Strategies for Using IRA money to invest in real estate.

12 Replies

Hi fellow investors. I haven't been on here in a while. I am trying to research different ways to use investor money. I have heard of folks using other investors selfie directed IRA money to invest in realestate and am looking for information on this strategy. Is anyone doing this right now? What are the rules and regs of this technique? Any info is appreciated.

Thx so much. 

Dan, the topic of using self-directed IRA to invest in real estate is a frequent discussion on this forum. A good place to start will be for you to search for previous discussions, the results will keep you busy reading for hours...

There are also several articles as well, and it has been discussed on podcasts too...

Generally self-directed IRA and Solo 401k investors will process such investment as a promissory note or equity investment. Do you currently have an IRA?

@Dan Velasquez

There are many strategies that could be used to bring other investor's IRA money into your deals.

An IRA could lend you money. This might be in the form of a mortgage secured by a property.

An IRA could joint venture on a deal with you, either by forming a LLC where you and the IRA are members or with the IRA and you(or your personal entity) as tenants in common.

The key rules are that an IRA may not deal with disqualified parties, which includes the account holder, their spouse, or lineal family. So, you could not deal with an IRA belonging to you, your spouse, your parents or your children, as you would be disqualified to any of those IRA's.

@Dan Velasquez

Learning the prohibited transaction rules is important if you are considering working with IRAs or 401ks. As Brian mentioned, a retirement account will have a list of disqualified persons with which it cannot transact. The subject of non-recourse loans may also come up in your reading. This type of loan allows the IRA or 401k to receive financing without a personal guarantee from the accountholder (which would be prohibited).

If you are looking to receive financing from an IRA or 401k, you can generally do so according to terms agreed upon by you and the retirement account holder as long as you are not a disqualified person to the account.

If you have existing retirement funds, a self-directed IRA or 401k of your own can be a good way to invest in real estate and increase your retirement savings. It would not be suitable to create personal income in the short term, however.

@Dan Velasquez

Many others have mentioned the prohibited transactions already. There are many investors who use investment funds from self directed IRA's and also many who are lending funds to others from their self-directed IRA. Would you be the lender or the borrower? The most common structure for borrowing from a non-prohibited investor is a promissory note acknowledgement. You and the other party set all the terms and then the SDIRA custodian sends fund from the lenders account to the borrower. I would be happy to connect and answer any follow up questions you may have.

Thanks very much for the replies. I found the SDIRA topic on forums and found a lot of interesting and helpful information. I am still a bit confused of a couple things and maybe some of you could set me straight. A little bit about what I'm doing and what I would like to do. I am a realestate investor and have been so for about 7 years. I mainly work with a private investor who is limited on funds. Enough to fund comfortable 3 deals per year. I buy renovate and sell properties. Usually 3-4 month total turnaround, returning money to the investor after each deal. I make the private lender a very good ROI, over $100k per yr. My background is production building, new construction of SFR 10 years in Oregon for a local builder. We built over 100 new homes per year easily in multiple subdivisions so you can see how I am anxiously ready to scale my business up to at least 10-12 of my own deals per year. I feel I can comfortably achieve these production numbers. I obviously require additional funds to do so though and is the reason for my inquiry. I am familiar with hard money and am not seeking assistance with that service here at this time. I want to learn to use SDIRA funds from other investors retirement accounts as I can confidently offer ROI's to investors greater than the stock markets ROI's. I need to be able to explain the process thouroughly to potential capital investors and show them how this is being done by others now and it can be done by us as well. If transactions are performed while staying within the rules, the risk to their IRA funds in regards to early taxes, penalties etc..is the same as if their money sits with traditional custodians. These concerns seem to be at the top of the conversation when discussing investment opportunities with them currently. I read up on a technique some offer to folks called "checkbook" SDIRA accounts. An LLC is set up through a traditional SDIRA custodian, in essence making the investors own LLC checking acct their SDIRA platform. Giving them more fluid access to their own funds to invest how they choose. Obviously all of the same rules and conditions apply to this platform as would be with a traditional SDIRA custodian. It appears to be a very efficient way for folks to invest their SDIRA as they see fit. As long as there are no prohibited transactions or dealings with disqualified parties going on then this should be treated just as a standard SDIRA held at a traditional custodian correct? I don't know if I am missing something so is why I'm brain storming with you all. A question I have is in a specific scenario where I am an investor/borrower seeking a lender to finance my projects.. Is the investor who owns the SDIRA account able to lend to me to fund my deals with no negative recourse regarding tax and penalty? I was understanding the information I read to be that the owner of the SDIRA account could buy real estate or other Investments through their own SDIRA acct, for their own investing activities. Not using any funds for personal use whatsoever, and having all of the funds land back into the SDIRA act. After the investment sold. Profits and all and would be safe from any prohibited transactions. Can the owner of the SDIRA acct. lend this capital out to me on realestate and still receive the same IRA retirement tax and penalty protections as a normal IRA account? All of my investment endeavors are done through a title company where an investor normally wires funds directly there for my transactions. I record said investor as my lender on title. When I complete a deal and sell it, the transaction is done at the same title company where funds are wired directly back to my lenders acct. principal and profits together. I basically need to show these investors that are interested in making money with me that this can be done with their SDIRA money safely while they continue to enjoy all of the tax benefits as they continue to grow their retirement funds as they would letting their money sit in a normal IRA. Do any of you see any prohibited transactions in this process that would present an issue in the SDIRA holders compliance? I really appreciate any and all feedback. Thanks again.

