down payment, get a mortgage or pay cash, and become a landlord or a flipper. It gives you full control and the most direct upside, but it also means real work, tenants, repairs, and a large chunk of capital tied up in one asset.

A REIT, short for real estate investment trust, is a company that owns a portfolio of properties, and you buy shares of it like a stock. It’s liquid, requires almost no money to start, and takes zero hands-on effort, but you don’t own or control any specific property, and your return is whatever that company’s whole portfolio does.

Real estate crowdfunding and syndications sit in between. You pool money with other investors into a specific deal, usually run by a sponsor who does the actual work. It’s more hands-off than direct ownership, and often more targeted than a REIT, but you’re trusting someone else’s management and your money is usually locked up for years.

Then there’s the path this guide focuses on: buying real estate directly, the same way you would with your own bank account, except the property is owned by your retirement savings instead of by you personally. It takes the control of direct ownership and pairs it with a tax advantage none of the other three paths offer.

What an IRA Actually Is, and What “Self-Directed” Means

If you’re not deep into retirement accounts, here’s the short version. An IRA, short for Individual Retirement Account, is a tax-advantaged account you use to save for retirement. Money goes in, either as a new contribution or rolled over from an old 401(k) or another IRA, and depending on whether it’s a Traditional or Roth IRA, you get a tax break either now or when you eventually withdraw the money.

Most people open an IRA through a bank or a brokerage firm, and that provider decides what you’re allowed to invest in. Almost always, that means stocks, bonds, and mutual funds. That’s a business decision those providers make, not an IRS rule. The tax code actually allows an IRA to hold almost anything except life insurance and a narrow list of collectibles. A Self-Directed IRA is the same account, Traditional or Roth, just opened with a custodian built to administer that wider range of assets, real estate included.

Why Doing This Inside a Retirement Account Works So Well

This is the part that makes the fourth path worth the extra learning curve. Buy a rental property with money from your regular bank account, and you pay tax on the rental income every year, plus capital gains tax when you eventually sell. Buy that same property inside a Self-Directed IRA, and the rent and the eventual sale proceeds grow tax-deferred in a Traditional account or completely tax-free in a Roth, exactly the same way stock gains would inside either account.

I’ve watched this play out with real results. One client of mine, a preacher, used a Self-Directed IRA to invest in real estate over time and grew a Roth IRA to $3.5 million, all of it tax-free once he reaches retirement age. That’s the entire case for doing this inside retirement savings instead of outside it.

What Kinds of Property You Can Buy

The range is wider than most first-time investors assume. Inside a real estate IRA you can typically hold single-family homes, townhouses, duplexes and other multi-family properties, condos, commercial buildings, raw land, and even real estate notes or tax lien certificates. You’re not limited to rental property either, some investors buy land and hold it, others buy a note secured by someone else’s property.

The Rules You Need to Know Before You Buy

This is the part that trips up first-time investors, so it’s worth slowing down on. The IRS restricts what it calls prohibited transactions between your IRA and anyone considered a disqualified person, which includes you, your spouse, your parents and grandparents, and your children and grandchildren. In practice, this means you can’t buy a property from yourself or a family member and put it in your IRA, you can’t sell IRA-owned property to a family member, you can’t live in it or let a disqualified family member live in it, and you can’t personally do repairs or property management on it, even for free.

The reasoning is straightforward once you see it: the tax benefits an IRA gets are meant for your retirement, not for transactions that quietly benefit you or your family right now. Fair market pricing doesn’t fix a prohibited transaction either, the mere fact that a disqualified person is on the other side of the deal is what triggers it. Get this wrong and the IRS can disqualify the entire IRA, treating it as fully distributed and taxable.

How the Money Actually Works

Every dollar tied to the property needs to run through the IRA, not through you. If the property needs a new roof, the IRA pays for it from IRA funds, not your checking account. If a tenant pays rent, that rent goes to the IRA, not to you personally. This isn’t a technicality, mixing IRA and personal money on the same asset is one of the more common ways investors accidentally trigger a prohibited transaction without realizing it.

Checkbook Control, an Option Worth Knowing About

With a standard Self-Directed IRA, your custodian reviews and processes each purchase, which works fine for most investors but can slow you down if you’re competing with cash buyers or need to move fast on a deal. A Checkbook IRA solves that by having your IRA own an LLC that you manage directly, so you can write a check or wire funds yourself the moment you’re ready to close. It’s not the right fit for someone making a single, occasional real estate purchase, but for investors who plan to be active in real estate over time, it removes a real bottleneck.

Getting Started With IRA Financial

Opening a real estate IRA follows a simple sequence: you open the account, fund it through a rollover or transfer from an existing retirement account, and once the funds are in place, you’re ready to make an offer. Most accounts open within a few business days, though funding through a transfer from a prior custodian can take a few weeks depending on how quickly they move.

On cost, I’ve always believed retirement investors shouldn’t be charged based on how much their account is worth or how many properties they own. That’s why IRA Financial charges a flat $495 a year for a standard Self-Directed IRA, with no fees tied to your account balance or the number of assets you hold. If you want checkbook control from the start, that runs $999 for the first year, covering LLC formation and setup, then the same $495 flat fee annually after that.

Final Thoughts

There’s no single right way to invest in real estate, a REIT and a crowdfunded deal both have a place depending on how hands-on you want to be. But if you’re set on owning property directly and you have retirement savings sitting in stocks and mutual funds, doing it through a Self-Directed IRA is worth serious consideration. The rules are learnable, the paperwork is manageable with the right custodian, and the tax treatment is something none of the other paths can match.

This content is for educational purposes only and does not constitute legal, tax, or investment advice. Consult a qualified professional before making any investment decisions.