How do closing agents fund private money deals?

Houston/DFW/Memphis · Member since 2023 · 25 posts · 7 votes

In my search for private money , I have heard there people use SDIRAs to fund real estate investments and be in the first position.

I wanted to know what are the pros and cons of using SDIRAs for fund Real estate?

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Brett SynickyPro Member

Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes

Quote from @Otis Clayton:

In my search for private money , I have heard there people use SDIRAs to fund real estate investments and be in the first position.

I wanted to know what are the pros and cons of using SDIRAs for fund Real estate?

Lots of people use checkbook SDIRA for private lending. In fact because an IRA kicks off UBIT on leveraged real estate many people opt for private lending until the account has enough to buy real estate in cash if that is their goal.
If you’re just looking for money to fund deals and you’re thinking the source could be IRA money then it shouldn’t make too much a difference to you whether the investor uses their personal funds or IRA funds. Only caution is if they don’t have checkbook control and there’s a time crunch going through the custodian can cause delays and red tape to deal with.

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Ken M.
Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes
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Quote from @Otis Clayton:

In my search for private money , I have heard there people use SDIRAs to fund real estate investments and be in the first position.
I wanted to know what are the pros and cons of using SDIRAs for fund Real estate?
.
I think you are asking a C.P.A. or enrolled agent type of question.
Are you wanting to know how to access a SDIRA or are you asking what are the risks associated with using SDIRA money?

We'll try to get you to the right people.
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Brett SynickyPro Member
Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes
1y
Quote from @Otis Clayton:

In my search for private money , I have heard there people use SDIRAs to fund real estate investments and be in the first position.
I wanted to know what are the pros and cons of using SDIRAs for fund Real estate?
Lots of people use checkbook SDIRA for private lending. In fact because an IRA kicks off UBIT on leveraged real estate many people opt for private lending until the account has enough to buy real estate in cash if that is their goal.
If you’re just looking for money to fund deals and you’re thinking the source could be IRA money then it shouldn’t make too much a difference to you whether the investor uses their personal funds or IRA funds. Only caution is if they don’t have checkbook control and there’s a time crunch going through the custodian can cause delays and red tape to deal with.
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Chris LumLee
Investor · Honolulu, HI · Member since 2017 · 187 posts · 108 votes
1y
As a lender the pros are that the funds can grow at a particular percentage that the funds are lent at. The cons, if the borrower doesn't pay on time or completely welshes on it then there's that oportunity cost.
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
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Quote from @Otis Clayton:

In my search for private money , I have heard there people use SDIRAs to fund real estate investments and be in the first position.
I wanted to know what are the pros and cons of using SDIRAs for fund Real estate?
There is really no cons if I was using my SDIRA to fund a real estate deal. The key is if someone is lending from a SDIRA to leave reserves in case the borrower defaults.
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Ken M.
Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes
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Quote from @Brett Synicky:

Quote from @Otis Clayton:

In my search for private money , I have heard there people use SDIRAs to fund real estate investments and be in the first position.
I wanted to know what are the pros and cons of using SDIRAs for fund Real estate?
Lots of people use checkbook SDIRA for private lending. In fact because an IRA kicks off UBIT on leveraged real estate many people opt for private lending until the account has enough to buy real estate in cash if that is their goal.
If you’re just looking for money to fund deals and you’re thinking the source could be IRA money then it shouldn’t make too much a difference to you whether the investor uses their personal funds or IRA funds. Only caution is if they don’t have checkbook control and there’s a time crunch going through the custodian can cause delays and red tape to deal with.
@Brett Synicky: What is the UBIT for using $200,000 from your IRA?
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Brett SynickyPro Member
Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes
1y
@Ken M. That's not how it works. UBIT is generated two ways. Income from leveraged real estate or active business income. It's a sliding scale but at about $12,500 of income for the year it scales up to 37%. But that is calculated after expenses and depreciation is factored in.
Retirement accounts are designed to be invested passively so when the IRS sees you running an active business in it, to level the playing field between retirement accounts and other business the retirement account incurs UBIT.

When the IRA invests in real estate using debt not only does it have to be non-recourse but the IRS says, you can use leverage but since you aren't only using IRA money for this investment the retirement account is going to pay UBIT on the income generated because of the debt.

There's more nuance to to it for sure but this is a good overview. Make sense?
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Ken M.
Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes
1y
Quote from @Brett Synicky:

@Ken M. That's not how it works. UBIT is generated two ways. Income from leveraged real estate or active business income. It's a sliding scale but at about $12,500 of income for the year it scales up to 37%. But that is calculated after expenses and depreciation is factored in.
Retirement accounts are designed to be invested passively so when the IRS sees you running an active business in it, to level the playing field between retirement accounts and other business the retirement account incurs UBIT.

When the IRA invests in real estate using debt not only does it have to be non-recourse but the IRS says, you can use leverage but since you aren't only using IRA money for this investment the retirement account is going to pay UBIT on the income generated because of the debt.

