What we did with a Self-Directed IRA . . .

23 Replies

About 3 years ago my Wife's 85K IRA was making mediocre returns and we decided it was time to use it for real estate, which we understand far better than stocks. We converted it to a ROTH and took the tax hit in a low income year (no more taxes to pay!)

We then transferred the account from Fidelity to a Self-directed custodian (Equity Trust - BTW, they have worked well enough for us but there have been several frustrations with lost paperwork, mistakes and slow processing). Then we purchased 2 REO lots in a nice subdivision. We sold one of them after about a year to a builder for a 30K Profit. The other will sell in a few months for a 40K profit. We have already reinvested in 2 more lots in other areas and plan to hold for a while. According to appraisals, our properties in the account are now worth 160K, almost double what the account started with. If we can continue to roll into investments with similar returns we should see about 500K by retirement time in 7 years. Please follow up with me in 2021 to see how we fared.

Before we invested in land we entertained the idea of private lending, buying a cheap rental or doing a rehab flip within the IRA. We have quite a bit of experience with these in our daily investing business so we understand the ins & outs. There are enough difficulties with paying bills, getting bids, collecting rents, buying supplies and materials, etc. with rehab and rental properties that we decided that vacant lots would just be easier in an IRA. There are big discounts when you pay cash for land, and less competition because most investors want cashflow, which you generally don't get from vacant lots.

I personally know other investors who have used their SDIRA funds to "partner" with other investors or to leverage with private money, non-recourse loans into larger deals. I think any of these can be an effective way to grow your retirement account if you understand the business model and are willing to work through the restrictions and extra layers of paperwork that are a part of SDIRA investing.

I would love to hear from other investors who have had success with SDIRA investing.

@Douglas Larson thanks for sharing, great story!

You may want to consider truly self directed Solo 401k plan as an alternative to SDIRA. There are several features that you may find it very beneficial in your situation. You may ready my other posts to learn more but here are couple:

  1. You have checkbook control over your retirement account and eliminate the custodian, making the process of acquiring and maintaining your investments really efficient (no need for a custodian approval, simply write the check and execute the transaction).
  2. If you decided to finance real estate in your retirement account, when using IRA it is subject to UDFI tax (type of UBIT assessed on leveraged real estate). However Solo 401k is exempt from this rule when you use leverage on investment real estate.

Keep it up and I'll try to remember to check back with you in 2021 :-)

Hi,

I did something similar.

I purchased a duplex for $132K cash with my self directed IRA, put $15,000 into rehab for a total of $147,000. Instead of selling, I rented out both sides of the duplex for $1700/month. I will now be doing a Cash out refinance with a Non-Recourse loan for 60%. The terms of the loan are: 6.25% for a fixed 20year loan. I still cash flow but in 20 years the duplex will be paid off entirely.

I plan on using the cash out refinance money to purchase another property and do this a few more times.

One things that's different from you situation is that I set my SDIRA into an LLC in order to have check book control, as well as to reduce my fees for my custodian which can be substantial if you hold loans in the SDIRA.

I'll keep a look out for your next deal. Happy investing and thanks for sharing.

DK

Thank you for sharing Douglas!

I also work with Equity Trust to get funds for a small sindication deal and my experience with them was similar to yours. I had several frustrations with lost paperwork, mistakes and slow processing . I won't recommend them and would no deal with them anymore.


I'll check with you in 2021:)

@Daniel Kang

Thanks for your story Daniel. How do you deal with rent payments? Do your tenants auto pay directly to the account? Also, who do you use for the checkbook control of the SDIRA?

I have a SDIRA with Entrust. Mixed bag so far.

I flipped one house for about a 40K profit in 4 months.

Then lost about 5K on another flip over 15 long and painful months.

I am buying notes now instead.

Hopefully less of a headache.

@Dmitriy Fomichenko

Thanks for the info. You appear to be quite the expert on the Solo 401K strategy. At first glance there seems to be similar advantages to the Self-Directed ROTH IRA and some other bonuses too. Do I understand that the solo 401K does not require a custodian? I know that 401Ks can be rolled over to an IRA but can you go the other direction from IRA into a 401K?

@Daniel Kang that is part of my strategy too. But you might want to talk with @Dmitriy Fomichenko about a solo 401k before you do the refi. The IRA will trigger UDFI wheras a 401k won't. There are other advantages too, such as being able to loan yourself money from the account for deals outside the plan. You also can contribute more, potentially. And it can be after tax, though for some reason a Roth IRA can't be rolled into a 401k.

Do you have any way to be considered self employed? If so a solo 401k may be the way to go.

@Douglas Larson great to hear your story, particularly since there aren't that many people investing in land on these boards, so it's nice to hear about successes in that area.

