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An adjustable-rate mortgage (also called an ARM) is a mortgage where the interest rate changes. Monthly payments may go up or down, following the larger interest-rate market. Borrowers may be looking to save money with this type of mortgage because there’s usually an introductory period where the interest rate is lower than what they could get with a fixed-rate loan. The monthly payment is lower as a result.

Adjustable-rate mortgages can make sense in certain situations, such as when buyers only plan to own a home for a few years or for those looking to buy a home in a high-interest-rate environment. However, they’re not your only option if you’re looking at getting a mortgage in a high-interest-rate environment.

Before you commit to an ARM, it’s important to understand what exactly it is and how it works. Keep reading to discover the pros and cons of an ARM and how the variable rate on an ARM is determined. You’ll come away understanding when it does (and doesn’t) make sense to get an ARM.

What Is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage is a type of mortgage loan where the interest rate can change periodically throughout the life of the loan. This means your monthly payment might increase or decrease over time.

They typically come in shorter terms, such as five, seven, or ten years. The adjustment period (how often the interest rate is evaluated and changed) is usually six months or one year. They may be useful as a financing tool for short-term situations, but there are some things to consider before taking on a mortgage like this.

How Adjustable-Rate Mortgages Work

The terms of an adjustable-rate mortgage are determined at the outset of the loan. You’ll decide on a type of ARM, apply with the lender of your choice, and start making payments once the loan closes.

What’s different about an ARM from other home mortgage loans is the interest rate will adjust periodically and your monthly payment will change. It’s typical to see an introductory period (a number of years) where your interest rate doesn’t change, however.

Types of Adjustable-Rate Mortgages

If you’ve started to look into financing a home purchase, then you’ve probably seen loans labeled with different numerals. Maybe you’re wondering, what is a 5/1 ARM? When you’re choosing mortgage terms, the different types of ARMs you can get correspond to the different terms (with 5-, 7-, and 10-year ARMs being the most common) and adjustment periods (typically 1 year or six months). An ARM is labeled with two numbers, first with the number of years in the introductory period, followed by the period when the interest rate will reset. A 5/1 ARM, for example, has a 5-year introductory period followed by one adjustment per year to the interest rate.

Here are some other examples:

•  5/6: A five-year term with an adjustment period of six months.

•  7/1: A seven-year term with an adjustment period of one year.

•  7/6: A seven-year term with an adjustment period of six months.

•  10/1: A 10-year term with an adjustment period of one year.

•  10/6: A 10-year term with an adjustment period of six months.

Recommended: Is a 10-Year Mortgage A Good Option?

Pros and Cons of Adjustable-Rate Mortgages

If you’re considering an ARM, you’re probably weighing the lower payment against future financial positions you’ll need to take. There are some other pros and cons to consider.

Pros of an ARM

•  Many different term lengths to choose from

•  Low annual percentage rate

•  May start with a lower monthly payment than a fixed-rate mortgage

•  May be slightly easier to qualify for

Cons of an ARM

•  Interest rate can change

•  You could end up with a higher monthly payment

•  If you’re unable to afford the higher monthly payment, your home could be in danger of foreclosure

Recommended: Cost of Living by State

How the Variable Rate on ARMs Is Determined

To fully understand how does an adjustable-rate mortgage work, it helps to see what’s going on behind the scenes of an ARM and how the rate is determined. You’ll be looking at these four components:

1.   Index

2.   Margin

3.   Interest rate cap structure

4.   Initial interest rate period

Index

The cost of an ARM is tied to a market index, generally the secured overnight financing rate (SOFR). These can increase when the federal funds rate rises.

Margin

The margin is the percentage points added to the cost of the index. It is disclosed when you apply for the loan and can vary from lender to lender, so be sure to shop around!

The interest rate on your ARM is equal to the index plus the margin.

Interest rate cap structure

There are three types of rate caps: initial, periodic, and lifetime. For the initial period, the cap is on how much interest you’ll be charged in the first period of your loan. For example, in a 5/1 ARM, you’ll have an interest rate that stays the same for the initial period of 5 years.

When your initial period is over, you’ll have periodic adjustments. These will have a separate cap for how much your interest rate can increase over the defined period (usually six months or a year).

You’ll also have a cap on how much your interest rate can increase over the life of the loan.

Initial interest rate period

The cost of an ARM is also determined by how long the interest remains constant for the initial period. ARMs with longer initial periods generally have higher rates. A 7/1 ARM will have a higher APR than a 5/1 ARM, for example.

💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

Adjustable-Rate Mortgage vs. Fixed-Interest Mortgage

When it comes to fixed-rate vs. adjustable-rate mortgages, the mortgages are structured very differently. Here’s a quick breakdown of the major differences:

Adjustable-Rate Mortgage	Fixed-Rate Mortgage
Interest rate adjusts after introductory fixed-rate period	Interest rate stays the same
Terms are usually shorter, such as 5 to 7 years	Terms are usually longer, such as 15 or 30 years
Loans are often refinanced at a later date	Loan can be paid off or refinanced
May have lower interest rate initially	Interest rate does not change
Monthly payment changes	Predictable monthly payment
Interest rate you pay is tied to economic conditions	Interest rate determined at the origination of the mortgage

The main difference between fixed-rate and adjustable mortgages is in how you pay interest on the loan. With a fixed loan, the interest is paid with regular monthly payments, which are fairly set (except for fluctuations with escrow items). With an adjustable-rate mortgage, the interest you pay can change.

The other major difference between the two types of mortgages is the term length. Fixed mortgages are often financed at 15- or 30-year terms. ARMs are usually held for shorter periods of time.

💡 Quick Tip: A major home purchase may mean a jumbo loan, but it doesn’t have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put as little as 10% down.

Example of When Adjustable-Rate Mortgages Makes Sense

There are a few scenarios where an ARM makes sense.

•  If you’re only planning to keep the home (or keep the mortgage) for a few years.

•  Interest rates are very high.

