(How) Can I buy my own note with self directed IRA?

25 Replies

Hi all,

I am considering doing a small private lending which would provide me a 1st position note on a property. Closing is expected in 3 weeks.

I'd love to be able to service the node using my IRA money, however it is currently not under a self-directed plan. I am not sure what it takes or how long to convert my current plan to a self directed plan. I am guessing that I would not have enough time to convert it service the loan for closing.

Suppose if I service the loan using my savings for now, how do I buy my own note using my IRA money in the future? I am sure that lending opportunities are not that rare, is this worth all the hassle ?

The loan is at 9% for 44% of the property value, 1st place. Is this an attractive loan?

Thanks for the insights!

@Ezra Nugroho  

you are considered to be a 'Disqualified Person' to your IRA. IRA is prohibited from conducting any business with a disqualified person. So the bottom line is your IRA can not buy a note that you personally own.

@Dmitriy Fomichenko  Thanks for your response. There goes my grand plan! Ha ha.. :)

How long does it take to convert a traditional IRA to a self-directed plan?

It depends which company/service you use and where the money is coming from. If you doing Transfer from an IRA typically it is faster compared with the rollover from 401k or other employer sponsored plan.

There are three primary steps that all have varying timelines.

1. Opening an new SDIRA. Come companies can open your account same day (online) and others process and manual application and require copies of your ID. Depending on who you choose, expect 1-3 days for step-up.

2. Funding your account (the longest step) can take anywhere from a few days up to a month or more. It really does vary from provider to provider and also what type of plan you have. Do you mind sharing the type of plan you have and with whom? I can probably give you a better idea of the timeline if I know who you're with now.

3. Funding your investment (note). Again, some SDIRA providers are faster than others. Assuming you have all of the investment documentation correctly completed to fund your investment, you can expect turnaround to take 1-3 days. Some of the very large providers have known to be slow at times due to volume and understaffing.

@Loren Whitney 

I had similar question to the orig poster. My current IRA is wtih Fidelity, and I want to move it to a SDIRA. Goals of the SDIRA is to invest in notes. Acct Size will be ~200K

Any tips on which SDIRA vendor is a good choice?

I forgot to complete the previous post. Quick question for @Loren Whitney . The IRA FAQ on New Direction IRA says that a person can acquire a property in an IRA. Can I buy this property with 20% down from the IRA and have a mortgage on the remaining 80% or does it have to be paid in full by the IRA>

@ANuraag M.  

you can get a mortgage in an IRA, however, it must be non-recourse loan (your are not allowed to provide personal guarantee so conventional loan will now work). You are most likely need 30-40% down for non-recourse loan.

@ANuraag M.  

Great Question. The answer is Yes! The IRA can seek financing and your retirement funds can be leveraged with a mortage. This loan would be issued to the IRA itself and be arms-length from you as the IRA owner. Because of the IRS rules, your IRA mortgage must be non-recourse, meaning that there are can be personal guarantees. There are fewer lenders that are willing to issue non-recourse loans and the rates/terms will vary. It pays to shop.

Another consideration to research and include in your calculations is UBIT tax. When debt financing a property with your IRA, the profits derived will be subject to tax after all depreciations and expenses. Check out my BP blog for more detailed explanations of UBIT.

Feel free to keep asking questions.

You folks should also consider Solo 401k as an alternative.   It can be more attractive than SDIRA in many ways.  

@Sandeep S. Correct me if I am wrong, but I think if someone doesn't have a Solo 401K, one cannot just roll over an existing traditional IRA or 401K to it, right? One has to build it from the beginning, and it may take some time for it to amount to some significant number to access these investment vehicles.

@Ezra Nugroho  - you may be right.  I am not an expert on solo 401k.  There are also restrictions on creating S401K if you have a W2 job.

I just wanted to highlight that S401K is a very good alternative in many situations (yours may not be one).

There are no restrictions on creating Solo 401k if you have W2 job. The requirement to establish Solo 401k is that you need to have self-employment activity, which can be as simple as sole-proprietorship, or have a small business without any full time employees (IRS definition of full time employee is someone working over 1,000 a year).

