Always dreamed of being a real estate mogul? It won't be quite that dramatic, but your IRA funds could pave the way for your involvement in the world of real estate.

You can follow the lead of a lot of smart self-managed IRA investors. Real estate, including self-storage, is usually the most popular investment for anyone who directs their own retirement account. According to Knight Frank Research, one of the world's largest global property consultants, individuals with ultra-high net worth invested almost a quarter of their portfolios in real property in 2014.

Even in a slow economic period, the return potential and tangibility of property makes investors like you comfortable investing in commercial real estate using an IRA portfolio. With every investment funded, careful consideration of every factor is necessary.

To protect yourself from fraud or violating tax laws, be sure to start with the following due diligence:

  • Real estate owned in a self-directed IRA must be investment property

First and foremost, to avoid tax penalties, you cannot live in the property, either as a primary residence or a vacation home.

  • Consider the implications of "disqualified persons" rules

Any time you plan to tap IRA funds for investments, you need to be aware that certain transactions are prohibited by law. As with any self-directed IRA transaction, the involvement of a "disqualified person" as part of an IRA-funded investment in real estate is prohibited. This means they could not be renters or live in the investment property any more than you, the account owner. Sale, exchange or leasing of a property between an IRA and a disqualified person is also prohibited.

There's more extensive information in IRS Publication 590-A, but generally disqualified persons include 

  • Your spouse
  • Any beneficiary of the IRA
  • Your lineal ascendants/descendants and their spouses
  • The people who are service providers for the plan, or fiduciaries. This list could include advisors, custodians and administrators
  • An entity (corporation, estate, partnership, and so forth) in which you are an owner of at least 50 percent of the voting stock, directly or indirectly
  • An officer or a director, or a shareholder or partner who holds 10 percent or more.
  • Examine the potential investment opportunities

Ways to invest IRA funds in real estate run the full range, from self-storage facilities and other commercial property to residential property, REITs, multi-family properties, strip malls, non-performing notes, REOS, deeds of trust and mobile home parks.

  • Research before committing

Just like you would before entering into any investment, make sure you have ample information before selecting a real estate investment that involves self-directed IRA funds. Due diligence means the collecting information on the cost and benefit of the investment compared to the risk.

A real estate due-diligence checklist includes

  • Understanding which parties will be involved in the investment
  • Checking for complaints on your real estate professional's record
  • Reviewing the expiration on any current lease agreements that involve tenants still in place
  • Undertaking a thorough inspection of the property, including a trusted provider in some situations to determine if repairs are needed
  • Having a working knowledge of any fees and who will be responsible for paying them
  • Calculating an annual "vacancy rate" for times the rental could potentially be vacant to avoid draining your IRA
  • Understanding the closing process may take a while, particularly if you are buying something the bank owns
  • With most properties, completing a title search to uncover any encumbrances including easements, rights-of-way, mortgages or claims
  • Figuring out if you would need a manager for the property and how much that would cost
  • Examining any current or potential environmental issues, which could include hazardous waste or contamination
  • Seeing if you'll need any insurance and verify that a company is able to issue such insurance in the name of the IRA.
  • Tax Repurcussions – Consult your accountant

Post due diligence:

Once you've made sure the real estate investment is possible and could be profitable, keep in mind these other important facts:

  • The property becomes an asset of your IRA and it holds the title. As an investor, you cannot purchase property you, your spouse or descendants already own (or your ascendants either).
  • Any income and expenses that are generated by the property can only flow through the IRA, not your personal or other business accounts.
  • An IRA is able to get a loan to fund a purchase.

Coda Management Group can guide you through the process of maximizing your IRA funds for a prime real estate investment: self-storage units.