Investing on crowd funding real estate platforms with Self-Directed IRA

San Jose, CA · Member since 2012 · 2 posts · 1 vote

Hello,

Thank you for taking time to answer my questions.

My yearly income is between $150K-$200K, which means I'm a non-accredited investor. I'm still very interested in investing on crowd funding real estate platforms like Realty Mogul. My question is:

1. Can I invest on the crowdfunding websites with my self-directed IRA?

2. Do crowdfunding platforms allow that?

3. Is IRS cool with that?

Cheers!

Ishmeet

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Josh Caldwell

Investor · Dallas TX, United States · Member since 2014 · 1k+ posts · 1k+ votes

11y

A couple of things here, First off why crowdfunding? That is a more risky versin of private lending. You can be a private investor with your self directed IRA and make a high rate of return secured by a property that should be bought well under market price. that is one of the safest investments out there in my opinion. Its easy to find those sorts of investments.

Now back to your question, even though I dont know why you would do this. Contact your self directed IRA custodian, it is their job to tell you if a transaction is allowed or not. The crowdfunding platform shouldnt care where you funds come from as long as your funds are legit.

I hope that helps, feel free to contact me if you have any other questions

Josh

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Josh Caldwell
Investor · Dallas TX, United States · Member since 2014 · 1k+ posts · 1k+ votes
11y
A couple of things here, First off why crowdfunding? That is a more risky versin of private lending. You can be a private investor with your self directed IRA and make a high rate of return secured by a property that should be bought well under market price. that is one of the safest investments out there in my opinion. Its easy to find those sorts of investments.
Now back to your question, even though I dont know why you would do this. Contact your self directed IRA custodian, it is their job to tell you if a transaction is allowed or not. The crowdfunding platform shouldnt care where you funds come from as long as your funds are legit.
I hope that helps, feel free to contact me if you have any other questions
Josh
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Josh Caldwell
Where this person lives is not like what your neck of the woods is like at all.
Under market deals are rare and hard to find PLUS its big dollars.. average loan would be well over 500k.. its not like there in your market were you can find 25 to 100k deals to fund and have many to choose from..
Crowd funding is a GREAT alternative for West Coast investors IMHO.. it allows them to diversify and have small amounts into many deals with professionals handling the due diligence.. the top one's Realty Shares and Realty Mogul are pretty sharp folks and have come along way since inception... now some of the newbie sites popping up I would not want to go through there learning curve.
When the rules change to allow non accreds into their deals these guys business's RS and RM are going to Explode again.. although both companies have just received VERY large VC capital infusion.. they will be the new super HML of the future.. and that's my take on it as a HML that has been doing this 30 years.... a lot of smaller companies are puckering as these guys move into a market and can under cut the locals rates.
Although with every investment the investor does still need to do their due diligence can't just invest blindly and willy nilly... Even CF make boo boo's the I funding Milwaukee transaction that has been dissected on this site is a classic case.
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Mark Nolan
Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
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@Ishmeet Singh
Yes both the IRA and solo 401k rules allow for investing in crowd funding. The following IRS link lists what investments are not allowed in a retirement account.
http://www.irs.gov/Retirement-Plans/Retirement-Pla...
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Charles Worth
Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
11y
@Ishmeet Singh
If you earn $200K your self you very well may be accredited based on the below from the SEC on what is an accredited investor:
a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year
Also if your net worth is over $1MM you are accredited.
As far as I know these offerings are still being done based on rule 506 from the SEC. I think Realty Mogul is 506 (b) which has less stringent verification standards. I believe these are based on who you are and what entity you use (like IRA etc.).
There are new rules being implemented that will likely let many of these platforms open up to most people for investment and not just accredited investors.
As to the comment of
@Josh Caldwell I might invest through a platform because they have a reputation to protect and if the deal goes bad they have a lot of incentives to step in and make sure it is fixed.
On the flip side and why the lending I have done was to someone I knew is that the platform take fees out of the pie, the returns are dropping like a stone and you don't personally know the person you lend to. I built a good relationship with the person I lent money to and have a fair amount of trust in him (the property was good too and at a good loan to ARV but obviously I wouldn't want to deal with it). However, this took work both in understanding the market and in decided who I could place that level of trust in. I would never have done it with someone I just met or that contacted me over the internet.
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Scott Steffek
Flipper/Rehabber · Crown Point, IN · Member since 2009 · 482 posts · 216 votes
11y
What is the reason you're interested in crowdfunding? Why don't you hook up with RE people in your aea? Go to meetings and get to know other investors and other wholesalers. Get involved with the RE community and take it from there. As far as investment dollars, there's areas all over the country that can offer you great investments for a lot less than $200k , or whatever. Our area has great deals for around $100k or less. It all depends on your goals. I do know some people who have had success with crowdfunding. Using your IRA/401K though, in my opinion, is a great way to go, whether it's crowdfunding or out and out investing. Good Luck!
