Using a self-directed IRA to invest in real estate will allow you to lend yourself the money to buy real estate.

Q: My partner and I are considering rolling over his 401k into a self-directed IRA in order to purchase rental property. I was wondering if you have any information on how to vet this type of company. That being said, we have experience with rental properties, so we are not outside the realm of our experience.

A: Self-directed IRA companies started to become more popular more than a dozen years ago when investors began using them to help finance the purchase investment real estate.

And why not? When you use a self-directed IRA, you’re essentially lending yourself the money to pay for the real estate. The proceeds from the investment property (that is, the income the property generates) go back into the account to repay the loan and any expenses. Over time, as the loan is paid down, profits will increase, but those must stay in the IRA as well until you withdraw them. At that time, you’ll owe ordinary income on your withdrawals, just as you would for withdrawals from any other qualified retirement account.

Many investors who have pots of ordinary IRA cash and investments just sitting there, earning virtually nothing, have looked to roll over those funds into a self-directed IRA account, where they can use those funds in a different way. At a time when stock market and bond market returns were uncertain, many investors turned to real estate to scoop up foreclosures and short sales that seemed to be underpriced. As the housing market has increased in value, investors are finding that their IRAs are worth a lot more.

Of course, there are issues to think about when about using self-directed IRAs, including the high fees some companies charge and the bevvy of rules investors must follow in order to not run afoul of IRS regulations regarding IRAs and investing in real estate.

When it comes to vetting self-directed IRA companies, you need to be extremely cautious. The SEC’s Office of Investor Education and Advocacy (OIEA) and the North American Securities Administrators Association (NASAA) issued an Investor Alert to warn investors of the potential risks associated with investing through self-directed Individual Retirement Accounts (self-directed IRAs). According to the alert, NASAA has noted a recent increase in reports or complaints of fraudulent investment schemes that utilized a self-directed IRA as a key feature. State securities regulators have investigated numerous cases where a self-directed IRA was used in an attempt to lend credibility to what turned out to be a fraudulent scheme. Similarly, the SEC has brought a number of cases in which promoters of fraudulent schemes steered investors to self-directed IRAs.

The SEC cautions investors to understand that the custodians and trustees of self-directed IRAs may have limited duties to investors, will generally not evaluate the quality or legitimacy of an investment or its promoters. In other words, when you buy a mutual fund on the recommendation of your registered investment advisor (RIA) or even an investment advisor at one of the big financial investment companies, there may be a duty to help you select the best investment for you and to investigate to make sure that the investment isn’t a fraud or a fake. But with a self-directed IRA, there is less regulation and the custodian or trustee of your accounts (you need a third-party to manage the investment for you to maintain it as an “arm’s length” transaction to meet IRS guidelines) may not have to ascertain whether the investment is fraudulent or even a good idea. That’s up to you.

The market for self-directed IRAs is small compared to traditional IRAs, but if it’s your money, that doesn’t matter. A 2011 study found that Americans have approximately $4.7 trillion in IRAs. About 2 percent, or $94 billion, is held in self-directed IRAs. The rebounding stock market might have changed those numbers somewhat, but you can see that it isn’t a huge number relative to the total amount held in IRAs.

To check out a self-directed IRA company, we suggest running the company through a news search engine and a couple of regular search engines along with the word “complaint.” That should bring up any issues or problems someone has faced. You can also check with your state regulator, and the SEC. For more information and resources on self-directed IRAs, visit Here’s the link to the SEC Investor Alert we found. (