Originally posted by @Douglas Larson :
@Dmitriy Fomichenko

Thanks for the info. You appear to be quite the expert on the Solo 401K strategy. At first glance there seems to be similar advantages to the Self-Directed ROTH IRA and some other bonuses too. Do I understand that the solo 401K does not require a custodian? I know that 401Ks can be rolled over to an IRA but can you go the other direction from IRA into a 401K?

Douglas, yes, there are similarities, but you are correct - Solo 401k has some very powerful features that are not available with SD IRA.

You can have Solo 401k with custodian such as Equity Trust, in which case some of the benefits will not be available to you. By utilizing truly self-directed Solo 401k, you act as the trustee of your Solo 401k Trust and there is no need for a custodian. By eliminating custodian you are eliminating all of the fees that are associated with having a custodian (transaction fees, asset based fees, sale/purchase fees, annual custodian fees, etc...), you are eliminating potential delays and don't have to wait for a custodian when you have a pending deal you want to invest in or simply making expense payment - do it as simple as writing a check! There are other benefits as well - you may check my other posts to learn more.

You are able to transfer/rollover most qualified retirement accounts into Solo 401k including employer 401k, Traditional IRA, 403b, 457, SEP and Simple IRAs, etc. While Solo 401k has Roth component allowing you making after-tax contributions, converting pre-tax contributions into Roth and rolling over employer Roth 401k into Roth Solo 401k, unfortunately if you have Roth IRA - it is not allowed to be moved into Solo 401k.

Originally posted by @Walt Payne :
The IRA will trigger UDFI wheras a 401k won't. There are other advantages too, such as being able to loan yourself money from the account for deals outside the plan. You also can contribute more, potentially. And it can be after tax, though for some reason a Roth IRA can't be rolled into a 401k.

Walt, you made a great point - by utilizing Solo 401k to invest in real estate with leverage UDFI tax will be eliminated (as opposed to SD IRA)!

@Dimitri and @Doug

Hi Doug: I currently use a LLC SDIRA that my attorney helped set up. I use a management company so all the rent checks for the different properties go to the management company and are then funneled back to my LLC checking account on a monthly basis. Does that answer your question?

Having my IRA buy out an LLC allows what I think are the two most important things:

1) better control over the money, especially when it comes to time sensitive real estate transactions

2) reduction in fees from my IRA custodian. A custodian might charge between $250-350/year PER property, and a separate $250-350 PER year if these are financed. That would come out to almost $2000 per year of custodial fees, on top of all the transaction fees if you have just 3 financed properties in your IRA.

Having a check book IRA lumps all of these fees and holdings under 1 entity and so will reduce you yearly expenses.

Unfortunately you do have a UBIT tax for financed properties in your SDRA, . I think the basis for this tax is somewhat justified, and I just consider it as a cost of doing business.

I am intrigued about the merits of a Solo 401K in doing real estate. However, it almost seems to good to be true. Why would the government allow you to get away with not triggering a UBIT for financed properties? If someone could provide a link explaining the positives AND negatives of having a solo 401K vs. a SDIRA it would be appreciated.

I appreciate the great feedback I'm getting from the forum discussion.

Happy investing to all.

@Daniel Kang Why can you roll any retirement plan except a Roth IRA into a 401k? Why does our government continue spending billions of dollars morethan their income? Why? Who knows. I sure don't.

If you are eligible, a solo 401k has several advantages. Talk with @Dmitriy Fomichenko about it. He will answer any questions you might have. There are also lots of good articles on various provider websites

@Daniel Kang you are mixing terminology. You do not have to pay UDFI on leveraged properties within a Solo 401K. You will pay UBIT on any flips you do within your Solo 401K.

Originally posted by @Daniel Kang:
@Dimitri and @Doug
Hi Doug: I currently use a LLC SDIRA that my attorney helped set up. I use a management company so all the rent checks for the different properties go to the management company and are then funneled back to my LLC checking account on a monthly basis. Does that answer your question?

Having my IRA buy out an LLC allows what I think are the two most important things:

1) better control over the money, especially when it comes to time sensitive real estate transactions

2) reduction in fees from my IRA custodian. A custodian might charge between $250-350/year PER property, and a separate $250-350 PER year if these are financed. That would come out to almost $2000 per year of custodial fees, on top of all the transaction fees if you have just 3 financed properties in your IRA.

Having a check book IRA lumps all of these fees and holdings under 1 entity and so will reduce you yearly expenses.

Unfortunately you do have a UBIT tax for financed properties in your SDRA, . I think the basis for this tax is somewhat justified, and I just consider it as a cost of doing business.

I am intrigued about the merits of a Solo 401K in doing real estate. However, it almost seems to good to be true. Why would the government allow you to get away with not triggering a UBIT for financed properties? If someone could provide a link explaining the positives AND negatives of having a solo 401K vs. a SDIRA it would be appreciated.

I appreciate the great feedback I'm getting from the forum discussion.

Happy investing to all.

@gautam

I accidentally posted a duplicate. Sorry to the readers.