There's more nuance to to it for sure but this is a good overview. Make sense?
Sort of. When I looked into IRA accounts, I found that it didn't do service to my situation. Thanks.
1 Reply
Brett SynickyPro Member
Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes
1y
https://www.biggerpockets.com/member-blogs/2810/21298-solo-4...Quote from @Ken M.:

Quote from @Brett Synicky:

@Ken M. That's not how it works. UBIT is generated two ways. Income from leveraged real estate or active business income. It's a sliding scale but at about $12,500 of income for the year it scales up to 37%. But that is calculated after expenses and depreciation is factored in.
Retirement accounts are designed to be invested passively so when the IRS sees you running an active business in it, to level the playing field between retirement accounts and other business the retirement account incurs UBIT.

When the IRA invests in real estate using debt not only does it have to be non-recourse but the IRS says, you can use leverage but since you aren't only using IRA money for this investment the retirement account is going to pay UBIT on the income generated because of the debt.

There's more nuance to to it for sure but this is a good overview. Make sense?
Sort of. When I looked into IRA accounts, I found that it didn't do service to my situation. Thanks.

Happy to help clarify if you’d like. DM me.

Another thing to note is that if you’re self employed with no full time W2 outside yourself and a spouse a solo 401k is exempt from UBIT on leveraged real estate.
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Ken M.
Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes
1y
Quote from @Brett Synicky:

https://www.biggerpockets.com/member-blogs/2810/21298-solo-4...Quote from @Ken M.:

Quote from @Brett Synicky:

@Ken M. That's not how it works. UBIT is generated two ways. Income from leveraged real estate or active business income. It's a sliding scale but at about $12,500 of income for the year it scales up to 37%. But that is calculated after expenses and depreciation is factored in.
Retirement accounts are designed to be invested passively so when the IRS sees you running an active business in it, to level the playing field between retirement accounts and other business the retirement account incurs UBIT.

When the IRA invests in real estate using debt not only does it have to be non-recourse but the IRS says, you can use leverage but since you aren't only using IRA money for this investment the retirement account is going to pay UBIT on the income generated because of the debt.

There's more nuance to to it for sure but this is a good overview. Make sense?
Sort of. When I looked into IRA accounts, I found that it didn't do service to my situation. Thanks.

Happy to help clarify if you’d like. DM me.

Another thing to note is that if you’re self employed with no full time W2 outside yourself and a spouse a solo 401k is exempt from UBIT on leveraged real estate.
Thanks. I've consulted a few times over the years with planners and with the way I buy properties, my liquidity requirements, and my concerns about about how government overspending affects the future, makes me a poor candidate for IRAs and 401(k)s with the stifling regulations.
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Otis Clayton
OP
Houston/DFW/Memphis · Member since 2023 · 25 posts · 7 votes
1y
Thanks Ken
I am interested in
1. Has anyone (lender or borrower )used an SDIRA to fund Real Estate investments? If so what documents were used?
2. What risks were associated with the transaction?
Thanks for helping me clarify
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Otis Clayton
OP
Houston/DFW/Memphis · Member since 2023 · 25 posts · 7 votes
1y
Quote from @Brett Synicky:

Quote from @Otis Clayton:

In my search for private money , I have heard there people use SDIRAs to fund real estate investments and be in the first position.
I wanted to know what are the pros and cons of using SDIRAs for fund Real estate?
Lots of people use checkbook SDIRA for private lending. In fact because an IRA kicks off UBIT on leveraged real estate many people opt for private lending until the account has enough to buy real estate in cash if that is their goal.
If you’re just looking for money to fund deals and you’re thinking the source could be IRA money then it shouldn’t make too much a difference to you whether the investor uses their personal funds or IRA funds. Only caution is if they don’t have checkbook control and there’s a time crunch going through the custodian can cause delays and red tape to deal with.

Thanks for linking the article Brett.
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Otis Clayton
OP
Houston/DFW/Memphis · Member since 2023 · 25 posts · 7 votes
1y
37%? Ouch

@Brett Synicky the scenario was if I could find a house and pay for it using the IRA then that would become the mortgage. The closing agent would help create escrow for taxes and insurance so the P and I would go to the IRA.
The mortgage which came from the IRA would be paid off with 5-7 years. At which time the investor who created the deal would now own the house free and clear. In this example the initial investment would be $50,000.
So the owner of the IRA would have to pay 37% in taxes seems to negate the interest paid of 12.5% annually.
Do I have this correct?
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Jamie DietzBusiness Member
Lender · Pittsburgh, PA · Member since 2015 · 175 posts · 90 votes
1y
In response to your original question, closing agents should handle private loans just like a bank loan. We fund multiple private loans each much and they are run through title/closing exactly the same. The loan is listed on the HUD and they provide lender's title insurance. The only difference is the source of the funds. Hope that helps?
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Brett SynickyPro Member
Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes
1y
@Otis Clayton nope. This is an example of private lending which is different than the IRA owning real estate and does not trigger UDFI/UBIT tax.
This is a very common way for people to investing using their retirement accounts. Often people overthink this. Consider doing this personally or using an LLC. It's the same thing except it's done in the name of the IRA and all the money comes out of the IRA and returns go back into the IRA.
Incidentally this is the perfect scenario where a checkbook IRA is going to be far superior to having to go through the custodian for every transaction.
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Jacqueline Wright
Lender · Nashville TN, USA · Member since 2024 · 142 posts · 30 votes
1y
Hi Otis,

Self-Directed IRAs (SDIRAs) can be a great tool for funding real estate deals, especially for private money deals. One of the pro's is Investors can tap into retirement funds to finance deals without depleting cash reserves.
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