In each of these situations, borrowers — including first-time homebuyers — don’t plan to hold onto the mortgage long-term. They’re looking to sell the property or refinance at a future date.

However, there are times where an ARM doesn’t make a lot of sense.

Example of When Adjustable-Rate Mortgages Doesn’t Make Sense

An ARM may not make sense when the interest rate for a fixed-rate mortgage is low. This was common just a few years ago, and buyers who have these low-interest, fixed-rate mortgages don’t need to worry about getting another mortgage.

If you’re considering purchasing a home with an ARM, you may also want to look at buying down the interest rate on a fixed-rate mortgage with points, especially if you plan on staying in the home long-term.

Can You Refinance an ARM?

Many borrowers get an ARM with the expectation that they will be able to refinance into a different mortgage at a later date. Refinancing any mortgage, including an ARM, will depend on your ability to qualify for the new loan. If your credit score or income take a serious hit, for example, you may not be able to refinance an ARM to get a more attractive rate. It’s also possible market conditions may change and the property could decline in value to the point that it isn’t a good candidate for a refinance. Remember, too, that when you refinance there are typically closing costs to pay on the new loan. That said, it’s a good idea to explore whether you can lower your monthly payment.

Adjustable-Rate Mortgage Tips

To keep your ARM manageable, you may want to consider some of the following tips:

•  Look at the rate cap structure. Make sure you can handle the monthly payment all the way to the cap rate, which is the limit on how much your interest rate will increase.

•  Watch for fees or penalties. If you pay off the ARM early, you may be subject to several thousand dollars in penalties or fees. Be aware of what you could be on the hook for.

•  Shop around for mortgage rates. The interest rate caps and margins will be different from lender to lender. Get a loan estimate to ensure you’re comparing apples to apples.

•  Work with someone you trust. It’s incredibly valuable to work with a lender you trust to give you good advice.

The Takeaway

Many borrowers may be considering an ARM at the moment, but you still need to make sure it’s the right financial tool for you. Adjustable-rate mortgage costs can increase when interest rates increase and, for some borrowers, monthly mortgage payments might become unmanageable. However, it is possible that an ARM could be the right solution for buyers who don’t plan on keeping the home long-term, or for those who believe they’ll be able to refinance into a less expensive mortgage in a few years.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Is it ever a good idea to get an adjustable-rate mortgage?

You should get in contact with a lender if you’re wondering about whether or not an adjustable-rate mortgage is right for you. Some borrowers find it makes sense if they’re looking for financing that’s geared toward short-term situations.

What is the main downside of an adjustable-rate mortgage?

Adjustable-rate mortgages have interest rates that can rise periodically, at intervals of every 6 months or a year. You could end up with a higher mortgage payment.

What is the major risk of an ARM mortgage?

The major risk of an ARM is when it becomes unaffordable after an adjustment period. If a payment can’t be made, the risk is going down the path to foreclosure. This can happen after the introductory period ends or if an adjustment significantly raises the monthly payment.

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Photo credit: iStock/Andrii Yalanskyi

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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The Department of Veterans Affairs sponsors the VA loan program to help eligible military members and surviving spouses become homeowners. If you’re interested in how to get a VA loan, you’ll need to first make sure you meet the government’s requirements and then find a VA-approved lender and seek preapproval for a loan.

Getting preapproved for a home loan can give you an idea of how much you’ll be able to afford. Having a VA loan preapproval letter in hand can also give you some leverage when it’s time to make an offer. Here’s a closer look at how to get preapproved for a VA home loan.

What Is a VA Loan?

A VA loan is a mortgage loan that’s backed by the federal government. The Department of Veterans Affairs works with a network of approved lenders that grant VA loans to eligible military members (including members of the National Guard and the Reserve) and surviving spouses. Should a borrower default on a VA loan, the federal government steps in to help the lender recoup some of its losses.

What is a VA loan good for? There are four ways that borrowers can use them.

•   VA purchase loans allow you to buy a home through an approved lender.

•   Native American Direct Loans (NADL) help Native American veterans or veterans married to Native Americans buy, build, or improve a home on federal trust land.

•   Interest Rate Reduction Refinance Loans (IRRRL) can help make existing VA-backed loans more affordable through interest rate reductions.

•   Cash-out mortgage refinance loans can help eligible borrowers tap into their home equity to withdraw cash, while refinancing into a new loan.

In terms of how to get a VA loan, each of these options has different requirements that borrowers need to meet.

💡 Quick Tip: Apply for a VA loan and borrow up to $1.5 million with a fixed- or adjustable-rate mortgage. The flexibility extends to the down payment, too — qualified VA homebuyers don’t even need one!^{†^}

How Does VA Home Loan Preapproval Work?

Mortgage loan preapproval simply means that a lender has reviewed your financial situation and made a tentative offer for a loan. It doesn’t constitute final approval for a mortgage, but getting preapproved is often beneficial, as a mortgage preapproval letter can give you an edge if you’re vying with another buyer for a particular property.

VA home loan preapproval works much the same as any other type of mortgage preapproval, with one extra step: Before you apply for the loan, you’ll need to get a Certificate of Eligibility (COE) from the VA. This document shows your lender that you’re eligible for a VA loan, based on your service history and duty status. The minimum service requirements for a COE depend on when you served. You can request a COE online through the VA website.

After you have the COE, you’ll need to give the lender some basic information about your household income, assets, and how much you’re hoping to borrow in a process called prequalification. This will allow you to see — often in just a few minutes — what kind of mortgage terms you might qualify for. From there, you can choose a lender and go through the next step, preapproval.

How to Get a VA Home Loan Preapproval Letter

Getting a VA home loan preapproval letter is a relatively straightforward process. Here’s what you’ll need to do.

•   Obtain your COE from the Veterans Administration.

•   Choose a VA-approved lender.

•   Complete the lender’s preapproval application.

