Using Self-Directed IRA

16 Replies

Hello All,

I'm looking to use a self-directed IRA to start investing in real estate. My primary goal is to watch and learn how someone else walks through the entire process so that I can move into using my own conventional lending in the future after I have built some experience.

Any suggestions on how to do this or some good companies to work with in the Houston area that specialize in walking through the whole process with their clients?

Any help is greatly appreciated.

Thanks.

@Kyle Lake  This is a fantastic question and looking forward to some responses.. I've been toying with this idea as well for some start up capital!

Thanks for posting!

I just rolled over a 401K that I had with a former employer over to a self directed IRA. The process was quite simple. I utilized Safeguard Advisors out of Oregon to handle the process and provided the hand holding through the entire process. I simply signed the documents as they became available and requested the funds from my 401k financial institution to be rolled over, the rest was handled by Safeguard which included working with IRA Services who services the self-directed IRA, setting up the LLC, Fed ID, and prepping all the necessary paperwork. I'm sure they would be willing to go over the intricacies with you. I was quite pleased with the entire experience.

When you say: "My primary goal is to watch and learn how someone else walks through the entire process so that I can move into using my own conventional lending in the future after I have built some experience." what is it you are really looking at doing?

I ask because in general I don't know of anyone that does any sort of RE investing using IRA's for clients. The whole self directed IRA thing is just that "self directed", you are your only guidance and council on the investment. The custodians really just do some paperwork, and maybe will shut you down if you're proposing a prohibited transaction.

Speaking of in general, you are much MORE likely to make a mistake in a SDIRA investment than personal, and the penalties are stiffer. The reason being there are many more rules about what you are and are not allowed to do.

Personally it's much easier to pick up the pieces when you make a mistake investing personally than in a SDIRA. you have more lending options, you have less restrictive rules and you have the ability to just do work yourself if necessary. With an IRA all of those become harder not easier.

Maybe if you can give an example of what kind of an arrangement you're looking for it would help get you a better answer, I may just be I don't understand what it is you're looking for.

I believe the rules prohibit you doing transactions between your SDIRA and yourself or immediate family members, so you cannot become your own conventional lender. But you might find a partner who has a SDIRA and you can loan each other money. However, if you have a tax-deferred IRA (not Roth) I would advise you not to invest with the IRA, because all your cash flows and appreciation that are tax advantaged as real estate will be regular income when you eventually withdraw them from your IRA. If you have a Roth SDIRA then all your cash flow and appreciation earnings are tax-freeing withdrawal.

You might consider cashing out your IRA (just enough for each investment you make), paying the tax and penalty, and then investing in RE so that you get all the cash flows now along with the tax advantages of depreciation and 1031 exchanges. No need to wait until you're old to enjoy the tax benefits of real estate. If you buy right, you will usually gain back the penalty amount or more in equity capture on each deal.

Originally posted by @Kyle Lake :

Hello All,

I'm looking to use a self-directed IRA to start investing in real estate. My primary goal is to watch and learn how someone else walks through the entire process so that I can move into using my own conventional lending in the future after I have built some experience.

Any suggestions on how to do this or some good companies to work with in the Houston area that specialize in walking through the whole process with their clients?

Any help is greatly appreciated.

Thanks.

 Hey Kyle

Around 2009 we converted my wifes old corporate stocks into a self directed IRA with Quest IRA here locally in Houston; we have bought and sold multiple houses our most recent transaction I posted about here on BP: http://www.biggerpockets.com/forums/522/topics/178...

There are several great companies who do it but Quest IRA is local and they have been doing it for years AND I love being able to go into the office locally and get information, attend events andddd meet PRIVATE LENDERS! You can google Quest IRA and Quincy Long, their office is in Katy!

@Doug McLeod  

Collaborative lending such as you describe would be viewed as a prohibited transaction. Cashing your your IRA to buy real estate is not something you should be advising, frankly. Yes, investing with an IRA is different than investing with personal cash. But, you you happen to have accumulated some tax-sheltered retirement money, giving up those benefits is unwise. Rather, invest that money in the assets that will provide you with the best possible security and return. Sure, you'll pay taxes when you take it out, just like if you grew your retirement savings in the stock market, but if you can grow your retirement nest egg to a good large sum by being able to invest that capital without the gains themselves being taxed at all, you come out ahead.

Originally posted by @Kyle Lake :

Hello All,

I'm looking to use a self-directed IRA to start investing in real estate. My primary goal is to watch and learn how someone else walks through the entire process so that I can move into using my own conventional lending in the future after I have built some experience.

Any suggestions on how to do this or some good companies to work with in the Houston area that specialize in walking through the whole process with their clients?

Any help is greatly appreciated.

Thanks.

 Hey Kyle,

I think there may be two pieces of your question, the first being using your retirement funds to invest in RE, and how that process works. There really isn't a custodian out there who will give you advice, but a good SD IRA custodian can absolutely explain how the whole process works. NuWireInvestor.com has a list of custodians by assets under custody and TPAs noted as such. http://selfdirectedira.nuwireinvestor.com/list-of-...

You can call pretty much anyone on that list and they can give you a step by step as to how the process of making an offer and signing paperwork works.

If you are looking at using retirement funds to invest in RE, but you are not 100% comfortable with the process (after speaking to a custodian), I would suggest taking a loan from your current 401k to use for RE investing. It gives you a 5 year timeline to repay the loan to yourself, and there is no chance you would run afoul of any prohibited transactions as the money is a personal loan.

Adam

Full disclosure I work for a self directed IRA custodian, Provident Trust Group.

