Baltimore, MD · Member since 2013 · 78 posts · 8 votes
Greetings BP,
Has anyone used a self-directed IRA to invest in RE? If so, what was your experience? I'm considering rolling some or all of my ROTH IRA funds into a self-directed IRA to invest in RE
I currently have a ROTH IRA that is self directed and have 3 rentals in it, my family as a whole have about 6 rentals and 2 mortgages that were taken back from selling property.
So my take on it is it's been great buying property in my IRA, the biggest difficulty is the length on time to disburse funds, which isn't too bad after you get the process and paperwork figured out. And that all of the expenses have to go in and out of the IRA.
So what I do is have my PMs hold a maintenance reserve and pay for things from that. Now funds for repairs go out immediately, and I don't pay any fees for processing a payment ect.
Now while I think having the rentals in my IRA is great, since I've been on BP I'm leaning to sticking with notes in my IRA. With RE you don't get the tax benefits which is ok but you also lose the ability to leverage, and RE has maintenance and PM.
Notes have a lot of the same benefits of RE as far as being tied to real property, but you never get maintenance requests and servicing is much cheaper than PM. You do loose the possibility for appreciation but that is just the trade off.
So would I buy another rental in my IRA absolutely, but I think that notes may be a better return for my IRA and keep my rentals in my name to maximize the benefits.
I currently have a ROTH IRA that is self directed and have 3 rentals in it, my family as a whole have about 6 rentals and 2 mortgages that were taken back from selling property.
So my take on it is it's been great buying property in my IRA, the biggest difficulty is the length on time to disburse funds, which isn't too bad after you get the process and paperwork figured out. And that all of the expenses have to go in and out of the IRA.
So what I do is have my PMs hold a maintenance reserve and pay for things from that. Now funds for repairs go out immediately, and I don't pay any fees for processing a payment ect.
Now while I think having the rentals in my IRA is great, since I've been on BP I'm leaning to sticking with notes in my IRA. With RE you don't get the tax benefits which is ok but you also lose the ability to leverage, and RE has maintenance and PM.
Notes have a lot of the same benefits of RE as far as being tied to real property, but you never get maintenance requests and servicing is much cheaper than PM. You do loose the possibility for appreciation but that is just the trade off.
So would I buy another rental in my IRA absolutely, but I think that notes may be a better return for my IRA and keep my rentals in my name to maximize the benefits.
Hey Eric — Matt's got it right. In my experience, investing in RE via your IRA/401k is better than nothing or the stock market. But I almost always try to talk people outa doing it. Notes are a far better play for many reasons. Here are just three. WAY less time involved, always buying at a sweet discount, significantly low LTV for safety.
Also, buying RE requires either all cash, or a 40-50% down payment inside your plan. The ammo time is shorter, and the interest rate is higher, not to mention most loans aren't fixed for any real length of time, with rare exception.
With notes, especially over time, your portfolio grows nicely every time one of your notes pays off. You then buy a bigger note(s) which in turn increase the monthly payments coming into your plan. If you're now around 40 and will retire at say, 60, you can generate tax free income using a Solo 401k that might astound you. This is made much more likely if you're able to max out on the annual contributions. Both husband and wife can contribute up to $17,500 apiece, after tax, 'til they're 50. Then it goes up to $23,000 apiece. It won't be uncommon for folks to end up with $100-500K/year in tax free income if they do this for a couple decades. It becomes even more predictable when they're able to begin with a significant 'rollover' stash of cash from another qualified plan.
Eric Johnson Sabrina Carapia people on this forum have differences of opinion on this topic.
We have a number of clients who do this in different ways. Some flip while others buy and hold for rental income. Ultimately it depends on what you goal is for the property and if it is leveraged or not. This brings a level of complexity to the table you should fully understand prior to doing it.
... you can generate tax free income using a Solo 401k that might astound you. This is made much more likely if you're able to max out on the annual contributions. Both husband and wife can contribute up to $17,500 apiece, after tax, 'til they're 50. Then it goes up to $23,000 apiece.
Jeff, just to be clear here, since you are referring to a SD401k, one needs a sponsoring business, and contributions to the SD401k need to come from profits from that sponsoring business, correct?
@Jeff Brown and @Matt Devincenzo thanks for the edifying responses. I was not aware that notes could be purchased inside an IRA. I will have to research this. Thanks again.
David — That's accurate. However, what many do is to roll over a previous employer 401k, or current IRA (NOT Roth IRA) into the Solo (SD) 401k. There are some other retirement plans that are also eligible to roll into the Solo.
The takeaway is that even though I might not have a primary or side business generating serious income, if I roll a few hundred grand into the Roth side of the Solo, I'll be pretty good to go 10-30 years from now. Make sense?
Is there any reason why you don't just cash out your 401k (obviously you can't do that if its with your current employer)?
To me, the advantages are:
1) You get the cash flow from your rentals now.
2) You pay the tax hit now but you'll make it right back in the equity capture (provided you're buying right of course). But you avoid the tax hit later when you were to take it out.
3) You can leverage the money to buy more homes.
i.e. If you had 100k, you might only be able to buy one home.
If you pulled out the 100k, you might end up with 65k. But you could use that to possibly buy 2 or 3 homes with conventional financing. Or maybe 4 or 5 with hard money.
Why not get 300 or 400 a month in cash flow per house in your pocket now? And own more homes? Would you rather control 100k in real estate or 400k in real estate when the market appreciates the historical rate of 3% a year?