Let’s get into the details of securing a VA home loan preapproval. First, you’ll need certain documents on hand to apply for the COE, and those documents are specific to your military status. If you are a veteran, you’ll need a copy of your discharge or separation papers. Active-duty service members will need to furnish a statement of service signed by their commander, adjutant, or personnel officer. This statement needs to include your full name, Social Security number, date of birth, date you entered duty, duration of any lost time, and the name of the command providing the statement. You can find full details and an online COE application on the VA website.

Once you have your COE and have found a prospective lender, the lender will likely ask to see certain documents to verify your income and financial situation, including:

•   Tax returns

•   Pay stubs

•   Bank account statements

•   Investment account statements

You may also need to provide a valid photo ID, your date of birth, and Social Security number. This information is needed to process a hard credit check, which can impact your credit score.

After your lender has everything it needs to process your preapproval, it will review your finances and complete a hard check of your credit history. Assuming your credit score and income check out, and there are no issues with your COE, you should be able to get a preapproval decision within a few days.

How to Buy a Home With a VA-Backed Loan

Home mortgage loans offered through the VA are attractive for a few reasons. For one thing, you can buy a home with no down payment required. For another, VA loans can offer more attractive interest rates than other types of mortgage loans.

Now that you know how to get a VA home loan, if you’d like to buy a home with a VA-backed loan, getting preapproved is the first step. Again, VA loan preapproval can give you an idea of how much you’ll be able to borrow, which can help you narrow down your search for a property. Once you find a home that you’re interested in, making an offer is the next step.

You can use a VA-backed loan to buy:

•   Single family homes with up to four units

•   Condos in a VA-approved project

•   Manufactured homes

VA loans can also be used to build a home. You’ll need to have the home appraised and evaluated to make sure that the property is structurally sound and that its value aligns with the amount you want to borrow. If there are no issues, you can move on to the closing to sign final paperwork and pay the VA loan funding fee.

This fee is a one-time payment VA borrowers are required to make to help cover the costs of the VA loan program. The amount you’ll pay for the funding fee depends on factors like whether you’re a first-time homebuyer and how much money you put down on the home, if any. Some buyers may pay no fee at all, or have it refunded.

Recommended: Cost of Living by State

Who Is Eligible for a VA Loan?

Eligibility for a VA loan is a two-pronged test. You’ll need to be able to obtain a COE from the government and you’ll need to be able to meet the lender’s credit score and income requirements.

COE requirements depend on your duty status and time served. Generally, you’re eligible if you are:

•   An active-duty service member who has served at least 90 days continuously.

•   A veteran who served at least 24 months continuously or 90 days of active duty.

•   A National Guard member who has served at least 90 days of active duty.

•   A Reserve member who has served at least 90 days of active duty.

These requirements assume that you served between August 2, 1990 and the present day. If you’re a veteran, National Guard member, or Reserve member who served before August 2, 1990, the service requirements are different.

You may also be able to get a COE under other conditions. Here are a few examples (find a complete list on the VA website):

•   Are a surviving spouse of an eligible service member

•   Are a Public Health Service officer

•   Served as an officer of the National Oceanic and Atmospheric Administration (NOAA)

•   Served as a midshipman at the United States Naval Academy

If you don’t meet any of the requirements to get a COE for a VA loan, then you’ll need to consider other home loan options.

How to Get Preapproved for a VA Home Loan

VA loans can be attractive to buyers since the VA doesn’t require a down payment or private mortgage insurance. If you’re wondering how to get approved for a VA loan, here are a few tips to qualify for a mortgage.

•   Consider your credit. The VA loan program has no minimum credit score requirement but the higher your score, the better your odds of being approved. A higher credit score can also help you get a lower interest rate on your loan.

•   Know your budget. Estimating how much you can afford when buying a home is important for ensuring that you don’t go over budget. If you know that you’re going to be looking at homes in the $300,000 range, for instance, then you wouldn’t want to ask for $500,000 when you’re trying to get preapproved.

•   Check the lender’s requirements. Researching VA lenders can help you find the one that’s the best fit for your needs and situation. Comparing minimum credit score requirements and income requirements can help you weed out lenders that are less likely to approve you.

Ideally, you should request preapproval from just one lender but that doesn’t mean you can’t shop around first by prequalifying with several lenders to compare rates.

💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

How to Find a VA Lender

The simplest way to find a VA lender is to use the resources available on the Department of Veterans Affairs website. You can also search for VA-approved lenders online. For instance, you might try searching for “VA lender near me” or “VA lender online application” to see what results turn up. If you aren’t sure a VA loan is right for you, check out a home loan help center to get more ideas for how to finance a home purchase.

Recommended: Cost of Living in California

How to Choose the Best VA Lender for You

One of the most important considerations when weighing how to get a VA loan is choosing a lender to work with. Comparing VA lenders is similar to comparing lenders for different types of mortgage loans, including conventional or FHA options. Here are some key things to consider as you shop around:

•   VA loan interest rates

•   Closing costs the lender charges, including origination fees

•   Minimum credit score and income requirements

•   Whether you have the option to buy points if that interests you

•   How long it typically takes for the lender to close a VA loan once you’re approved

It’s also a good idea to check out reviews from previous buyers to see what they have to say about a particular lender. The better the lender’s reputation is overall, the easier they might be to work with.

Tips on the VA Home Loan Preapproval Process

VA home loan preapproval may seem a little tedious with all the information that you need to provide. But it’s important that you don’t skip this step, as preapproval can work in your favor when it’s time to buy a home.

Here are a few tips for ensuring that your VA home loan preapproval goes as smoothly as possible.

•   Carefully read through the instructions for completing the application before you begin.

•   Organize your documents beforehand so that you’re not scrambling to find information later.

•   Review your application before submitting it to make sure you haven’t overlooked anything and there are no errors.

•   Opt for an online application process if possible, which could save you some time.

How long does it take to get a VA loan? While you might be able to get preapproved the same day or the next business day, closing can take anywhere from 30 to 60 days. That’s important to know as you plan out your home purchase.

The Takeaway

VA loans can offer some attractive benefits to homebuyers, and getting preapproved is usually to your advantage. It’s important to take your time to find the right lender to work with so you can get the best loan terms possible.

