I am using a HELOC and possibly my IRA to fund my first FLIP. My question is would I have to pro rate the amount I used in my IRA out of the profits and stick it back in my IRA or how does that work with flips and splitting the money. I work with IRAs everyday but not when it comes to real estate. If the IRA is going to limit the income I can take from the gains then I would rather use hard money for the remaining balance.
Also, any recommendations for the state of Minnesota for Insurance reps and appraisers?
I can't answer the first part about IRA's. For insurance I strongly recommend an insurance broker. Saved me a lot of money compared to the good neighbor. My bank picks the appraiser. Not sure why you would pay for an appraisal for a flip. I buy and hold, but I'd think all you would need is a realtor to help value and sell your flip.
@Jeremy Karja shoot me an email directly and I'll pass along a few contacts for you on your questions.
IRA money is not suitable to the plan you are discussing.
While a self-directed IRA may be invested in real estate, everything must be done at arm's length and exclusively for the benefit of the IRA. There can be no direct or indirect benefit in either direction between the IRA and a disqualified party - which includes you, your spouse, lineal family, or entities owned by lineal family.
While there are those out there promoting on the internet that you can "partner with your IRA", doing so is complex, limited to very rigid situations, and is not risk free from severe IRS penalties.
When an IRA invests in real estate, all costs must come from the IRA and all income flows to the IRA. This is not capital that YOU can use to assist in funding YOUR deals.
Additionally, IRA's are designed for passive income like rentals, interest on notes, dividends, etc. Flipping houses is a business, and if a tax-exempt entity like an IRA engages in a business on a regular or repeated basis, there are some pretty steep taxes (UBIT) paid to level the playing field for tax-paying businesses.
While an IRA is not necessarily the route for your intended use, there is a lot of potential to increase the security and returns your IRA can generate by investing in real estate and notes. It is simply diversification for the IRA.
Thank you @brian
for your ideas and help on this one!
My other question is could I use a friend or families IRA to invest in something like this?
Also, when and if I use a friend and families money or IRA how do I structure it? Meaning if they come in with 60% of the money and I come in with 40% and their money is backed by the property, I assume I structure it so they get first rights to the property?
@Sean Blomquist I did email last night and but I will email again in case it went to spam. Could you please check?
You may not use the IRA of someone to whom you are a disqualified party. That would be lineal family like parents, grandparents, children or grandchildren. A non-lineal family member like a cousin or sibling could use their IRA to partner with you in some fashion.
If the transaction will be a flip, it will be best for the IRA party to be a lender. They can provide capital secured by a mortgage and deed of trust on the property.
Congrats on your big decision! That is exciting!
@Brian Eastman nailed it for you Jeremy. Locally, I have done a few deals within IRA's for clients and they work well as Brian mentioned for buy and hold simple property acquisitions where you have literally zero involvement. Keep you and any family members out of any dealings on the property is critical or you could have major penalties which negates the whole reason for doing RE investing in your SDIRA.
If you have specific questions or want to meet up, my brokerage is officed downtown Minneapolis and I am happy to connect. Lastly, locally @Todd Grill is a great person to talk to. He has done extensive investing in IRA's and leverage non-recourse loans. He is a book of knowledge and a great guy. Happy to make an introduction for you.
Good luck on your latest adventure!
PS Have you looked into construction loans (commercial arms) or Hard money instead of the IRA option? Just a thought..
I will also confirm that you can't invest your IRA with your money and that a relatives funds would violate the disqualified party provisions. Ultimately investing with retirement funds will only work if your goal is to increase retirement income. That is why rentals and passive income works well. This is one area on BP that I would NOT listen to people who are doing these transactions, many people are doing this incorrectly and think they are fine. If you are serious about using your retirement funds in real estate I would talk to a specialist.
Not sure what your options are but if you have a 401(k) you could look into taking a loan from the plan as a source of financing. Otherwise if the deal is good, using a HML will not be too painful.
It wasn't clear what you are looking for related to insurance but if you are looking for property insurance I would talk to the National Real Estate Investor Grop NREIG. Their rates were less than I was paying and they will insure vacant or properties under renovation when your larger carriers will not.
To learn more about the UBIT rules, see the following IRS page.
Couldn't tag him before but @Matthew Smith is a good appraiser and knows real estate very well.
Jeremy... I've been a Certified Appraiser in the Twin Cities for 20 years. If you have any questions regarding appraisals and/or the appraisal process, please feel free to message me. I'd be happy to help.
I will say that typically the Banks and/or Lenders will be the ones to order the appraisal. This places them as the client and ownership over the appraisal report. Most will not take an appraisal completed for a private party, and a lot will not even take an appraisal completed for another Bank and/or Lender (even thou Fannie Mae and Freddie Mac regulations do allow one bank to use an appraisal if it was completed for another bank/lender) because the clients named on the appraisal report, is not permitted to be changed once it's completed. Now this may not be the case with small local Banks and/or Credit Unions. So I recommended that you check with your Bank/Lender first.
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