I stopped contributing to my 401k right after I started investing in real estate. Not that I had much in there. And after switching jobs this year, I cashed out the entire thing and took the hit.
To me, the numbers just make more sense this way.
I've run em a hundred times and always come up with
the same answer. Real estate is the best investment
there is - bar none. But its greatest return potential
can only be achieved through leverage IMO.
i.e. If you pay cash, there is no monthly principal paydown adding to your net worth. The appreciation is going to be a lot less - controlling one house at 100k if no loan, but 3 or 4 houses with the same 100k means you're appreciation is over 300 to 400k.
No mortg interest writeoff so taxes on income come into play more.
One house at 100k that cash flows 900/month with no mortgage interest deduction. Versus 4 houses that cash flow 450/mo with the mortgage interest deduction. Total cash flow is much greater with the leveraged homes 1800 vs 900 and you get to offset a larger portion of that income as well because of the added depreciation (1 home vs 4) and mortg interest deduction (none vs 4).
Sabrina Carapia- you can invest using your 401k if you are able to roll it over into a Solo 401k. This is a strategy we teach our clients so they can maximize their investment return.
Investing in Notes is a very good alternative as well if you do not want to invest straight into a property.
However you decide to invest (IRA, 401k, directly), just be aware of what you are getting yourself into. You cannot "self-deal" when using retirement accounts, regardless of what people tell you. It is always better to err on the side of caution rather than lose all of your investment proceeds to the IRS by trying to game the system.
I'd recommend researching your investment strategy and learning from people who have been through the same process before beginning. Good luck!
My husband and I each have self-directed IRA's. Our last deal, we were the lender on an investors rental for 3 years. We were the "private money" everyone wants. When he couldn't refinance yet, because the regular banks said the area hadn't come back, we just refinanced for him. We upped the % of the note. It is relatively easy to do.
Although, we have heard, not to put our own rentals in since you can not work on it or take any money out of it.
But I would check around at different Self-directed companies. I would like to get out of the one we are with(high fees) but to switch would costs $$ to get out and $$ to get into the new company. They get ya coming and going!! We are just trying to get as much interest as anyone is willing to take to off-set the high fees.
Note that you will have to earn 4-7% more per annum on your funds after you cash out, in order to break even compared to keeping funds within a tax-deferred account. This is due to the compounding benefit of the tax deferral through time.
It can be hard to sustain the 4-7% advantage over time because it becomes almost impossible to keep all your properties 75% leveraged. The mortgages pay down, and you also hit the wall on the # of loans you can have after a few years, so then your LTV starts to get really diluted. The only potential solution to keep your optimal leverage ratio as your portfolio gets very large is to upgrade into commercial property.
Hey Eric — Matt's got it right. In my experience, investing in RE via your IRA/401k is better than nothing or the stock market. But I almost always try to talk people outa doing it. Notes are a far better play for many reasons. Here are just three. WAY less time involved, always buying at a sweet discount, significantly low LTV for safety.
Also, buying RE requires either all cash, or a 40-50% down payment inside your plan. The ammo time is shorter, and the interest rate is higher, not to mention most loans aren't fixed for any real length of time, with rare exception.
With notes, especially over time, your portfolio grows nicely every time one of your notes pays off. You then buy a bigger note(s) which in turn increase the monthly payments coming into your plan. If you're now around 40 and will retire at say, 60, you can generate tax free income using a Solo 401k that might astound you. This is made much more likely if you're able to max out on the annual contributions. Both husband and wife can contribute up to $17,500 apiece, after tax, 'til they're 50. Then it goes up to $23,000 apiece. It won't be uncommon for folks to end up with $100-500K/year in tax free income if they do this for a couple decades. It becomes even more predictable when they're able to begin with a significant 'rollover' stash of cash from another qualified plan.
Eric Johnson Sabrina Carapia people on this forum have differences of opinion on this topic.
We have a number of clients who do this in different ways. Some flip while others buy and hold for rental income. Ultimately it depends on what you goal is for the property and if it is leveraged or not. This brings a level of complexity to the table you should fully understand prior to doing it.
Hi Kirk, I completely understand that every transaction carries a level of complexity that would be better assessed by professionals before moving forward with it.
Thank you for your notes!
Not at this time. The note guy I'd chosen has had to deal with some very seriously medical issues recently. I'm now on the lookout for replacements. Not a happy task for me.
@Jeff Brown Was searching for info on this strategy and pulled up this old thread. Have you found a new note guy? I know you're always preaching rolling 401k's over to a SD then investing in notes, and I'm trying to figure out:
1) where to get the notes
2) worst case scenario, note defaults, then what?
3) how much do I need to get started? Do I need to save up more first?
Thanks, and if this info is already written somewhere else, please just post a link.
Hey Adrian — I'd suggest newbies avoid websites and the 'street' in general as sources for discounted notes. Note funds are the way to go from where I sit. The worst case scenario ISN'T having to foreclose. And you WILL foreclose sooner or later if you buy enough notes over a long enough time. Anyone who says differently is either ignorant or they think you are.
I talk about notes in several videos and podcasts (audios) on my site, bawldguy.com. You'll hafta register to access the content.
I don't have a lotta time today, but I'll be writing about notes on BP in the near future. I'm also heartily encouraging Dave Van Horn to get into the note weeds too. Between the two of us there's a buncha info to digest.
Also, you would do well to visit Dave's note website. They offer various levels of courses on notes, which have received solid reviews.