SoFi offers VA loans with competitive interest rates, no private mortgage insurance, and down payments as low as 0%. Eligible service members, veterans, and survivors may use the benefit multiple times.

Our Mortgage Loan Officers are ready to guide you through the process step by step.

FAQ

Can you get preapproval for a VA loan?

Yes, it’s possible to get preapproved for a VA home loan. You’ll need to find a VA-approved lender to work with and verify that you’re eligible to get a loan through the VA program. Having VA loan preapproval doesn’t guarantee that you’ll qualify for a mortgage, however.

What do I need to get preapproved for a VA loan?

To get preapproved for a VA loan, you’ll need to find a VA-approved lender. Next, you’ll need to provide the lender with some information about your finances, along with a Certificate of Eligibility. You can obtain this document from the Veterans Administration.

How long does it take to get a VA loan preapproval?

Assuming that you have all of the necessary documents and information to process your preapproval application, it may be possible to get a decision the same day. VA loan preapproval shouldn’t take more than a few days to obtain if you’ve checked off all the lender’s requirements.

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^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
^{^}SoFi VA ARM: At the end of 60 months (5y/1y ARM), the interest rate and monthly payment adjust. At adjustment, the new mortgage rate will be based on the one-year Constant Maturity Treasury (CMT) rate, plus a margin of 2.00% subject to annual and lifetime adjustment caps.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Owning a home — or another type of property — with another person comes with all sorts of complications attached. Along with figuring out who’s responsible for washing the dishes and what color to paint the bathroom, you also have to define who owns what.

That’s where joint tenancy comes in. Joint tenancy means that both (or all) parties have 100% ownership in a home (or other kind of property, like a bank account), rather than each owning a 50% share. Right of survivorship means that, if one of the owners passes away, the other(s) will automatically assume full ownership of the property.

Let’s take a closer look at joint tenancy with right of survivorship (JTWROS), as well as viewing some specific examples so you can see exactly how it works in action.

What Is a Joint Tenant With Right of Survivorship (JTWROS)?

Joint tenancy with right of survivorship is — as mentioned — co-ownership in an asset like a home or bank account with assumed ownership after one party’s death. So a joint tenant with right of survivorship is any one person in that ownership position.

With JTWROS, two or more people jointly own an entire asset — rather than each owning some proportional measure of the asset’s value.

Requirements for Joint Tenancy With Right of Survivorship

In order to establish joint tenancy with right of survivorship, all parties involved must meet four criteria known as the “four unities” of joint tenancy. They must have:

•   Acquired the asset at the same time

•   Obtained the same title document

•   Received an equal share of interest in the property

•   Gotten an equal right to own and use the whole property

Keep in mind that specific laws around JTWROS vary by state, so to fully understand how it works where you live, you’ll need to look up your own state’s laws. For example, in California, the default state is for co-owners of property to be tenants in common — which is a different type of ownership structure (more on that below). You should always look up your own local laws, or speak to a local legal expert, in order to ensure you fully understand your ownership rights.

Understanding Joint Tenancy With Right of Survivorship: Examples

Definitions are all well and good — but how does JTWROS work in practice?

One of the most common examples of joint tenancy with right of survivorship is when a married couple purchases a home together. Say Rebecca and Jane buy their first home as young newlyweds, preparing to build a family and a life together.

If both Rebecca and Jane meet the four unities of joint tenancy — including purchasing the home together and having both of their names on the home’s deed — they can share 100% ownership of the home, rather than each of them laying claim to 50% of the home’s value. That means that, if either one of them were to pass away, the other would immediately assume full ownership of the home rather than having to go through the process of probate. (Of course, it also means that neither Rebecca nor Jane could choose to leave the home to someone else — including their children — without first terminating the joint tenancy.)

You could also choose to enter into a joint tenancy with right of survivorship with a non-spouse. Say you and two friends choose to purchase a condo in Seattle together, which you plan to rotate between you as a vacation home. So long as you meet the four unities and specify it at the time of purchase, you can all share 100% ownership of the condo. That said, none of you would be able to leave the condo to your children in your will, sell your share of the property, or even specify what proportion of the property value you own. In order to do any of that, you’d need to be in a tenancy in common. So as you’re thinking about a home mortgage loan, a down payment, and other details around a home purchase, it’s important to think about how you want ownership expressed on the deed as well.

Other Examples of Joint Tenancy With Right of Survivorship (JTWROS)

Although we’ve been talking primarily about homeownership in this article, keep in mind that joint tenancy with right of survivorship can apply to other sorts of ownership and property, too. For example, a married couple or pair of business partners might hold a bank account in joint tenancy with right of survivorship. The same may hold true of personal property, such as a vehicle, when purchased jointly.

Different Types of Joint Tenancy

In order to fully understand joint tenancy, you have to understand tenancy in common — which is the primary alternate ownership structure.

Tenancy in common allows mutual owners to designate proportional ownership (rather than sharing 100% ownership), and any tenant can sell their portion of the property whenever they choose. In addition, the right of survivorship clause does not hold, and each tenant-in-common can leave their share of ownership to a beneficiary in their will if they so choose.

Joint Tenancy with Right of Survivorship	Tenancy in Common
Each tenant enjoys full ownership of the shared property.	Tenants may designate proportional ownership: 50/50, 60/40, etc.
If one tenant dies, full ownership is automatically bestowed on the surviving tenant(s).	If one tenant dies, they can will their share of the property’s ownership to anyone they want.
The four unities must be met in order for joint tenancy to be established.	Tenancy in common can be established without meeting the four unities.

What Are the Tax Implications of JTWROS?

Part of the reason some people choose to enter into a joint tenancy with right of survivorship is to avoid probate — the lengthy, and often costly, legal process by which a person’s assets are assigned to new owners after their death. Still, it’s important for tenants to understand that JTWROS comes with certain tax implications.