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Anthony PolcynPro Member
Investor · Jackson, OH · Member since 2014 · 42 posts · 20 votes
11y
Ishmeet,
I agree with some of the above comments. Meet some active investors and invest in rehabs. Your funds can be put in rehab deals with purchase and repairs under 70% of after market value. Unsure what rate you are looking for, but from my experience you can easily make above 10% backed by a first mortgage with significant equity to back the deal. I would pay 10+% all day long for private funds!
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Scott Steffek
one must be careful investing IRA funds so your not hit with IBT tax.. consult an expert before you think your can use your IRA funds for fix and flipping your own projects.
@Mark Nolan
Mark I know you usually don't give specific advice more of general advice and a nice welcome.. but maybe you could expound on this just a little.
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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@Ishmeet Singh
A self-directed IRA or 401k may generally invest in crowdfunding.
Some crowdfunding opportunities are limited to accredited investors, but not all.
If the investment represents debt to the funded entity, the investment is simple from an IRA perspective.
If the investment represents equity in the funded entity, then an IRA or 401k may have exposure to Unrelated Business Taxable Income (UBTI), depending on the nature of the funded activity.
Most IRA custodians can process such investments, but cannot advise you with respect to whether there is tax exposure to your IRA, which is why you want to have a CPA or work with an advisory firm.
Crowdfunding can certainly have a place in your portfolio. This is a means to invest smaller amounts of capital with less time commitment than investments such as owning rental property. You can also achieve a reasonable amount of diversification by having access to several markets. As with any opportunity, you need to invest the time into proper diligence, and ensure what it actually is that your investment is backed by.
As several folks on this thread have commented... if you have the capital and the network to engage in direct private lending, you will generally have more control and a more secure asset such as a first deed of trust.
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Greg K.
Real Estate Investor · New York City, NY · Member since 2015 · 5 posts · 0 votes
10y
What type of crowd funded equity investments would incur a UBTI tax if done through a Solo 401k?
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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@Greg K.
If the income received to an IRA or Solo 401k is viewed as trade or business income, then UBIT will apply. Passive income not subject to UBIT includes interest, dividends, royalties, and rent from real property.
If a crowdfunded investment is into a C Corporation, then the corporation will be paying taxes on income and then {hopefully} issuing dividends to shareholders. This would not be subject to UBIT.
If a crowdfunded investment is into another form of business entity such as a LLC, LLP, etc. there is no tax paid by the business and the income flows through to the owners (including those in a crowdfund that offers equity). Operating income received in this fashion would be subject to UBIT. Any gain in value of "shares" in such a venture would not, however, be subject to UBIT.
See IRS Publication 598 for more information.
Solo 401(k) plans are exempted from UDFI taxation on debt financed real estate investments, but are not exempted from UBIT. Unfortunately, a lot of folks mis-state this as saying 401(k) plans are exempted from UBIT. UDFI is a subset of UBIT, so the confusion is natural, but it is still confusing.
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Travis Limbocker
Investor · Castle Rock, CO · Member since 2015 · 38 posts · 24 votes
9y
@Brian Eastman thanks for paining a clear picture on the UBIT and UDFI subject. I've been digging around the forums and looking into the crowdfunding with SDIRA's and Solo(k)'s and there seems to be a difference between debt-financed and equity investments when it comes to UBIT. You mention a solo(k) would be subject to UBIT (not UDF) if the investment is into an LLC. What if the crowdfunded investment is equity-based, free of debt-financing? Would UBIT still apply to the rental income generated by such assets?
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
9y
@Travis Limbocker
Yes, either an IRA or 401k will have exposure to UBIT on an equity participation crowdfund.
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Larry Fried
Investor/RE Broker · Eugene, OR · Member since 2014 · 3k+ posts · 968 votes
9y
Originally posted by @Brian Eastman:

@Travis Limbocker
Yes, either an IRA or 401k will have exposure to UBIT on an equity participation crowdfund.
But Brian, Travis was asking you in particular about rent income, and you just said above that rental income would be exempt from UBIT. That is what I understand as well.
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
9y
@Larry Fried @Travis Limbocker
My apologies. I saw the term equity and hinged off that, and did not see the phrase rental income. Reading too fast.
If a crowdfund is producing returns from rental income, then that would most likely be deemed passive and not subject to UBIT. It can be a little tricky in larger syndicates if there are other sources of income, so be sure to check the specifics of a particular investment with appropriate counsel. Most legitimate crowdfund ventures will have docs drafted by or access to counsel that are familiar with UBIT.
Refer to publication 598 covering these topics. Passive income not subject to UBIT is rent from real property, dividends, royalties and interest.
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Travis Limbocker
Investor · Castle Rock, CO · Member since 2015 · 38 posts · 24 votes
9y
@Larry Fried @Brian Eastman thanks for clarifying. It's funny to me how much this topic is discussed and yet, there's never a black or white answer. I had a conference call with a few mainstream crowfunders this morning and they still couldn't give me a straight answer.
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