Getting started in REI with an IRA or Self-Directed IRA

14 Replies

My father and I are looking into getting into RE Investing. Our long term goal is to build a portfolio of rental properties that produce passive income both for his retirement and my long term wealth. As we contemplate our strategy for how we begin we have thought about using a large portion of his IRA to get started. He lost a HUGE chunk of it in the stock market when the market crashed and is currently only getting about 10-20k/yr added as the market has been growing. But it will not be even close enough for him to retire on in 7-12 years when he hits retirement age.

One of the things we considered was taking a HUGE chunk out of his IRA, paying the taxes and fees to pull the money out r possibly rolling it into a self directed IRA and buy a quadplex. We have found a couple quadplexes that will turn us about $1k per door in cash flow (again the property would be paid for in full). These quadplexs are in growing markets in our area and have good tenants already in place. And only need a few small capital expenditures to get started. Just having one of these quads would give us $48k cash flow per yr. We obviously want to take a yr or 2 and take that cash flow saved to buy another multifamily property and build our wealth that way.

We are both new at REI and am looking for advice on whether or not this is a good idea. Within a decade we hope to at least have 5 multifamily properties with at least owning 2 or 3 free and clear. Then he can start living off one or 2 of the properties and I can focus on growing our portfolio. Can anyone tell me what requirements there are if we would choose to self direct his IRA? Can we use that cash flow to purchase another property? When can we start pulling that cash flow out?

Just looking for advice. The stock market sucks and we are looking for ways to get started in REI. Thanks BP.

@Michael Strobel Great thinking about using IRA money. My 1 suggestion would be roll it over to self directed and invest for long term. The money from the property would have to go back into the retirement account but you would avoid the tax hit upfront. (Clearly if the tax hit is not to bad, take it and run). Im my business I have a lot of 401k/IRA dollars and in my opinion is is a great way to protect your investments.

I just had an investor roll over some money before the stock market dip a couple months ago and it saved him a lot of money.

I agree with you, multifamily properties are a great start and I like your plan. But before taking the tax hit, speak to a professional (I can recommend someone if you are interested). 

Good luck and let me know if you have any questions.

@Michael Strobel

if your father decides to rollover his IRA into self-directed IRA this would be considered a 'qualified transfer' therefore there will be no taxes or penalties until the time of distributions. The subject of SDIRA is regular discussion here on BP forum so my recommendation would be to search the forum for related keywords and that will keep you busy reading and educating yourself.

If your father decides going this route then all of the investments, income and gains would belong to his IRA. You can not use any of that right now, and even him too. IRA is a retirement account and is designed to be used during the retirement.

When your father retires he can start taking distributions from his IRA and leave off of that. If he decides to designate you as the beneficiary - you will inherit his IRA when he dies.

Hope this helps.

Originally posted by @Dmitriy Fomichenko :

@Michael Strobel

if your father decides to rollover his IRA into self-directed IRA this would be considered a 'qualified transfer' therefore there will be no taxes or penalties until the time of distributions. The subject of SDIRA is regular discussion here on BP forum so my recommendation would be to search the forum for related keywords and that will keep you busy reading and educating yourself.

If your father decides going this route then all of the investments, income and gains would belong to his IRA. You can not use any of that right now, and even him too. IRA is a retirement account and is designed to be used during the retirement.

When your father retires he can start taking distributions from his IRA and leave off of that. If he decides to designate you as the beneficiary - you will inherit his IRA when he dies.

Hope this helps.

 Hey Dimitri,

Thank you for your explanation. Then I have a quick question for you. If you self direct enough to purchase a 4 plex, after a couple years can you take the cask flow you are getting from that property and purchase another property with that money? Then creating more cash flow, and greater retirement? Or can you only use it to make 1 purchase?

Thanks

Originally posted by @Linda Weygant :

One thing to be careful of is that you, as a direct lineal descendant of your father, have some restrictions when dealing with your father's self directed IRA.

Good observation Linda, immediate family members are considered to be "disqualified person" and are prohibited from conducting any business with an IRA.

Hi Michael - John Cohen is right on track. Easy enough to create an SDIRA for your REI activities, and a solid course of action. There are lots of third parties out there that you help you do just that. Just make sure you do it right, and keep solid tracking on everything you do, formally separated and in separate bank accounts (don't comingle ANYTHING, IRS hates that!), and yes the money from the property positive cash flow or gain on sale must go back into IRA (but, can then be distributed in smaller chunks as taxable). Tax reporting at the Federal level on the properties in the SDIRA is minimal as well.

Originally posted by @John Cohen :

@Michael Strobel Great thinking about using IRA money. My 1 suggestion would be roll it over to self directed and invest for long term. The money from the property would have to go back into the retirement account but you would avoid the tax hit upfront. (Clearly if the tax hit is not to bad, take it and run). Im my business I have a lot of 401k/IRA dollars and in my opinion is is a great way to protect your investments.

I just had an investor roll over some money before the stock market dip a couple months ago and it saved him a lot of money.

I agree with you, multifamily properties are a great start and I like your plan. But before taking the tax hit, speak to a professional (I can recommend someone if you are interested). 

Good luck and let me know if you have any questions.

Hello and welcome!  It sounds like a good head.  There are several ways you could go.  Besides MF you could look at for sale by owner deals owner has just died deals  foreclosure deals,  and anything else you feel comfortable with.  Just allways run the numbers completely and know your markets will support.  If you do not feel comfortable with the deal just walk away and do another one.  I am 59 years old and I found BP about 3 months ago and I am still learning.  I graduated from college with a business degree that had real estate emphasis and I got a broker license in 1980.  Regardless of what I got a degree in I felt more comfortable in the construction business.  I have been in the construction business since I was 17.  If you feel that I maybe of any help to you please contact me at any time.  Good luck!

@Michael Strobel

Here are some things to understand when investing IRA funds directly in real estate without the use of an a LLC

1. The rules do allow for it as confirmed by the following IRS website. 

https://www.irs.gov/Retirement-Plans/Retirement-Pl...

2. Title to the property is taken in the name of the IRA.

3. All expenses and gains must flow through the IRA.

4. If debt financing is used, UBIT will apply and it must be paid using IRA funds.

5.Neither the owner nor disqualified parties such as her parents, kids and spouse may use the property for personal reasons whether to rent or for collateral. 

Originally posted by @Linda Weygant :

One thing to be careful of is that you, as a direct lineal descendant of your father, have some restrictions when dealing with your father's self directed IRA.

Linda, you raised an important point that I'm unclear about. I'm also about to leave my 9 to 5 career and am considering rolling over my employer managed pension fund to a self directed 401K with checkbook control so that I may grow the fund by investing beyond ETFs (namely real estate). I understand that all proceeds from my investments go back to the SD401K, and the restrictions regarding family members using or buying assets belonging to my SD401K. So what happens when the day comes and I bequeath my estate to my surviving children and spouse? With these prohibitions, it seems counter-intuitive to me. Can I hand over the assets as well the monetary value of the SD401K to them?

@Sam Sharata

When it comes to estate planning and inheritance, a self directed IRA or Solo 401k is no different than any other plan. The difference is what the plan is invested in.

When you establish your plan, you will designate beneficiaries.  When you pass, those beneficiaries will inherit the plan and the assets the plan holds.

There are considerable variables as to who and how many beneficiaries you have that I cannot cover here, but again, the concept is no different than your heirs inheriting an IRA that owns stocks or bonds - with the exception that real estate can be a larger, less liquid asset.