For example, if your joint tenant is not your spouse, and the value of your shared property is higher than the annual gift tax exclusion ($19,000 in 2025), the transferral of ownership at the time of their death could trigger the federal gift tax. You may also be subject to estate taxes if the value of your shared property exceeds the IRS’s threshold for that tax — $13,990,000 in 2025.

Always check with a qualified tax professional to be sure you understand the tax implications of shared property ownership.

Advantages and Disadvantages of JTWROS

As you’ve seen by now, joint tenancy with right of survivorship has both advantages and disadvantages. Here are some of them at a glance.

Benefits of JTWROS

•  Right of ownership is automatically transferred at the time of a tenant’s death, avoiding the lengthy probate process and simplifying estate planning for families and married couples.

•  All tenants claim equal ownership over the asset, be it a home, bank account, or vehicle.

Drawbacks of JTWROS

•  No tenant can choose to leave their share of ownership to an heir in their will.

•  Because all tenants share 100% ownership of the property, if one tenant has financial trouble, this trouble affects other tenants even if their finances are in better shape. (For example, if two people share joint tenancy of a vehicle and one falls deeply enough into debt for their car to be repossessed, the other will, obviously, also be unfairly penalized in the process.)

When Does Joint Tenancy With Right of Survivorship Make Sense?

Joint tenancy with right of survivorship can be a great choice for families or married couples whose long-term financial goals and life plans are woven together — and who both have similar financial histories and habits. On the other hand, for those purchasing an asset together in the short term, or in situations where one tenant may have serious debt while another does not, joint tenancy with right of survivorship may not be the best choice.

How to Enter a JTWROS Agreement

Ensuring that a joint purchase is a JTWROS has everything to do with the wording on the asset’s title or deed — so it’s important to ensure that your mortgage lender, bank account representative, or whomever you’re making a purchase from, understands your intention to enter into a joint tenancy with right of survivorship at the time the asset is acquired.

The Takeaway

Joint tenancy with right of survivorship is an ownership structure in which all parties share 100% ownership of an asset such as a home, joint brokerage account, or vehicle. If one of the tenants dies, the ownership is automatically transferred to the other(s), which makes it a common choice for married couples and families.

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FAQ

What is the primary advantage of being a joint tenant with right of survivorship?

One reason married couples and families so frequently choose this ownership structure is that ownership of the property is automatically conferred to the surviving tenant if the other party dies — which avoids the lengthy probate process and doesn’t require anyone to move at a very difficult emotional time.

Which tenancy is best for married couples?

Although every couple is different, many married couples choose a joint tenancy with right of survivorship to simplify their estate planning.

What is a primary feature of property held in joint tenancy?

Property held in joint tenancy is owned 100% by all parties involved — rather than each party owning a proportional share of the property’s value.

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Rental scams are an all too common occurrence, costing would-be renters an estimated $12.5 billion in 2024 alone. In today’s competitive rental market, prospective tenants can be eager to sign a lease and may ignore warning signs. While scams take many different forms, any of them aim to deprive innocent victims of their money.^[1]

If you’re in the market for a new place to live, learn how to spot the signs of a rental scam.

Common Types of Rental Scams

Rental fraud can be hard to spot as common scams may use sophisticated approaches to target their victims. The people behind the scam count on renters not catching on until it’s too late and their money is gone. They also leverage the fact that the housing market can be highly competitive and many people rely on technology (such as video tours) to review options vs. turning up in person.

Here are some of the most common rental scams making the rounds. It’s worth knowing that while these scams occur on year-round leases, many are also perpetrated on short-term rentals, such as those for vacation homes or off-campus student housing.

The “Phantom” Rental: Fake Listings

Phantom rentals involve a property that doesn’t actually exist. Fake listings can look like the real thing, complete with photos and detailed descriptions of the property. As convincing as these listings may look, the property is actually made up.

This type of scam works by encouraging people to rent the property without seeing it in person. Scammers may offer excuses as to why they can’t show it to you (say, business travel or a family medical emergency), or pressure you to pay the deposit and first month’s rent to get the keys. Once you hand over the money, the scammer disappears.^[2]

The “Hijacked” Ad: Real Listings, Fake Contact

Some scammers commit rental fraud using real listings for homes, apartments, or other properties.

They’ll find a property that looks promising, copy the photos and descriptions, and use them to create a new listing. You contact the number in the listing expecting to talk to a legitimate rental agent, but you’re really talking to the scammer. Based on images and videos, you pay a deposit in good faith to the scammer, who pockets your money.^[2]

The “Bait and Switch”: Property Isn’t as Advertised

Bait and switch is a deceptive marketing tactic in which one thing is advertised but something entirely different is delivered.^[3]

With these types of rental scams, you may be wowed by photos of the property or a detailed description. You go to check it out, or even sign a lease sight unseen, only to find out that what you’re paying for and what you expected to get are two different things. The actual property doesn’t match with what you believed you were renting.

The “Payment Redirect”: Impersonating a Landlord

Some scammers will go as far as pretending to be the property’s owner to deceive people into signing fraudulent rental agreements. They may even be able to clone the landlord’s email address or payment portal to cheat people out of their money.

The most persuasive scammers convince their victims to send payment for a deposit or rent to them, without verifying that they are who they say they are. Payment redirect scams may involve multiple people working together to facilitate fraud.^[4]

How to Spot a Potential Rental Scam (Red Flags)

Some rental scams may be more obvious than others. If you want to know how to avoid rental scams, you first need to know how to recognize them. Here are some of the biggest red flags to watch out for.

The Listing Is “Too Good to Be True”

You may have a checklist of must-have and nice-to-have features that you’re looking for in a rental. If you find a listing that seems to have it all, including lower than expected rent and deposit requirements, that could hint at a scam, especially in today’s tight rental market.

Here’s a simple way to evaluate a seemingly perfect property: Compare it to similar rentals in the same market. Rental listings for a specific area often have similarities in terms of their size, features, and price. You might think you’ve hit the jackpot if you find the one outlier that surpasses the competition in every way but you may be walking into a scam.