Originally posted by @Kyle Lake :

I'm looking to use a self-directed IRA to start investing in real estate. My primary goal is to watch and learn how someone else walks through the entire process so that I can move into using my own conventional lending in the future after I have built some experience.

Any suggestions on how to do this or some good companies to work with in the Houston area that specialize in walking through the whole process with their clients?

Kyle, the location of the self-directed custodian should be the last thing you need to look at. Some of the important factors to consider is the quality of client services and support custodian offers to its clients as well as fees they charge (transactions fees, asset-based fees vs. fees based on the account balance, etc.). 

An alternative to that is to use what's known as Checkbook IRA. This structure allows you to bypass the custodian and do all of the investment and transactions on the LLC level, which is investment of the IRA.

And if you are self-employed, even better option is truly self-directed Solo 401k which allows you to eliminate the custodian altogether and be the trustee of your own Solo 401k trust.

Following are some helpful resources surrounding self-directed IRAs.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Investments

http://www.irs.gov/Retirement-Plans/Reporting-for-Hard-to-Value-IRA-Investments-is-Optional-for-2014

http://www.sec.gov/investor/alerts/sdira.pdf

http://www.irs.gov/pub/irs-pdf/p590.pdf

http://www.journalofaccountancy.com/Issues/2000/Apr/TheDosAndDonTsOfIraInvesting.htm

I rolled my 401K over into a Self Directed IRA to trade foreign currency with Equity Trust Company. It was easy, it took Equity Trust 45 to 60 days to open the account. I completed the forms online and faxed my signature. I would recommend you check the fees associated with the account.

Kyle, 

Figuring out what you want real estate to do for you I think is the best starting point, are you trying to be a lender?  Own properties outright (real estate is a tax sheltered investment, usually not a good idea to own within another tax sheltered vehicle), or be an equity investor in larger real estate projects?

Nailing down your investment philosophy is probably the first step, all money is green, so it really doesn't matter which you use until you figure out what you are trying to accomplish.

Kyle, hang in a sec: Kudos to Mark Nolan, above, who gave those great websites, especially the SEC warnings with quotations from fraud cases. 

Now: we set up a SDIRA for my wife's IRA a couple years ago, allowing her to invest in what we do anyway: buying and holding rental real estate. It's easy to move money from one place (Fidelity, Vanguard, etc.) to a qualified custodial company, because everyone wants to ability to charge you money. Then, we had to find an attorney who knows the law really well, which we did, and I literally wrote the Operating Agreement that the custodial company (Pensco [I'm not sure they're the best, though, and I'm researching other custodians]) required before they would allow us to open the check-book IRA. We have to designate a qualified person to be a legal consultant, too (used the same attorney who helped me write the OA). [Aside: Be aware of the stringent rules about this. There is both letter and spirit of the law. There are many "disqualified" persons or entities. The point of it all is that you can't use the SDIRA to benefit anyone or anything except the IRA. Your SDIRA can't sell a property to someone you know, or are related to, for instance. Your SDIRA can't hire your relative to work on the property. It can't sell something to someone you know.] Then we set up an LLC, and Pensco "funded" the LLC's account. Now we use the money to buy properties, and all costs and rents come from and go to that LLC's bank account. You have to report to the custodial company annually on the value of your investment (Fair Market Value of property plus any cash on hand. The custodial company charges you based on the value of your SDIRA, and will issue an IRS 5498 that tells the value. The SDIRA is a great vehicle for using an existing IRA to invest in any business that YOU know well and can be reasonably sure of doing well in. It allows you to control money that you might otherwise just leave sitting in an index fund, or worse.

Thank you everyone for the great advice. There are definitely many rules with using the self-directed IRA route to be aware of. Its also neat to hear people that are using them sucessfully @David Epstein @Tyron McDaniel

To clarify some questions I was wanting to use the money to be a private money lender rather than using the money to invest in properties myself.  So basically my main concern is finding someone to lend to that I can learn from while lending them my money.  Hopefully this route would help me stay compliant with SDIRA rules as well as learn how a more experienced investor handles the investing process.  Hopefully that makes sense now!

If anyone has suggestions on finding someone to lend to or needs a lender themselves feel free to PM me.

Hello,

I believe 

Dimtriy Fomichenko, Brian Eastman, and Jim Hitt With American IRA would all do you well. These guys all know what they are doing. If you need any guidence on real estate investing then that is what I do very well. You are welcome to read my profile and reach out to me if you have more questions.


Craig

This post has been removed.

Originally posted by @Matt Devincenzo :

When you say: "My primary goal is to watch and learn how someone else walks through the entire process so that I can move into using my own conventional lending in the future after I have built some experience." what is it you are really looking at doing?

I ask because in general I don't know of anyone that does any sort of RE investing using IRA's for clients. The whole self directed IRA thing is just that "self directed", you are your only guidance and council on the investment. The custodians really just do some paperwork, and maybe will shut you down if you're proposing a prohibited transaction.

Speaking of in general, you are much MORE likely to make a mistake in a SDIRA investment than personal, and the penalties are stiffer. The reason being there are many more rules about what you are and are not allowed to do.

Personally it's much easier to pick up the pieces when you make a mistake investing personally than in a SDIRA. you have more lending options, you have less restrictive rules and you have the ability to just do work yourself if necessary. With an IRA all of those become harder not easier.

Maybe if you can give an example of what kind of an arrangement you're looking for it would help get you a better answer, I may just be I don't understand what it is you're looking for.

There are firms that work with real estate investors within the SD IRA space! The Growth Equity Group solution is just that.

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