@Loren Whitney @Ezra Nugroho

You are better off rolling it over to a SD IRA. Who are you buying the note from, an individual or fund/entity? I like QuestIRA.com as they were able to accept the blank assignment from the fund my Roth bought a note with, unlike other funds that want the note holder to assign it to you before they send the money.

Problem is, who would assign a note before its paid for? Catch 22. So Quest will accept blank assignment and alonge in lieu of getting the completed ones after the money is wired. I am not compensated by Quest, I just highly recommend their services, as the fund commented they were the first IRA that they were ever able to consummate a deal with...

@Christopher Winkler  

That's all good information to consider Chris but I don't necesarily think it applies to this specific scenario. The original post makes it sound like a new note vs. an existing note.

Originally posted by @Loren Whitney:

@Christopher Winkler 

That's all good information to consider Chris but I don't necesarily think it applies to this specific scenario. The original post makes it sound like a new note vs. an existing note.

 Actually he did not say if its a fresh or existing note. Ezra, new note or existing note? I would suggest not buying a fresh green note unless they put 20% down and have an excellent 675 or better Fico with established employment and no history of missing other payments. Also the price of 44% of value could be good, though there is not enough info to make a judgement...

@Christopher Winkler This one is basically for a brand new note. The loan is only at 45% LTV, so the buyer is bringing a lot down.

I think for this actual deal, I may just take it slow since I don't have the infrastructure set up, i.e. SDIRA. I don't want to rush everything and make mistakes just to make the deal happen. I am sure that other opportunities are going to show up in the future.

Rolling over the IRA could take a couple weeks, and if its a Roth, its tax free profits, otherwise tax deferred with traditional IRA. Also, one of the biggest thing to check is the buyer and their creditworthiness, as well as digging to see if the valuation of the property is what they say it is. An O&E and or Title report is also highly suggested, as is a BPO by a competent company. Good luck!

Great thread. I have a question or two: if you had a substantial amount of money in multiple IRA's and about 20 years from retirement would you do the SDIRA or Solo 401k? Can I buy a property through the solo 401k and then use for my own use without a tax hit?

@Les Jean-Pierre  

you can combine multiple accounts into one self directed IRA or Solo 401k.

Almost anyone can set up a self directed IRA, while Solo 401k will not work for everyone. It is designed for those who are self-employed or have a small business without full time employees (the self-employment activity can be full time or part time in addition to full time job you have). Solo 401k has several advantages over SDIRA so if you qualify (i.e. you have self-employed activity) then it would be best choice for most people.

Here are some advantages: higher contribution limit, checkbook control, ability to borrow against it...  just to name a few. You can learn more here: 

http://www.biggerpockets.com/blogs/2810/blog_posts...

Regardless if you use IRA or 401k to buy investment property, you are not allowed to personally use it or receive any other benefits from it. It has to be for investment purposes only.

Originally posted by @Les Jean-Pierre:

Great thread. I have a question or two: if you had a substantial amount of money in multiple IRA's and about 20 years from retirement would you do the SDIRA or Solo 401k? Can I buy a property through the solo 401k and then use for my own use without a tax hit?

 While I am not an attorney, and really don't know about the Solo401, if you have a Roth or Traditional, its easy to roll it to a self directed. Then all your profits will be tax deferred, as you are not mentioning its a Roth. You might take a hit on converting the traditional to a solo, though you should seek a competent attorney in your state. I converted a traditional to a Roth this year, and will have to pay a small penalty in the taxes that are owed, though its worth it to me in the long run. You can find RE attorneys by state here; legalleague100.com, and let me know if I can be of any other help...

Originally posted by @Les Jean-Pierre :

Great thread. I have a question or two: if you had a substantial amount of money in multiple IRA's and about 20 years from retirement would you do the SDIRA or Solo 401k? Can I buy a property through the solo 401k and then use for my own use without a tax hit?

The advantage of a Solo 401K compared to an SDIRA is the contributions are up to 10 times more than traditional or Roth IRA of $57.5K, and an additional $57,500 contribution from your spouse (if applicable) if he/she is also involved in the self-employed business. This is what I'm using because of more freedom to work my real estate and take out financial loans of up to $50K.

@Sheryl Griffin  Thanks for your response.

For solo 401K, is the contribution limited up-to the income that you generate from self-employment of business? What if the business is not producing, or actually generating a loss? 

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