Buying investment property using LLC

8 Replies

Hello Everyone, I am new to bigger pocket forum. I have 2 rental property and 1 primary home in Southern California. I am looking to my my 3rd investment property to rent out. I heard of Real estate investment through IRA. I learned a bit from Midlandira.com. They also mentioned that IRA can invest in LLC. Does anyone have idea on following question? If I And my wife invest our IRA in LLC and with some my own cash, buy a property using my credit. For example, 150k from my Ira,50k from wife Ira and 70k from personal cash use it for 30% down payment for a property in Southern California. Is it possible and tax / irs headache? Thank for reading and guiding. Thank n Regards Naresh

You can NEVER mix personal assets with your (wife included) IRA assets. Look up prohibited transactions and disqualified persons.

Hello Naresh, It is possible to invest your personal money, your IRA money, and your wife's IRA money in an LLC. The ownership percentages must be based on the dollars each entity invests. Once the percentages are set up, they are rigid as it relates to the other LLC members (i.e. none of the three entities can buy each other out).

That being said, it is likely that some lenders will not loan to an LLC with those members, but some may. Neither your or your wife's personal assets would be allowed to be collateral on the loan.

Naresh, 

You and your wife are both considered to be disqualified to your IRA. IRS does not allow any transaction between IRA and disqualified person, all transactions must be "arms length".

If you decide to use leverage in your IRA the loan must be non-recourse, you are not allowed to use conventional financing because it requires personal guarantee. Here is a list of non-recourse lenders:

https://www.biggerpockets.com/blogs/2810/50272-list-of-non-recourse-lenders-for-self-directged-ira-and-401k

Because of all of the prohibited things that you cannot do with your own money, I do not mess with Self-Directed IRAs. It is a paperwork nightmare and they charge a fee every time you do anything. I had a SDIRA and after a few years, I rolled it all back out of there. SDIRA salesmen on here will tell you that it's a great thing, because it's the way they make money. Don't touch IRA money and stop putting money in the IRA and put it into real estate.

@Anthony Dooley

I'm sorry your experience with a self-directed IRA was not positive.

Some types of investing are not well suited to a self-directed retirement plan based on IRS rules.  Each month, in fact, about 30% of the folks who contact us have in mind something that is not well suited to such a plan, and we are very up front in letting them know that - and either walk away or help them adjust their goals to something that will work.

There are, however, many ways that an investor can use a self-directed plan to invest in what they know and build their tax-sheltered savings in a more safe and consistent manner than would be possible with a portfolio entirely based on the public exchanges.  Diversification is a good thing.

I personally have not had real success investing in the stock market - some good years, some not so good, overall mediocre.  However, I do not go about telling other investors to avoid such investments or make blanket statements that all advisors associated with conventional financial products are just out to make a buck and do not have their clients best interest in mind.  I also know many investors who have done quite well in standard investment products.  I have found what works for me (lending, rentals, etc.) and smile every time I look at my savings balances.  The past is the past.

I would also point out two things based on your comments that may indicate why you chose to go in a different direction.  

1) The use of a self-directed IRA custodian - where they have to sign every document and cut every check - is not well suited for a portfolio that involves a lot of assets or assets that create a lot of transaction activity. A checkbook IRA LLC or Solo 401(k) plan is much better suited for such ventures. Such programs would eliminate the fee intensive "paperwork nightmare" you refer to.

2) Your retirement plan is not technically "your money".  It is your future self's money or piggy bank money - and comes with special tax-sheltered status as a result.  It is not your money until you take a distribution and pay taxes. This is the case whether the IRA is in the stock market or diversified into alternative assets. With proper strategies, you can use the tax-sheltering benefits of such a plan to compound earnings over time and build a significant amount of wealth to draw on in your sunset years.

Self-directed IRA and 401(k) plans are not for everyone. For those willing to learn the rules and design an effective strategy within those boundaries, however, they can be very, very powerful wealth building tools. Over a dozen years of working in this niche, we have worked with thousands of clients who are tremendously pleased they made the switch to a self-directed plan. Hearing those success stories is a big part of what motivates us to show up at the office every day.

There are people who misused their IRAs and lost money are a result of making poor investment choices or violating the rules and getting their IRAs disqualified, therefore losing money to taxes and penalties. But there are a lot more of those who invested successfully with significantly higher returns compared with the stock market. 

Self-directed IRAs are not for everyone. If self-directed IRA is not your "thing" Anthony Dooley, that doesn't mean that it won't work for everyone else too (there are millions or investors who are using these vehicles).

Of course there are rules that you need to understand and follow when it comes to IRA investing! There are rules for virtually everything out-there. There are rules regarding how and what to post here on BiggerPockets forum, violate them and you will get warned first and then kicked out. When you board the plane you must behave, otherwise you will get escorted out and not going to fly to your destination. Try violating the rules when you get behind the wheel and run a red light... you will get a ticket in the best case scenario or get killed (or kill someone else) in the worse case... You get the idea!

Instead of getting upset or discouraged because there are limitations when it comes to self-directed IRAs, my suggestion would be to understand the rules, embrace the rules and then go make yourself a lot of money (by following the rules). 

I certainly understand the factors related to the choice of whether to invest in real estate inside or outside a tax advantaged account.  And I encourage investors to also consider this choice.  If you have already contributed to a tax advantaged account, generally speaking, your "job" is to get that money to make the most money.   This is the big advantage of the tax-deferred status.  So, the question sometimes becomes can I get that contributed money to make more money in the stock market (or other asset class) or in real estate.

Of course, some choose to distribute the tax advantaged account, and some of those are willing to take the 10% penalty.  In those cases, I certainly would encourage anyone to "run the numbers" and see which choice makes the most sense.

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