Rental Income and SDIRA

7 Replies

Hey guys, I'm looking to purchase a multifamily unit, a quadplex to be exact, with the focus being on producing more household income. I'm considering either using a VA loan to build new or use an SDIRA for a down payment on a conventional loan.

 I was wondering if somebody could help me understand how rental income would be treated off the property if I used an SDIRA. Also, I'm kind of assuming that it can be used for a downpayment and not the entire ask. 

Thanks in advance. 

@Eric John

  1. If the IRA owns the property, then all rental income and/or proceeds from the sale are required to flow back to the IRA.
  2. Also, you cannot use the property for personal use.
  3. If the IRA does not have enough funds to make the full purchase, it can obtain a non-recourse loan from a bank lender, for example.
  4. However, when an IRA uses borrowed funds to invest in real estate, it will subject the IRA to UDFI a type of tax. See following. https://www.irs.gov/irm/part7/irm_07-027-008.html
  5. Therefore, it may be best to consider using a solo 401k instead if you plan to use non-recourse funds since a solo 401k plan is generally not subject to UDFI.
  6. For a list of non-recourse lenders, see following.

    https://www.biggerpockets.com/blogs/3441/51027-nonrecourse-loan-debt-for-self-directed-solo-401k-investment

@Eric John

If you use SDIRA your rental income will go back into your SDIRA and hence depending on the type of your IRA - Roth or Regular, the taxes will be either defferred or it will grow tax-free.

Also, you're correct you can use SDIRA funds as a down payment only. But then you would need to get a non-recourse loan. Also, make sure your SDIRA company allows that.

Also, search through older posts here on BP - there have been tons of discussions on this topic. 

Thanks for the input. Putting a little more thought into it, I'm going to consider purchasing land with an SDIRA and will see what it will take to build the quad. 

I appreciate your help everyone. 

@Eric John

If your IRA owns the land, YOU cannot build a quad on that land.

All IRA investments must be done entirely at arm's length, with no transactions or nexus of benefit in either direction between you and the plan. This prohibition extends to certain family members and family owned businesses as well.

A self-directed IRA is not a way for you to access tax-sheltered IRA money for your deals. Rather, it is a means for you to take existing retirement savings and diversify from market based assets into solid assets such as real estate. But it is all exclusively for the benefit of the IRA.

That's kind of a bummer @Brian Eastman . Being I got decades before I can tap into my retirement funds, looks like I will have to find another way to finance the project I have in mind. I appreciate the info. 

@Eric John whether it is a SDIRA or a solo401k you cannot use "tomorrow's money" to change your today. It would be cool if you could, but it would kind of ruin the entire "retirement" part of the retirement fund  ;)

Best of luck!

@Eric John You could use a SDIRA to purchase a quad cash. Or the SDIRA can take out a non-recourse loan like others have said. Typically these require a larger downpayment than conventional (30-50%) and a higher interest rate. 

Another way you can utilize your SDIRA is by lending to rehabbers who'll give you 10%+ apr

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