An increasing number of people are exploring the idea of using their IRA to invest in real estate.

The financial strategy is giving people more avenues to get into real estate while growing their retirement investments.

The self-directed IRA and Limited Liability Company are the vehicles to drive their financial future forward.

But common mistakes can result in huge losses.

Steer clear of these five frequently made mistakes.

Mistake No. 1:

Do-it-yourself kits

All you have to do is search the Internet using key words such as “self-directed IRA” and “LLC” and you’ll find numerous sites offering do-it-yourself kits to set up an LLC to fund your real estate transactions.

“People are selling (these kits) for $400; I’ve actually seen them on eBay for $90,” said Jeff Nabers, founder of the IRA Association of America.

Nabers founded a resource site on investing with your self-directed IRA to help investors with the process. He cautions people to beware of self-serve kits.

“(The kits) aren’t providing any actual service. They’ll just provide a sample operating agreement and a rundown of how to file an actual LLC yourself with your state,” he said.

The main problem with the do-it-yourself kits is that you are the person held responsible for legal compliance of your IRA LLC.

“If someone has $100,000 or $1 million IRA, if they do something and it’s not compliant and it results in being deemed a distribution, that person is going to be taxed and penalized on the full value of the account,” Nabers said.

The bottom line is that if you think you are saving thousands of dollars by doing it yourself, but then you end up paying tens of thousands or even hundreds of thousands of dollars in taxes and penalties — the initial savings is nullified.

“A lot of people even go so far as to label the do-it-yourself kits a scam because really it’s kind of convincing people to do it themselves and then they are the ones on the hook for it (should something legal go wrong),” Nabers said.

Mistake No. 2:

Overpaying for legal and expert help

While using experts to set up an IRA LLC may initially cost more than a do-it-yourself kit, most find the benefits outweigh the risk.

Nabers also said that you don’t have to get sucked into paying an outrageous price if you comparison shop.

“A lot of times people will end up paying $10,000 or more to get an LLC put together and an opinion letter,” he said.

He said a more reasonable market rate for getting that service is in the range of $4,000 to $6,000.

But great deals can be found at www.iraaa.org. The association offers its members a significant discount on this service.

Do your homework and shop around before you commit to an attorney.

Full-time investor, Jason Merritt, discovered he was overpaying for his IRA LLC set up fees.

“(The money) adds up because we usually set up a different IRA or LLC for different projects or ventures that we go into,” Merritt said.

Merritt has taken advantage of the discount that he gets for being a member of the association.

“For about $1,500 he can set up an LLC for us,” he said. Merritt adds that over the course of a year he has been able to save thousands of dollars.

Mistake No. 3:

Not understanding prohibited transactions

Investing with your IRA can be risky business if you don’t understand what constitutes distributions and prohibited transactions. A common mistake is that people think that their IRA can invest in a second home; your IRA, however, can only be used for investing purposes.

“For instance, here in Myrtle Beach, a lot of times, people will buy a property as an investment but part of their motivation for buying it is that they can come and spend a couple of weeks here and there vacationing in that property. But if their IRA owns the property they can’t get any personal use out of it,” Nabers said.

Mistake No. 4:

Putting all your eggs in one basket

A healthy financial portfolio is one that is diversified. For instance, it’s not recommended that you take all of your money from the stock market and put it all into real estate.

“It’s about freeing up your retirement funds to be invested without undue limitations,” Nabers said.

The diversity creates better financial stability — if a particular area isn’t performing and you have your investments diversified you’ll be able to experience gains from your other financial strategies. Having plenty of options to increase your financial wealth provides greater security.

Mistake No. 5:

Not using experts

Many people first go to their attorney or CPA to ask about a self-directed IRA. Nabers said the problem with this is that the average CPA or attorney simply doesn’t have the time to do enough research to know all the ins and outs of what you can and can’t do.

He said instead of admitting that they haven’t done the research, it is not uncommon for attorneys or CPA’s to steer their clients away from self-directed IRA investing in an effort to keep them as clients.

If you’re interested in using your IRA to invest in real estate it pays to consult the experts to walk you through the process.