Real Estate Agent · Chicago · Member since 2020 · 23 posts · 20 votes
Hello BP,
Background: I currently have a W2 job and looking to change the job. What I found so far is that after I change my Job, I can convert my existing 401k and ROTH IRA to SDIRA account for real estate investing.
Next Steps: I am currently looking for my first 2-4 MFH units ( not owner-occupied) investment property as buy-and-hold. So let's say I find an undervalued currently rented property that may need some cosmetic repair such as new paint, upgrading appliances, and fixtures.
So I will need funds for the Purchase price + rehab cost.
Ask: I am struggling to understand how can I use SDIRA for investments which could be under my name or my LLC.
What are my options or ways to structure the finance for this deal using SDIRA as a down payment?
Can I combine SDIRA for a down payment with HML, PML, or any bank?
What Legal or IRS rules to be aware of to avoid issues?
Real Estate Agent · Boise, ID · Member since 2016 · 1k+ posts · 888 votes
3y
@Ashwin Abichandani it would have to be under the LLC name. Also major rules on this and worth looking into. You have to pay tax on any leveraged portion (ie if you get a loan), you can't use depreciation or write off expense for taxes (probably one of the biggest advantages to REI). Find a company that manages SDIRA's and ask them questions.
For getting loans you must use a non recourse loan and can usually only get up to 60 LTV. Rates will be higher. Lending may be more ideal out of a SDIRA. Below is a local company to me that helps with SDIRA's and they have some decent info on their site.
@Ashwin Abichandani You could avoid using your IRA all together for the down payment if you have the owner hold a second position note for the downpayment, assuimg your bank doesn't care about second position notes. *Not a lawyer and this isnt legal advice* but if your bank does have a problem with it, have your closing company record the mortgage a couple days after the closing date so it looks like the seller gave you a personal loan afterwards. We typically have success offering 4-5% interest on 5-10 year notes. Feel free to reach out to me if you want me to explain in further detail.
Investor · Charleston, SC · Member since 2011 · 606 posts · 413 votes
3y
Buying a property you already own is a prohibited transaction and is considered self dealing. You can however, buy a property with a downpayment from your IRA and get financing for the rest BUT it has to be non-recourse debt or in other words you cannot sign personally for the note. You also have to consider UDFI (unrelated debt finance income) which is generated when an IRA borrows money to purchase real estate. The debt financing portion (the loan) is subject to tax at estate tax rates. If interested in learning more reach out.
The first thing you need to understand is that IRA is a separate legal entity from you and you (and your immediate family members) are considered to be "disqualified persons" to your IRA. IRS rules prohibited any direct or indirect transaction between a self-directed IRA and a disqualified person, therefore it is not possible to use an IRA in connection with your personal LLC.
You can establish a self-directed IRA, but you will not be able to combine your 401k with your Roth IRA (unless your 401k is a Roth or you are willing to do a Roth conversion). Pre-tax and Roth funds can't be mixed.
Regarding financing: you are not allowed to use conventional financing in an IRA because IRS prohibit you to provide a personal guarantee, therefore the loan must be non-recourse. Here is a list of lenders specializing in these kinds of loans:
Non-recourse lenders will typically require 30-40% down and 10-15% in reserves. Using leverage inside of your IRA will trigger Unrelated Business Income Tax on the leveraged portion of the income.