Would you start a new self-directed IRA to hold long term real estate investments?

7 Replies

I came across this BP forum post from a few years back discussing the merits of cashing out a 401k to invest in real estate. 


There was some good discussion but the post was really geared towards people that already had 401k accounts and whether or not they should roll them into a self-directed IRA. I can see a SDIRA as a good alternative when you already have a pile of cash in a 401k and want to invest in RE instead of stocks/bonds, but does it make sense when starting from scratch? Would you start a SDIRA specifically to hold investment properties?

It seems to me like you can invest in real estate using a Roth and cash out tax free during retirement. Assuming you eventually run out of 1031 exchanges that is a better deal than holding RE in an LLC and eventually paying taxes. But I have read investing in RE using an SDIRA is restrictive and involves some red tape. Do the benefits outweigh the costs? Is the play to put some REI properties into a SDIRA for retirement and keep most outside for income before retirement? Looking forward to hearing your take on this issue!

@Brian Jurvelin

As with so many topics of this nature, there is no single answer.  It will all vary upon your situation.

A Roth IRA is a fantastic tax sheltering vehicle. If you can invest a Roth IRA in something that produces superior return (i.e. > 8%) over a long period of time, you can create significant tax free wealth. A Roth IRA is also particularly nice for transferring wealth to the next generation.

Starting from scratch with a SDIRA probably does not make a lot of sense. You need some gas in the tank to get the car down the road, if you know what I mean. It is difficult to invest at arm's length - which is critical - with just a few years worth of Roth IRA contributions. I often recommend to younger folks just starting out that they build up some asset value in a conventional IRA and then move to a self directed once they have something to work with.

If you are self employed, the Solo 401k provides a much more generous option for building Roth wealth through contributions.  These plans allow for $18,000 of contributions per year for those under age 50, without income limitations.   I have clients with a day job who also flip houses on the side.  They turn that flipping business into a sponsor for a Solo 401k and then kick as much of the profits as they can into a Roth account within the 401k.  Within a few years, they have enough to put their plan to work as a hard money lender or landlord.  They get good returns from investing in what they know.

Is the red tape worth it? Absolutely. There are restrictions to investing IRA or 401k funds, but with the right mental attitude, it is very easy to follow the rules. The key is to realize this is tax-sheltered retirement savings. While you can diversify that savings into assets such as real estate, it is not money being added to your real estate investing budget. Simply think of yourself as a fund manager, investing in an asset class you understand, and keep everything at arm's length, and you can create a whole lot of tax free wealth.

The biggest challenge in using a SDIRA to invest in RE is the amount of capital needed in the account to get going and even with a good size IRA - do you want to tie up such a large portion in one asset? Further the financing is much more restrictive - non recourse - typically 65% LTV. In the short term, doing flips in your IRA could be a great way to build an account. I just wrapped up a flip with a partner - he was able to add $30,000 tax free to his IRA account with a $55,000 investment.

Great benefits in doing deals inside a retirement account, but challenging. The benefits of real estate out side of retirement is the ability to finance. After you get a handful of deals done you will start to look at deals a little different and bring in retirement funds where you can.

One way to start out with a small SDIRA is wholesaling. Earnest money would be put out and the profits go back in. Just a thought. 

Welcome @Brian Jurvelin

I agree with Travis (good to see you on BP Travis) regarding the amount of necessary capital needed to gain traction with an SDIRA - especially in real estate. Most investors will use their existing retirement assets by funding their SDIRA with a transfer or rollover.

If you're looking to purchase a property as a long term hold, you'll need enough to cover your down payment and closing costs (or cash purchase), plus any reserve requirements that your lender adds into the equation at a minimum. If you don't purchase a turn-key property, you'll likely find some repairs and/or improvements that need to made. Your IRA (as owner) will be responsible for covering all those costs which require additional capital beyond the minimums. SDIRA investors will commonly plan and strategize for all expected and unexpected events to determine their cash balance requirements. As you can see, the need for capital extends far beyond the basic acquisition costs.

Good luck getting started! You’ll find lots of great support here at Great Pockets. There are many SDIRA and Solo(k) investors.

@Travis Sperr Thanks for the input.  It sounds like investing in RE inside a SDIRA is probably not a strategy to pursue at the beginning stages of your investment career but can be beneficial down the road.  

@brian c Good suggestion to build up the funds in the SDIRA to have enough to buy a property.  I don't have any experience with wholesaling at this point it is nice to know the strategy is there if I need it.

@Brian Jurvelin

A self-directed IRA can also be invested in tax liens which is a popular investment for those with low balance IRAs.

I prefer investing in trust deeds in a retirement account because all interest income is sheltered. Owning rental in your own name offers tax benefits such as depreciation. 

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here