Lafayette, IN · Member since 2009 · 2 posts · 0 votes
I've run across a method that utilizes retirement funds to purchase wholesale foreclosures and REO's. Does anyone have any experience with this? I'd like to know your thoughts.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
Sure, its not difficult to do with an IRA. 401ks are considerable more trouble.
With an IRA, you have to find a trustee/custodian who will let the IRA holder invest in real estate. Then you can buy real estate either for long term hold or short term.
There are some nasty taxes that apply to ordinary IRAs. They're called UBIT (unrelated business income tax) and apply to an active business like fix and flipping or wholesaling. These taxes are at the trust rates, which are 35% after $11,000 of income.
Rental income is exempt from UBIT. However, income from debt financed rentals are not.
Making loans from an IRA to a wholesaler or fix and flipper would not be subject to this tax.
Roth IRAs are supposedly exempt from UBIT, but I'm not certain about that.
401ks are hard to use because your employeer controls the allowed investments and real estate is rarely allowed.
Its possible to have your own company and create a Solo401k and put 401k money into it. Most employeers only allow you to take money out of the 401k and put it into a different one if you quit.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
Sure, its not difficult to do with an IRA. 401ks are considerable more trouble.
With an IRA, you have to find a trustee/custodian who will let the IRA holder invest in real estate. Then you can buy real estate either for long term hold or short term.
There are some nasty taxes that apply to ordinary IRAs. They're called UBIT (unrelated business income tax) and apply to an active business like fix and flipping or wholesaling. These taxes are at the trust rates, which are 35% after $11,000 of income.
Rental income is exempt from UBIT. However, income from debt financed rentals are not.
Making loans from an IRA to a wholesaler or fix and flipper would not be subject to this tax.
Roth IRAs are supposedly exempt from UBIT, but I'm not certain about that.
401ks are hard to use because your employeer controls the allowed investments and real estate is rarely allowed.
Its possible to have your own company and create a Solo401k and put 401k money into it. Most employeers only allow you to take money out of the 401k and put it into a different one if you quit.
Madison, MS · Member since 2008 · 53 posts · 5 votes
16y
Jon,
I am currently seeking investors for a Real Estate development. Is it possible for them to use funds from there IRA to invest. It is a long term play. Thanks,
Michael
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
Yes, absolutely. IRAs are a common source for funds for deals like that.
You still have to follow the rules regarding solicitation funds (i.e., selling securities). If your just getting money in the from of a loan from one person, its pretty straightforward. Some custodians, like Sterling Trust Company, will only allow this if its secured by real estate.
If you're pooling funds, such as selling units in a LLC, you really need to do a Regulation D filing to make this legit. And prepare a property operating agreements and private placement memorandum.
Madison, MS · Member since 2008 · 53 posts · 5 votes
16y
Thanks, that is great information. We have found people a little weary to invest their cash. I think this is great option to see if they would like to divert a portion of their IRA towards this investment. Thank you for your reply and insight.