Recommended: Cost of Living by State

Communication and Pressure Tactics

Scammers may want to close a deal with you quickly so that you don’t have a chance to spot their rental fraud. That’s where high-pressure tactics come in.

For example, the person posing as a landlord or rental agent may bombard you with calls, emails, or texts telling you that you need to jump on the property before they hand it over to someone else. Or, they may offer you a special “discount” to motivate you to hand over a deposit and first month’s rent.

If a rental situation makes you feel uncomfortable, don’t be afraid to walk away. You could be saving yourself the headache of cleaning up the mess from a scam.

Suspicious Payment Requests

Typically when you rent a place, the property owner or rental manager will ask you to pay by check, credit card, or debit card. Scammers, however, may ask for more unusual forms of payment, including:

They may also pressure you into paying upfront before you sign a lease or even see the property. Or scammers may tell you there are added fees you’ll need to pay on top of your deposit.

Lack of a Proper Screening Process

Legitimate rental agreements usually require some prescreening before you can be approved. For example, you may need to undergo a credit check or a criminal background check. You might also need to provide references from previous landlords or people you know professionally.

Lack of screening is often a giveaway that a rental opportunity is a scam. Any reputable property owner or rental agent will want to know a little bit about the person they plan to rent to.

Recommended: How Much Money Should I Spend on Rent?

Proactive Steps to Avoid Getting Scammed

Knowing how to avoid rental scams is a good thing if you don’t plan to buy a property any time soon. Here’s how to check if a rental property is legit as you look for a place to call home.

Do Your Homework: Verify Everything

A little due diligence can go a long way in avoiding rental scams. Before you hand over money or sign a lease, take time to confirm that everything is as it should be.

Asking questions can help you root out a potential scam. If the person you plan to rent from is hesitant to answer your questions, ignores them, or gets angry with you, that could signal that you’re dealing with a scammer.

The In-Person or Live Video Tour

Seeing a rental in person can clue you in to a scam if the property doesn’t match the photos or description listed online. It’s also a chance to decide if the place fits your needs, and get a feel for the neighborhood.

Ask for a live video tour if a property owner or rental agent is reluctant to let you visit or your schedule doesn’t allow you time to visit. If that request is also turned down, then you may be dealing with a scammer.

Research the Landlord and Property Ownership

If you’re worried about imposter scams, do your research on the property and its owner or owners. For instance, you should know whether you’re dealing with an individual owner, or a rental property company. Here are some other tips for researching ownership.

If people in the neighborhood seem willing to chat, ask them what they know about the property and its owner(s). People who live in the area may be the best source of information about what a rental is like and whether it’s legitimate.

The Lease Agreement and Secure Payments

At this stage, you may be ready to sign a lease and pay your deposit if everything else checks out. Before you do, take care of these steps.

Be prepared to walk away from any rental situation that doesn’t feel right.

What to Do If You Suspect or Become a Victim of a Rental Scam

You can do all the right things and still run into a rental scam; sometimes, scammers are just that good. If you think you’ve been scammed or suspect that a scam is afoot, here’s what you can do next.

Immediate Actions to Take

Protecting yourself quickly matters if you believe you’re a victim of rental fraud. Here are some important first steps to take.

The goal is to try to minimize the damage as much as possible. If you gave the scammer your Social Security number, you may also want to freeze your credit reports. Freezing your credit prevents anyone from opening new loans or credit cards in your name.^[6]

Reporting the Scam

Reporting rental scams can protect you financially and potentially help others avoid becoming victims. You can report rental fraud or gain important information from these agencies:

Document each report you make. If there’s any chance of a scammer using your personal information to commit additional fraud, your evidence can help you to defend yourself against collection claims or lawsuits related to identity theft.

Monitor Your Accounts

It’s always a good idea to track your financial accounts for suspicious activity but especially so if you’ve encountered a rental scammer. You can set up alerts for your checking accounts, savings accounts, and credit cards to notify you of new transactions, including purchases, transfers, or withdrawals.

You could also take the additional step of closing your existing bank accounts and opening new ones. You financial institution can likely help you achieve a secure banking experience if you’re in the challenging situation of enduring a rental scam.

The Takeaway

In today’s often highly competitive rental market, scammers may try to take advantage of people with fake listings, impersonation of landlords, and other fraudulent activities. It’s important to protect yourself by being aware of these ploys and proceeding carefully to verify listings and lease opportunities and use secure payment methods when drawing upon your checking account.

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FAQ

What is the single biggest red flag for a rental scam?

If a rental listing seems too good to be true, that’s often an indication that you’re dealing with a scam. If a property seems unbelievably affordable, that’s often a clue that it’s not legit. Another common sign of a scam is being subjected to high-pressure sales tactics, such as signing a lease and sending payment ASAP, before you’ve done your due diligence.

Are listings on major sites like Zillow or Apartments.com automatically safe?

While major rental listing sites typically have state-of-the-art security features, there are indeed plenty of scammers out there trying to post fake listings, hoping to trick people into paying deposits or other fees. For this reason, it’s always wise to be alert to red flags and learn how to check if a rental property is legit.

Is it normal to pay a rental application fee?

Rental companies and property owners may collect a rental application fee to cover the cost of a credit check or background check. If you’re asked for a fee, get an explanation (preferably in writing) of what it’s for. Beware of fees that seem unusually large or that the rental agent demands you pay, especially via a person-to-person payment app.

What should I do if I live out of state and can’t see the apartment in person?

If you can’t get to a rental in person for a tour, you could ask for a live video tour of the property. Alternatively, you may ask someone you know and trust who lives in the area to visit the property on your behalf. You’ll need to get the property owner or rental agent’s consent for that first.

How can I quickly verify the person I’m talking to is the real owner?

The best way to quickly verify someone’s identity is to meet them in person to discuss a rental property and ask for a government-issued photo ID. Take down their information then compare that to property tax records which can be found online for the property in question.