@Dan Velasquez

Yes, you are simply looking for private lenders. 

You are an investment provider, with an opportunity for that investor to lend on.

An IRA may be a lender, whether the IRA is simply using the 3rd party processing services of a self-directed custodian, or whether the client chooses to create the more flexible Checkbook IRA LLC platform. For a lender just doing one longer term note, the custodial route is pretty simple and cost-effective. For a lender that will be doing multiple loans concurrently or a series of shorter term notes, then the Checkbook IRA LLC will reduce fees and paperwork, as they can lend directly from the IRA owned LLC instead of needing the custodian to do all the processing (and charge for such).

So long as the borrower is not a disqualified party to the IRA, this is a perfectly suited investment for an IRA. The earnings are passive interest, and fully tax sheltered to the IRA. Really no different than if a stock issued dividends to the IRA or interest earned on a CD, but I highly suspect the rate of return for rehab and new construction loans will be much better.

You want to get on the phone and speak with some plan providers.  They can help you be more conversant on the topic and then be someone you can refer potential investors to for plan services.  

@Dan Velasquez I will give a little input from the investor side as opposed to what the providers are saying, which is great advice so far. It sounds like you are completely on the right track with your thinking of how things can work.

I have invested in buy-n-hold rentals with my own SDIRA and SOLO401K (you need to be self employed for SOLO, but a great option if it fits) and am currently working with a couple possible investors that are working on figuring out if they want to partner on some deals with cash or set up a SDIRA. 

There are essentially two ways you can go when seeking other peoples money (same as with cash deals)..... one is to borrow at a fixed rate, the other is to let them partner with you. In my opinion it depends on their goals and risk tollernce. I can imagine a question that would come up with doing flips is 'what if you loose money, do I?" It depends who you set things up obviously. 

In my case, all but one of my potential partners like the idea of being a partner as compared to just being the lender in order to get higher potential returns. We are leaning towards them bringing the needed 20% down from their SDIRA and the LLC we form borrowing the rest, and me doing all management. Essentially they dont want to loan at say 5-6% when they can partner and earn 10-15% long term.

Dan Dietz

Dan, you are a home builder /developer, that is what you do best and that is what you should focus on. You don't have to become an expert in self-directed IRA/401k and be the one to explain the process thoroughly to potential capital investors in your business/projects. I suggest that you do your due diligence to find a reputable self-directed IRA/401k service provider who can handle this task for you. This way you can focus your efforts on what you do best and by creating a system where you can work with other experts you can accomplish more and be more efficient.

Hope this helps! 

Thanks Dmitriy! That is a great idea. Who better to fully explain than an expert. I have to be able to at least get past the initial conversation,speaking intelligently on the subject. I have found the answers to most of my questions on forums here and also from your all replies so thank all of you for taking the time. Daniel, I have an investment company which is an LLC and I offer my capital investors a percentage of my profits, per deal. I think this is more appealing to capital investors and better for me also as you never know what exact numbers are, although I do my homework and forecast the numbers pretty close. Tell me what you think about an acceptable percentage return to capital investors is. Research I have done says 10-12% ROI is very attractive to folks. Reason this becomes an important number is that some people see me successfull in my deals and want to invest but most don't have 300-400k to invest all at once. They want to put I. 10k or 50k. Or similar. I don't like to turn them away but if I can't put it to work it makes no sense sitting in my acct. obviously others are doing this. I believe it is called hard money lenders ha!! I'd like to raise the capital myself to save myself at the same time offer my capital investors greater returns. Thank Brian for your input as well. That was what I was looking for. It appears as though as long as it is treated correctly and rules not deviated from at all it is a very sound way of doing business for people who have SDIRA money. They can continue to grow their retirement with all of the same tax benefits a normal 401 or Ira offer.

I am sure there is a great reason... but as successful as you appear, what is the reason for not using a traditional lending resource that many of use to (collectively) borrow trillions of dollars a year? Commercial lenders will be half the rate... 

Chris, great question. Thanks for the assumption but although I may may appear successful, I am not a large guru who is anywhere near where I ultimately see my company being. I found myself content over the past few years working mainly with one private investor and a few others that would dip a toe in for 1 here and there. 2-3 deals per year has made a comfortable routine for me and enabled me to work for myself on my terms. I am trying to scale my business though and to do this I need to secure additional reliable funding. As to your question regarding conventional financing options. Conventional financing isn't an option for active investors as far as I know. Not really in place to assist investors on short term lending solutions. The big banks make their money the longer you hold their product so when using it how I would, the pre payment penalties, fees etc, don't make financial sense. There are different products like bridge loans etc. basically hard money and I am exploring these options as well. It is really expensive to use and the interest rates can really make for a bad day if you end up having any delays. The more creative People can be with their SDIRA funds opens up big opportunities for not just me but for their retirement accounts also. The hard money lenders are doing what I talked about above. Basically securing these investors capital through their SDIRA money, offering them a fair but not GREAT ROI, then turning to investors like me, offering that same money short term between a 8-15% depending. I am exploring how I can work with a handful of intelligent people with capital and offer them an even higher ROI than the stock market or these hard money folks offer. Ultimately this will cost me less to borrow these funds. Creating a win for both sides and obviously helping me to scale to production levels I want to achieve. This may be a discussion for a different forum topic but, are there specific funding alternatives you were referring to besides the referenced conventional options? Appreciate the feedback.

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