Thanks Gautam for your clarification. I was just making a point that regular self directed IRA's trigger UBIT (Unrelated Business Income Tax) for leveraged properties. I'm not as familiar with solo 401K and their respective UDFI and UBITs. I was just trying to ask why a solo 401K doesn't require taxes on leveraged properties and a self directed IRA does?

I have a traditional W2 income so I probably couldn't get a solo 401K. However, if everyone could qualify for both SDIRA or Solo 401K, why wouldn't everyone choose a Solo 401K? There must be some kind of drawback?

@Mark Whittlesey

I see you are in Encinitas! Love that place! I did a flip there (actually Leucadia) in 2011 and one in Carlsbad in 2012. Flipping in an IRA adds other layers of fun I'm sure! I would love to hear more about your note buying business model, especially within your SDIRA. Notes and wholesales have really grabbed my interest in the BP podcasts because they just seem cleaner and easier . . . and I'm tired of swinging a hammer and babysitting subcontractors!


I have a traditional W2 income so I probably couldn't get a solo 401K. However, if everyone could qualify for both SDIRA or Solo 401K, why wouldn't everyone choose a Solo 401K? There must be some kind of drawback?

Not everyone qualifies. But pretty much anyone can make themselves eligible. Just start a micro small business that earns a few bucks. Create a solo 401k, then funnel money through your regular IRA into it, and invest away.

Most people don't even understand the differences between a traditional IRA and a Roth IRA.


I have a traditional W2 income so I probably couldn't get a solo 401K. However, if everyone could qualify for both SDIRA or Solo 401K, why wouldn't everyone choose a Solo 401K? There must be some kind of drawback?

Not everyone qualifies. But pretty much anyone can make themselves eligible. Just start a micro small business that earns a few bucks. Create a solo 401k, then funnel money through your regular IRA into it, and invest away.

Most people don't even understand the differences between a traditional IRA and a Roth IRA.

@Douglas Larson

Right now I am working with a company called Equity Build.

They do all kinds of brokering of multis, rehabs, new construction.

Mostly in Chicago. But more recently in Houston.

So I have a small piece of one note. And I am working on buying out another investor on another deal.

@Mark Whittlesey Thanks for the info. I will check out "Equity Build."

@Dmitriy Fomichenko I was dissappointed to hear that I can't roll the SD Roth IRA into a solo 401K. Maybe it's time for me to start another retirement account.

@Gautam Venkatesan - Both UBIT and UDFI sound like good reasons not to flip inside retirement accounts. Thanks.

Originally posted by @Douglas Larson :

I was dissappointed to hear that I can't roll the SD Roth IRA into a solo 401K. Maybe it's time for me to start another retirement account.

Douglas, I know it is disappointing, but unfortunately I don't set the rules... Knowing what you will gain with Solo 401k you may want to make new contributions and investments using this plan.

Originally posted by @Dan K.:

Hi,

I did something similar.

I purchased a duplex for $132K cash with my self directed IRA, put $15,000 into rehab for a total of $147,000. Instead of selling, I rented out both sides of the duplex for $1700/month. I will now be doing a Cash out refinance with a Non-Recourse loan for 60%. The terms of the loan are: 6.25% for a fixed 20year loan. I still cash flow but in 20 years the duplex will be paid off entirely.

I plan on using the cash out refinance money to purchase another property and do this a few more times.

One things that's different from you situation is that I set my SDIRA into an LLC in order to have check book control, as well as to reduce my fees for my custodian which can be substantial if you hold loans in the SDIRA.

I'll keep a look out for your next deal. Happy investing and thanks for sharing.

DK

You mentioned 'cashing out' after you did the rehab. I assume the rehab costs came out of your SDIRA. But once that was done and you did a cash out refi, where did that cash go? into your bank account or back to the SDIRA? I'm looking into this strategy, using a SDIRA to fund, and it looks like I can't partner with myself (50% my SDIRA, 50% a non-recourse mortgage to me)....but I may be able to partner with a friend and use his SDIRA for 50% and then i'd get the 50% non-recourse loan. I'd have to assume we'd have a lot of docs to show/prove that all the expenses were 50% each and then the profits after a flip would be 50% as well. My profits (if any) would be subject to tax and his (if any) would go back into his SDIRA acct.

@Pat Mcgrath

The proceeds from a cash out refinance MUST go back to your SDIRA. If I were touch touch any money personally it would be considered a prohibited transaction.

I have my IRA set up in a single member LLC. Once you do a dual member LLC i.e. partnering it becomes more expensive to setup. Unless you are doing deal that are larger it might not be worth it. A single member LLC generally costs $800 if done by an attorney and depending on state costs. In california it would be more like $1500.

You'll find it challenging to find a bank that will do a non-recourse loan sfor a non IRA account unless the property is well over 1 million dollars but you can try.

hope that heps

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