If you have ever thought about buying residential income property, but asked where the financing would come from, this article is for you. You’re not the first person to wonder that. Why not try using the money in your individual retirement account (IRA) or your 401K?

If I were you, I would be thinking, “How does that work?” Well, as it turns out, it’s not as difficult as you would imagine. There is a special kind of IRA or 401K – called “self-directed” – that allows you to invest in whatever you want, whatever you understand. Real estate is included.

You better believe there are plenty of excellent reasons to invest this way, not least of which is the fact that income taxes on the money are deferred until retirement. Your tax rate will probably be lower then, and so your money will grow fast now, AND last longer when you need it.

Second, your self-directed retirement account will let you put your money where you are most comfortable – and where you know something. If real estate is your thing, why not invest your money there, instead of some mutual fund you know absolutely nothing about? How about buying a rental house in the neighborhood right next to yours?

Be aware that the government has rules for these self-directed accounts that must be followed. Never fear, because whoever you hire to manage your account will know and understand these rules, and guide you every step of the way. The number one rule is that the IRA or 401K owns the property… not you, Mr. Investor.

Since the Individual Retirement Account owns the real estate, all money paid or received relative to that piece of property must come from the IRA or 401K, and be paid back into it. You can’t comingle funds, or write checks from your personal account. Because of this rule, paying bills can be a bit aggravating, because you need to request checks from your account holder. It can get expensive, too.

As with every other IRA or 401K, all of your capital is at risk. The nature of real estate investing is that it is possible to lose money. It’s rare, but it does happen. At least with a self-directed account, you control the investments, and therefore you can insure you don’t invest in money losers.

Finally, you should ask yourself if self directed retirement account investing in real estate is something you are interested in. It’s not hard to do, and it can be a truly excellent way to get started in the game of residential income property. Why leave all that money in the hands of other people who don’t understand your investing goals?