Using a Self Directed IRA

9 Replies

I've had a mobile home park in my IRA for the last 4 years. Just make sure you stick it with a property manager after purchase. Not too difficult.

We have been adding rentals 3-5/yr to both of our SD-IRAs for 4 yrs now.  We are quite familiar with the pain in the rear of working through a custodian trying to pay contractors, buy appliances.  It's a royal pain.  But do able obviously.

We have snapped! We have had it with SD-IRAs and the need for an intermediatary custodian. I'll not consider the check book style SD-IRA because my view and maybe some FUD coming from a somewhat well known SD-IRA/SD-401k Attorney saying the IRS is moving to start auditing SD-IRA holders especially if they hold real estate. I admit now I'm spreading FUD. If you've managed as many rentals as we have doing rehab and remodels, you will know first hand how difficult it is to follow all rules: no working on the property yourself (ever) never us your own funds to pay contracgtors (ever) on and on. All good rules that make sense. But if you self manage and self mange rehabs it's difficult given that contractor's 2nd job is to be a pain to pay and have them buy materials. (this was a sarcastic statment).

We are going to move our SD-IRA to a SD-401k (personal 401k). The laws (statute) that set up each are years apart and have different custodial requirements. So far my reseearch and folks I'e talked to say the personal 401k does not need a custodian. Just a Trust, EIN, and bank account and re-title the rentals into the new trust. Trust of course is properly setup per 401k regs and by an experienced Attorney in this space.

Benefits:

- you manage the check book.  No custodian.  Speed and ease of buying appliances, paying contractors, buying materials.

- Less audit risk.  The custodian is my view the main entry point of the IRS audit.  The SD-401k has a very very small foot print for the IRS to come in on.  No annual reporting, unlike IRAs.

- near zero annual fees and costs. SD-IRA custodians charge hefty fees.

But you need a viable (profit generating) company LLC or S-corp etc to hang your 401k off of. This is the catch for most new folks. If you have a bunch of real estate outside your IRA it makes sense to set up a management company even for just 5+ properties. This is where I'm at right now. Working on forming the management company, create the SD-401k, move assets, poof: a much easier life managing the properties in the tax defered account.

Anyone setup a personal 401k and hold real estate?

@James Cash The personal 401k is great for all the reasons Curt mentioned.  However, you must be careful if you hire employees.  You also will have to file a tax return for the 401k when it reaches $250k value. No one likes an audit but if you do things according to the rules you should be fine and that goes for whatever vehicle/entity you choose. 

@Curt Smith

I am a third generation real estate investor-learned from my parents and grandparents. I used to manage and fix my own properties until I realized that I could make more money by making deals than doing repairs.  If I did more deals I could afford to hire competent tradesman to do the work and make more money with less liability.  I have a degree in engineering and launched rockets for 18 years and was the biggest control freak I knew(just ask my wife) so I understand how hard it is to make that switch. Structure your business to succeed by doing what you do best. Good luck.

Originally posted by @Carl Fischer :

@James CashThe personal 401k is great for all the reasons Curt mentioned.  However, you must be careful if you hire employees.  You also will have to file a tax return for the 401k when it reaches $250k value. No one likes an audit but if you do things according to the rules you should be fine and that goes for whatever vehicle/entity you choose. 

@Curt Smith

I am a third generation real estate investor-learned from my parents and grandparents. I used to manage and fix my own properties until I realized that I could make more money by making deals than doing repairs.  If I did more deals I could afford to hire competent tradesman to do the work and make more money with less liability.  I have a degree in engineering and launched rockets for 18 years and was the biggest control freak I knew(just ask my wife) so I understand how hard it is to make that switch. Structure your business to succeed by doing what you do best. Good luck.

 What do you mainly invest in Carl? SF, Multi or commercial?

@Curt Smith

Sorry I did not see your question. I invest in SFH, student rentals, commercial, retail, warehouse, office and raw land. I think it is diversification. I can build cheaply when no one has jobs because the trades people reduce their prices and also product sales are prevalent. As business picks up commercial rents go higher. Banks not lending turns many people to renting either multi family or SFHs. I personally think commercial is best with triple net leases-it minimizes the work and calls.