Article Sources

1. Federal Trade Commission (FTC). Protect yourself (and your money) from scammers this Financial Literacy Month.
2. Federal Trade Commission (FTC). Rental Listing Scams.
3. Cornell Law School. Bait and switch.
4. Office of Inspector General. OIG Fraud Bulletin.
5. Federal Trade Commission (FTC). If You Were Scammed.
6. Consumer Financial Protection Bureau. What does it mean to put a security freeze on my credit report?.

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About the author

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Photo credit: iStock/atakan

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SOBNK-Q325-070

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There are a couple of ways to use an IRA to invest in real estate. First, you can invest in mutual funds, exchange-traded funds (ETFs), or real-estate investment trusts (REITs) that focus on real estate investments within an IRA.

It’s also possible to set up a self-directed IRA, or SDIRA, that can own physical real estate, as well as other types of alternative investments.

Using an IRA to invest in real estate property directly, however, is a complicated and potentially risky proposition. It’s important to understand the many rules and restrictions, as well as the potential advantages and disadvantages of investing in real estate in an IRA before doing so.

Can You Invest in Real Estate Using an IRA?

IRAs can offer a wide variety of investment opportunities, including those that target the real estate sector. While conventional investment options within an IRA are often confined to equity and fixed-income mutual funds, exchange-traded funds (ETFs), and index funds, it is in fact possible to use an IRA to invest in real estate in various ways.

Investing in real estate may be appealing to some investors because this asset class tends not to move in sync with traditional stock and bond markets; thus real estate may provide portfolio diversification. Some real estate investments also offer the potential for passive income.

But real estate is a type of alternative investment, and as such tends not to be very liquid, which may present risks for some investors.

Ways to Invest in Real Estate With an IRA

Here are some choices investors can consider for IRA real-estate investments. But not all types of real estate can be held in any type of IRA:

•   Real estate mutual funds, real estate-focused exchange-traded funds (ETFs), real estate investment trusts (REITs) are typically available through a traditional, Roth, SEP, or SIMPLE IRA.

•   Investing directly or owning residential and commercial investment properties, tax-lien certificates, crowdfunded real estate investments typically require a self-directed IRA or SDIRA (see detail below).

1. Real Estate-Related Funds

Like any type of mutual fund, real estate funds hold a basket of investments. Real estate mutual funds tend to be actively managed funds that may hold shares of real estate-related stocks, REITs, or they may track an index.

A real estate index fund, for example, seeks to mimic the performance of a market benchmark or index.

ETFs, meanwhile, are pooled investments similar to mutual funds, but are traded on an exchange like stocks, so they offer more liquidity. ETFs may also hold real-estate related investments — typically shares of REITs.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA online and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

2. Real Estate Investment Trusts

Investors can also invest in Real estate investment trusts (REITs) directly. REITs own and manage properties on behalf of investors. REITs can target a specific niche or segment of the real estate market, such as retail shopping centers or storage facilities. Or they might hold a wide mix of property investments, including residential rental properties, office buildings, and industrial warehouses.

Dividends are often at the top of the list of benefits when weighing the pros and cons of REITs. They’re required to pay out 90% of profits to shareholders as dividends, making them a potentially reliable source of passive income.

Some of the advantages of REITs include passive income from dividends, and portfolio diversification, but these vehicles come with a number of risks. Potential risks include less liquidity and sensitivity to interest rates, as well as other factors that can negatively impact real estate markets: i.e., consumer trends, property destruction (from wear and tear, or weather), local laws and regulations.

3. Investment Properties

It’s also possible to own investment properties directly, such as commercial and residential real estate, among other types of properties. Investment properties can generate passive income through rent payments, and they may offer a profit when sold.

But investment properties typically require an upfront investment of capital, managing a mortgage, and ongoing maintenance that may be beyond the reach of most investors.

4. Tax-Lien Certificates

Tax-lien certificate investing involves buying liens that have been placed against properties in connection with unpaid tax debts. The holder of the certificate can collect interest while the property owner repays the debt. If the owner defaults on the debt, the certificate holder can take ownership of the property.

These are high-risk instruments, typically owing to the potential for losing money on tax payments and low-quality properties that don’t yield a profit.

5. Real Estate Crowdfunding

Real estate crowdfunding platforms, also known as online real estate platforms, allow a number of investors to purchase property by pooling their investment funds. Depending on which platform you’re using, the minimum investment could be as low as $500, but terms vary and the risks can be high.

Crowdfunding is even less liquid than many other types of real estate investments, since there’s typically a minimum holding period — which means investors’ money can be tied up for long periods, and there is no guarantee that a certain property or properties will turn a profit.

What IRAs Can You Use to Invest in Real Estate?

If you’re interested in real estate funds or REITs, you may be able to invest in these through a traditional, Roth, SEP, or SIMPLE IRA. Many brokerages include real estate funds and REITs as investment options for ordinary IRA investors.

On the other hand, if you’re specifically interested in property investments or tax-lien certificates — i.e., directly investing your IRA in real estate — you’ll need to open a self-directed IRA (SDIRA) instead.

What Is a Self-Directed IRA?

A self-directed IRA is a traditional or Roth IRA that’s held by a specialized custodian that allows investors access to a broader range of investments, including alternative investments like real estate.

Unlike ordinary IRAs which are overseen by a broker, all assets in a SDIRA are researched and managed by the account holder.

Self-directed IRAs are subject to a number of IRS restrictions. Many of these rules also apply to ordinary IRAs, but it’s important to bear them in mind when thinking about investing your IRA in real estate. Specifically, you’re barred from:

•   Transacting with disqualified persons. These include your spouse and any family members, as well as your IRA beneficiary if they don’t fit either of those categories. The prohibition also extends to any business entity that’s owned by a disqualified person.

•   Using the IRA or investments in the IRA for personal benefit. Using an IRA for personal benefit in any way is not allowed. For example, if you’re collecting rental income from a property you own in the IRA, you have to deposit any profit into the IRA, along with any other income generated by self-directed IRA assets.

