Investing in Real Estate With Your Children

I learned about investing when my father introduced me to his brokerage account at a young age. It was through him that I learned what stocks were and grasped a general idea of how the stock market works. He set up a custodial account for me, as I was under the age of 18. He then put my life savings in stocks, a whopping $1,000 that I had saved from birthdays and mowing lawns. Investing for your children is somewhat easy as all you need to do is set up a brokerage or custodial account if they are under the age of 18. Not all parents may be knowledgeable about the stock market. Alternatives such as real estate, offer a wider variety of investments that appeal to a broader market.


Like stocks, properties tend to go up in value over time. You can also rent a property and generate a passive stream of income.

Real estate investing is not for everyone. But for those in the real estate industry, this may be a preferred alternative (or addition) to investing in the stock market. Purchasing real estate with your children is simple and self-explanatory. Find a property and buy the property. You could even own the property 50/50 with your child. If you are using IRA funds, financing can be challenging. There will be more rules and potential taxes in which you will need to familiarize yourself. For this reason, most IRA transactions are cash.


We should teach saving at a young age, especially the importance of investing with IRA accounts where gains grow tax-deferred. Unfortunately, my father was not very knowledgeable about IRA accounts. It was not until I started working at Midland that I began to understand the importance of saving for retirement. Using tax-deferred strategies such as IRAs, HSAs, ESAs, 401ks, and 1031 exchanges became important. IRAs and other investment options are not taught in school, so it’s important to teach your children at home.


To be eligible to contribute to an IRA, you must have earned income from a salary, commissions, tips, or bonuses. It is unlikely that your child is working a summer job solely to save for retirement! Yet, if you have expendable cash, you can always gift your children money. The annual gifting limit is $15,000 per year (as of 2020). As long as your children have enough earned income from a job, they can potentially use the proceeds of your cash gift. The gift could help them max out their IRA contributions and even HSA and 401k (if eligible). Learn more about gifting money to your children for retirement savings.

Investing in stocks through an IRA is very straightforward. All you do is set up an IRA brokerage account and buy a stock. Investing in real estate through IRA funds is a little more complicated. A brokerage is not going to allow you to make this investment, as it is not in their business model. They will try and pitch you the option of purchasing Real Estate Investment Trust (REIT) stocks instead. However, you can use your retirement funds to invest in real estate, which includes buying land, rental properties, commercial properties, and even loaning money via promissory notes. You can do all this in a tax-deferred manner using self-directed retirement accounts such as 401ks, IRAs, ESAs, and HSAs. While your children likely do not have the same amount of funds as you do, they can still invest in real estate by structuring things differently.


  1. The first step is to find a self-directed IRA custodian, such as Midland, that can do the recordkeeping and report to the IRS on the movement of funds and the real estate in the IRA.
  2. You do not need to own the property 100% with IRA funds. When purchasing the property, you can team up with other entities or your funds. But, all expenses and income going forward have to remain proportional to how you purchase the property. For example, if you buy a $100,000 property using $90,000 (90%) of your IRA funds and $10,000 (10%) of your child’s IRA funds, going forward, all expenses and income have to remain in this proportion. If your real estate tax bill is $1,000, then your IRA would need to pay $900 (90%) and your child’s IRA would need to pay $100 (10%).
  3. You cannot live in the property personally or have disqualified people living in the property if your IRA owns it. Disqualified parties include your parents, grandparents, spouse, children, grandchildren, daughter, and son’s/daughter’s in-laws.
  4. You cannot put “sweat equity” into the property, which means you and disqualified parties cannot add value to the property by cleaning, fixing, replacing, or landscaping.
  5. When investing in real estate using your IRA, it is highly recommended to maintain an IRA cash balance to cover unexpected costs associated with owning property.

If you have questions or want additional information on investing in real estate with your children, call us at 239.333.1032 or visit

MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account. Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.

AUTHOR: Andy Anger, Senior Associate in Client Services at Midland Trust

Ideas for Finding Real Estate Investments for Your IRA

Ideas for Finding Real Estate Investments for Your IRA

So you want to purchase real estate in your IRA account? Most people do not even know that you can do this. Yes, you can, and for the right person, it can be an excellent investment. Why buy real estate in your retirement account? I would say there are three reasons. First, diversification away from stocks and bonds gives your portfolio an asset that traditionally holds its value over time and has the opportunity to appreciate. Secondly, you understand and want to be involved in the management of the rental property. Real estate is not like a stock. It requires love and care to make it grow. Third, the opportunity for the annual income and the gain on sale to be tax-free. All gains inside an IRA account are tax-free.

