What Would You Do with $100,000 in an IRA?

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I have a good friend who just moved $100,000 into a self-directed IRA and we recently discussed how he could invest that money in real estate. I thought it was an interesting discussion and assume this is probably a fairly common scenario. Many investors that are tired of insanely low returns from conservative vehicles such as money markets, CD’s, bonds, or even just cash positions are often open to investing in real estate, but don’t know where to begin.

Step One: Self-Direct It

For starters, I would roll my IRA(s) into a self-directed IRA. There are a handful of good, reputable custodians that specialize in this. Yes, the yearly fees may be slightly higher than you are used to, but the ability to invest the money in real estate and other creative outlets far outweighs the minimal costs associated with this type of account.

Keep in mind this is just my opinion, but I like the idea of pursuing a balanced approach to real estate investing. While owning real estate obviously has numerous benefits, there is also much to be said about diversifying into other income producing strategies such as private lending (also referred to as hard money lending)

Buy a Property First

The first thing I would do is identify a market (city ands state), product type (single family vs multi-family) and a price-point that will help you achieve your goals. In referring to goals, it’s important to determine where you fall into the spectrum of cash flow vs. appreciation.  Some markets produce excellent cash flow, but aren’t necessarily growth markets. Some markets are poised to appreciate quickly over the next several years, but perhaps don’t produce as much cash flow. Personally, I think it makes sense to invest in a market that has a healthy combination of the two.

Once you have narrowed down your criteria, find a team of professionals in that market that can help you purchase a property, renovate it, and finally get it leased and managed. I think in many markets, it’s reasonable to buy and rehab a good investment property for around $70,000 to $110,000. In purchasing the property, I recommend using leverage if at all possible. There are a handful of lenders around the country that have non-recourse loans that can be obtained for properties purchased through an IRA. Most of these lenders require between 30%-50% down.

Become a Lender

Once I had purchased a property, I would take the balance of the IRA funds (minus $5000 as a slush fund) and find a good team of real estate professionals to do short term hard money loans with.  It’s not uncommon to find a team of turn-key operators (with a solid track record) that will pay in the neighborhood of 1 to 2 points and 12% interest for 6 month notes.  This is a great way to get safe returns while not locking up money for an extended period of time.

Using this blended strategy, over the course of a few years, I think it would be very reasonable to obtain a yearly ROI of between 15-20% on your money taking a fairly conservative approach. Again, this is just my opinion on how to invest 100K. One of the great things about a platform like BiggerPockets is the wealth of experience and shared knowledge that help all of us as investors develop our own opinions and strategies on investing! I’d love to hear how others would investing 100K in an IRA!

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About Author

Ken Corsini G+ is the founder of Georgia Residential Partners, LLC - a real estate investing firm based in Atlanta, Ga focused on creating turn-key investments for investors all over the country. He's been investing in real estate since 2005 with hundreds of real estate transactions.

10 Comments

  1. In 2010 I created a self-directed IRA funded with 200k and I purchased 3 properties and they have provided a 15% return excluding any appreciation. I have some cash sitting in these accounts right now and I think it’s a good idea to explore doing some hard money lending.

      • After I purchased the first three I looked into financing a 4th but in my opinion the cost of the loan and the rates were too high . So to answer your question, no I didn’t get any financing.

  2. I am not a huge fan of owning property in a retirement account. Leverage (in an IRA) is subject to UBIT and you can’t write off interest or depreciation or write off expenses in running the business. I prefer the lender approach in a retirement account and owning property outside the retirement account. If you have the option many find an SD 401K more beneficial than an SD IRA. In a SD 401K, leverage is not subject to UBIT and the new tax laws for 2013 allow you to more readily covert to a Roth 401K.

    • While you’re correct about leveraged profits resulting in UBIT (Unrelated Business Income Tax), be aware that you (YOUR IRA) can write off interest and other expenses. You personally aren’t receiving the benefit but your IRA certainly does. In a leveraged situation, you’re allowed to write off expenses in proportion to the taxable portion of debt equity.

      I second the idea of investigating individual 401(k) plans but only if you’re truly self-employed. Starting a C-Corp so that you may open an SD401k is not the same.

  3. Owning a rental property and lending money are very different businesses. Learning both at once seems a good way to end up with considerably less than $100,000 in retirement savings.

    Opening a SDIRA is a good way to diversify. But unfocused is not a synonym for diversified.

    • I’d have to agree that buying, especially one that you can’t actively manage potentially in another state, while picking up lending at the same time would seem to require a steep learning curve and would be accompanied by an awful lot of risk for someone who isn’t familiar with these businesses. Unless you are truely going to manage the investments directly.

      • Alan – thanks for the comment. Once you understand what makes a good real estate investment, have learned how to vet a deal … and have actually purchased your first property – you’ve also basically figured out how to vet a hard money deal. Rather than buying the property though, you are simply lending funds on the property.

        Here’s the deal though – I really only recommend lending to reputable groups with a proven track record for turning properties. The idea is that this is a hands off investment …. there should be nothing to actively manage in a hard money deal. There are very good, reputable and proven real estate investing groups all over the country that would be easy to lend to with minimal risk and minimal management needed.

  4. Great discussion. I have been investing in real estate in Detroit, MI for over a decade and have found nowhere else with the returns like I have achieved personally and for my clients. Obviously I am a little spoiled because the market I live and invest in allows RIDICULOUS returns (purchase for $1,000 rehab for $7,500 and rent for $1,150 ROI 68%)

    Understandably it is hard for me to settle for 8-15% as a hard money lender, however I have invested via a SDIRA and earned +15% and borrowed IRA funds at higher rates (18-30%) for transactional funding, and JV on deals, when the sweetheart 68% aren’t readily available in a particular month, so either way seems a viable solution.

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