•   Making disallowed investments. Finally, there are some limits on what you can own in a self-directed IRA. Disallowed investments include life insurance, collectibles, and business interests in S-corporations. Transactions that count as “self-dealing” are also prohibited: i.e., borrowing money from a SDIRA, selling property to it, using it as loan collateral.

Note: While the IRS permits using an IRA to buy a first home, that doesn’t apply to self-directed IRAs.

Steps to Buying Real Estate With an IRA

If you’d like to invest in property or tax lien certificates with an IRA, you need to set up a self-directed IRA, and then purchase the property or similar investment through the SDIRA . Because it can be very difficult to secure a mortgage for this kind of purchase, most direct property purchases are paid for with cash from the SDIRA.

1. Find a Custodian

The first thing you’ll need to do is find a qualified custodian that offers self-directed IRAs for real estate investment. When researching custodians, it’s a good idea to consider their reputation in the space, customer service and satisfaction, as well as the fees you’ll pay.

2. Open a Self-Directed IRA

Once you select a custodian, you can open your SDIRA. Your custodian should be able to guide you through this process, which usually involves completing the appropriate paperwork.

Remember, you’ll need to specify whether you’d like to open a traditional or Roth self-directed IRA. Traditional IRAs allow for tax-deductible contributions, while Roth SDIRAs can offer qualified withdrawals tax free in retirement.

Your custodian may give you the option (or require you) to establish a self-directed IRA as a limited liability company (LLC). Doing so can offer an advantage, since it allows you to have full control with regard to signing authority over IRA funds.

However, setting up an LLC real estate IRA can trigger additional IRS rules against prohibited transactions.

3. Deposit Funds to Your IRA

The next step is transferring funds into your self-directed IRA. That may be as simple as scheduling an electronic transfer from a bank account. You can also roll funds over from a 401(k) or another eligible plan.

Keep in mind that self-directed IRAs follow the same annual contribution limits as other IRAs, but those limits do not apply to IRA rollovers.

4. Compare Investment Options

Once you have money in your self-directed IRA, you’ll need to decide how you want to invest it. If you’re focused on real estate, that might mean purchasing an investment property. It’s important to perform due diligence to find a property that aligns with your investment needs, goals, and risk tolerance.

Remember that self-directed IRA investment options can include:

•   Single-family or multifamily homes

•   Commercial and rental properties

•   Land

•   Tax liens

•   Mortgage notes

Each one can have a different risk/reward profile so it’s important to understand what you might gain from each one and what you may stand to lose. It’s also a good idea to consider how much of your self-directed IRA funds, and your portfolio as a whole, you’d like to allocate to real estate.

5. Purchase a Property

If you’re investing in a rental property and you’ve found one you want to buy, the final step is making the purchase. You’ll need to make an offer and once that’s accepted, you’ll need to authorize your IRA custodian to complete the transaction on your behalf. That’s important, as the property needs to be held in contract by the IRA, rather than yourself.

Pros and Cons of Investing Your IRA in Real Estate

Investing an IRA in real estate can yield some advantages but there are some serious considerations to keep in mind.

While you can use a self-directed IRA to hold real estate, which may offer some tax advantages, it’s important to know the rules so you don’t risk losing those benefits. Also, keep in mind that holding real estate inside a self-directed IRA can mean missing out on some tax advantages you’d get by owning property directly.

A self-directed IRA can offer high return potential but that means doing your homework first to find solid investments. You’ll need to spend some time researching properties to ensure that you understand the risks, as well as the level of returns you might be able to expect.

Managing a self-directed IRA may be more time-consuming than investing in a regular IRA, especially if you’re not hiring a property manager to oversee property investments. Self-directed IRAs offer less liquidity and depending on which custodian you choose, the fees may be high.

Is Investing Your IRA in Real Estate Right for You?

Deciding whether to invest in real estate with your IRA can start with reviewing your portfolio as a whole. Here are some questions to consider:

•   Do you already own any real estate investments, including REITs or index funds?

•   If so, how much of your portfolio is allocated to real estate?

•   How much time and effort do you have to put into managing real estate investments?

•   How much money are you able to invest?

•   Do you have a trusted custodian and if not, do you know where to find one?

•   What degree of risk are you willing to take and what kind of returns are you hoping to earn?

•   Asking those kinds of questions can help you to evaluate where real estate fits into your investment plans and whether a self-directed IRA is the best option for you.

Alternative IRA Investment Options

In addition to real estate, you can also hold a wide variety of other alternative investments in a SDIRA.

•   Commodities

•   Gold and other precious metals

•   Limited partnerships

•   Private equity

Remember that the IRS bars you from owning things like artwork, antiques, rare coins or stamps, and fine wine in a self-directed IRA.

The Takeaway

Opening an IRA for real estate investing could be worth the effort if you’re hoping to diversify your portfolio beyond stocks and bonds, but it requires opening a specific type of IRA called a self-directed IRA, or SDIRA. This type of IRA isn’t available from a traditional broker, because you can use a SDIRA to hold alternative investments, such as real estate and commodities.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

Can I invest in real estate using my IRA?

You can invest in real estate using a self-directed IRA, or SDIRA. This type of IRA is held by a custodian and allows you to choose from a wider range of investment options than regular IRAs. With a self-directed IRA, you can own rental properties, mortgage notes, and tax lien certificates.

How is real estate taxed in an IRA?

Real estate held in an IRA is subject to the tax rules that apply to the type of IRA. For example, if you have real estate in a traditional SDIRA then any earnings or income generated by those investments would grow tax-deferred. You’d pay ordinary income tax on them when you make qualified withdrawals in retirement. A Roth-style SDIRA would provide tax-free income on qualified withdrawals. Owing to the complexity of self-directed IRAs to begin with, it might make sense to consult a professional regarding tax implications.

What type of real estate can be held in an IRA?

A self-directed IRA can hold residential rental properties, commercial real estate investment properties, tax lien certificates, and mortgage notes. If you have a regular traditional or Roth IRA, you can use it to invest in real estate funds, ETFs, or REITs.

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