Self Directed IRA for first rental property?

5 Replies

I am considering using a SDIRA to purchase my first property and am hoping the BP community can answer some basic questions.

1. Can I manage the property or do I need to have a property management Co? I understand I can not put any sweat equity in to it.

2. Can I own other properties outside of the SDIRA?

3. Do I have to create an LLC?

4. Do SDIRA companies have associates that will answer these kind of questions, or are they hands off?

Thanks in advance for your time.

@Joe Palmer

Your IRA can own rental property. This is not "your first rental property", but rather you directing your IRA away from stocks and into rental property.

You can separately invest in real estate personally. Those activities just cannot intersect in any way with your IRA's investments in real estate.

A LLC under the IRA is not required, but is generally a much more efficient tool for holding assets like real estate that generate a frequency of transactions or anything time-sensitive in nature.

You can in a limited sense administer a plan held property; executing contracts, paying for expenses and receiving income into the plan. This works with the LLC model where you have control. Most non-LLC custodians will require a 3rd party property manager as it suits their "intermediary processing" type of service better.

There are different types of service providers, with different levels of consulting capacity. Most trust companies acting as custodian will be very passive and guide you to your legal professional for guidance. Facilitators of checkbook IRA LLC and Solo 401(k) plans will more often have the ability to provide guidance, as they are not holding your funds but rather creating a legal structure around your plan so that you can hold the funds locally. Of course, there are also just some "document mills" that setup plans and wish you the best. A few phone calls will help you to quickly identify who can really help you out and who is just selling a service.

@Joe Palmer

1. You are correct, you can hire people to do work but you can't do the work yourself. 

2. Sure, you can own as many properties as you want outside of the SDIRA as long as they are not connected in any way to the property inside of the SDIRA.

3. If you don't do an LLC or get Checkbook control the fees will kill you so it's best to get one or do a Solo 401K if you are eligible.

4. There are several SDIRA guys on BP that give good advice. Search for SDIRA with the search tool. I researched this subject for 6 months before I started my SDIRA. I wish I knew of BP before then.....

5. You will have to put a higher % down if you want to get a mortgage because SDIRA loans have to be Non-Recourse. Then you have to pay UBIT or UDFI tax on the % of the rent income that is mortgaged. Your CPA should understand this, it's not that complicated. You won't be getting any Non - Recourse mortgage with 20% down, more likely 40% to 50% down. 

Hey @Joe Palmer ,

If you do end up going through a SDIRA route you would need to make sure you are separate from the property and that includes insurance. I can help to make sure your personal name is in your SDIRA or LLC for the property. Feel free to reach out I am just looking to help out any way possible.


@Joe Palmer

I suggest that you interview a few providers and as you do so here are some issues to consider:

1. In order to have checkbook control (via an IRA LLC), the IRA account will need to be at a trust company that will allow the IRA to invest in an LLC (where you will be the manager and your IRA will be a member - an as manager you will have checkbook access to the LLC bank account). Therefore, you will want to confirm that the trust company allows for investing in an LLC and the associated fees and minimum balance that applies to the IRA account.

2. Confirm that the IRA LLC provider will prepare all of the documents needed to not only form the LLC (articles of organization, SS-4 to obtain an EIN) but also the documents needed by the trust company to process the investment of IRA funds in the LLC.

3. Confirm that the provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).

4. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).

5. In addition, if you are self-employed with no full-time employees you may wish to consider opening a Solo 401k instead of a self-directed IRA as it has several advantages over an IRA LLC such as much higher contribution limits, direct checkbook control (i.e. no need to have the account at a speciality trust company), ability to take a 401k loan, exclusion from unrelated debt finance income tax with respect to investment in real estate acquired with non-recourse financing, etc.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you