The first thing you need if you want to purchase real estate in an IRA is to understand what a Self-Directed IRA is. Ordinary IRA custodians (like the big brokerage houses) are not interested or equipped to hold real estate in your IRA. They don’t offer real estate as an IRA option because

  1. They don’t know how to generate revenue from an asset that they do not sell
  2. They don’t want to deal with administrative burdens such as closings, tax bills, insurance, rental agreements, and annual valuations (which custodians are required to report to the IRS annually).

To own real estate inside your IRA, you must have a “self-directed” IRA so that your investment choices are not limited to certain asset classes. Midland Trust Company is a perfect choice with a long history of reasonable fees and excellent service.

What are the different types of real estate you can buy in your Self-Directed IRA?

  1. Rental Real Estate – The most common real estate investment in a Self-Directed IRA is rental real estate. The most common types of rental properties include single-family homes, commercial properties, and condominiums.
  2. Raw Land – Many investors believe in the appreciation of good real estate and the low maintenance of raw land. This can also include leased farmland that generates cash flow.

Where do you get started finding a real estate deal? Well, there are many ways to locate or evaluate real estate opportunities, but they all require hard work. I am going to tell you a rule I learned 20 years ago that has always held true, I need to give credit to Jeff Tumberello, a local SWFL Real Estate investor, who I heard it from. The gain on the real estate is made when you purchase the property, not when you sell it. The moral of the story being, don’t overpay for the property; if you don’t get the right deal upfront, it can take years to make it up. I am not saying that is the only way to make money on a real estate investment, but it sure helps to get started by not overpaying.

So how do you find the deals? There is no right way to find real estate deals. Remember, you are looking for a property that has great potential to appreciate and cash flow. This can be a rehab flip or a long-term rental property with great potential. I am not trying to be sarcastic, but you probably won’t find it on under “new developments.”

Let me tell you how I have seen the best investors find real estate investments for your IRA.

  1. Join a REIA Club (Real Estate Investment Association). There are national groups and local groups. Surround yourself with like-minded people looking for deals and to share the knowledge they have learned. There are many types of Real Estate Groups, one place to look them up is
  2. Ask friends and acquaintances if they know of anyone interested in selling because you may be interested in buying. Without a real estate broker, you automatically save 5-6% of the purchase price. As mentioned before, the money is made on the purchase.
  3. Scour Craigslist and look for the oldest listing on Zillow and You are not looking for a beautiful house; you are looking for a property that will make you money. Also, follow up on a real estate deal that fell through. A contract may have fallen through because the roof was bad, but that may not scare you because your cousin in the roofing business.
  4. Have friends that are Realtors; they know of deals before they even hit the market. Realtors and a real estate office may have a pocket listing. A pocket listing is a property that the seller wants to get rid of but has not listed it on the local MLS.

One last tip, be good at math. I would recommend knowing a couple of easy calculations. How to calculate capital gains? Taxable gains are sometimes different than book gains. Understand the concept of basis; Basis is the tax term for Cost plus additions less depreciation. Second, know how to calculate an income statement for rental property. A rental property may have a mortgage payment, and typically an income statement, you do not deduct loan principal. I would learn how to run a cash flow statement. You need to know when you are making and losing money.

Finally, (I know I said the last tip above), know a good banker, preferably a community banker. A Community banker can make the deal so much easier, plus they can be a trusted source when you need advice on whether that property cashflows. FYI, most properties purchased in Self-Directed IRAs are cash purchases and do not use a mortgage.

For more information on how to set up a real estate IRA, check out Midland Trust’s Real Estate page. Buying real estate is not hard, but it does take hard work to stay on top of your investment. I always like the Warren Buffet philosophy; while you may not make money on every investment, make sure you do not lose money. It can be hard to recover lost money.

Midland Trust Resources for Self-Directed IRA Investments:

  1. Real Estate IRAs
  2. Types of IRA Accounts
  3. How to Handle Income and Expenses

Happy real estate hunting.

Dave Owens

President & CEO of Midland Trust Company