Can I BRRRR with a self directed IRA?
Handyman · Lebanon, TN · Member since 2019 · 31 posts · 13 votes
Can I BRRRR with a self directed IRA?
Most Popular Reply
Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votesYes, a self-directed IRA or Solo 401(k) can execute the BRRRR strategy.
Keep in mind, this is not you investing in the transaction and having access to the IRA money to do so, but rather diversifying that IRA money into a real estate project you believe will produce better returns for the IRA than current investments do. All activities must be exclusively for the benefit of the IRA and conducted at arm's length. You cannot personally benefit from the IRA such as by receiving income personally, nor can you inject value to the IRA via the provision of goods or services. Basically, you get to be a fund manager and put the money to work.
In the BRRRR strategy, the retirement plan purchases the property and engages contractors to perform necessary work. Once rented, the plan can obtain a non-recourse loan to pull equity and place that into a new plan-held project - thereby projecting the growth curve of the plan forward more aggressively.
Non-recourse lenders will be more conservative on their view of ARV and on the LTV they will issue, so this strategy will be less aggressive than what you can do on a BRRRR transaction personally. That is OK, it is still a great strategy to put retirement money to work that is usually more productive then sitting on a handful of mutual funds.
In an IRA, the usage of debt-financing will create a small tax exposure on Unrelated Debt-Financed Income (UDFI). The concept is that the IRA is receiving income based on the use of non-IRA funds. The tax will not erase the benefits of leveraged returns, but will put a little friction on the boost in return that leverage produces.
If you are self-employed with no full time employees (like most realtors) then you would possibly qualify for a Solo 401(k). While similar in many respects to the Checkbook IRA LLC in that it provides full control and flexibility to invest without 3rd party intermediary processing, a 401(k) based plan will have some advantages such as a narrow exemption to UDFI taxation on debt-financed real estate and higher contribution limits.
There are several providers of such plans including our firm that are active here on Bigger Pockets. Get on the phone and start asking questions. You'll pretty quickly get to better understand the strategy and identify which providers just setup plans and who can act a a meaningful guide as you utilize this very powerful retirement strategy.
7 Replies
- 7yCarl FischerPro MemberRental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
You can have what they call a checkbook Ira LLC. Which works pretty much like you suggested. There are rules that must be followed to setup the LLC and to run the LLC. It is not hard. You can use several individuals who routinely answer questions on the BP forums. I personally prefer a 401k arrangement over the checkbook Ira for many reasons and it accomplishes the same goals.
It is definitely worth educating yourself in this area. It is one of the best wealth building tools I know of.
You do need to understand the nuances especially if you are running a business, borrowing/refinancing, etc because there can be some tax liability in certain instances.
- 7yWhitney HuttenPro MemberInvestor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
@Charlie Shew Be sure to get with your CPA as I believe you will still have UBIT issues to deal with if you get a loan on the property. Also, find out what fees you will incur with your provider as you may have to run an annual legal audit for each investment your checkbook llc holds. Normally, your provider will do this if the asset was held directly, but since the provider can't "see" it, that responsibility will fall to you most likely. You can also lend through your checkbook IRA to other projects in RE. That's what I've done and it certainly is very easy and you bypass UBIT.
- 7yBrian EastmanPro MemberSelf Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
Yes, a self-directed IRA or Solo 401(k) can execute the BRRRR strategy.
Keep in mind, this is not you investing in the transaction and having access to the IRA money to do so, but rather diversifying that IRA money into a real estate project you believe will produce better returns for the IRA than current investments do. All activities must be exclusively for the benefit of the IRA and conducted at arm's length. You cannot personally benefit from the IRA such as by receiving income personally, nor can you inject value to the IRA via the provision of goods or services. Basically, you get to be a fund manager and put the money to work.
In the BRRRR strategy, the retirement plan purchases the property and engages contractors to perform necessary work. Once rented, the plan can obtain a non-recourse loan to pull equity and place that into a new plan-held project - thereby projecting the growth curve of the plan forward more aggressively.
Non-recourse lenders will be more conservative on their view of ARV and on the LTV they will issue, so this strategy will be less aggressive than what you can do on a BRRRR transaction personally. That is OK, it is still a great strategy to put retirement money to work that is usually more productive then sitting on a handful of mutual funds.
In an IRA, the usage of debt-financing will create a small tax exposure on Unrelated Debt-Financed Income (UDFI). The concept is that the IRA is receiving income based on the use of non-IRA funds. The tax will not erase the benefits of leveraged returns, but will put a little friction on the boost in return that leverage produces.
If you are self-employed with no full time employees (like most realtors) then you would possibly qualify for a Solo 401(k). While similar in many respects to the Checkbook IRA LLC in that it provides full control and flexibility to invest without 3rd party intermediary processing, a 401(k) based plan will have some advantages such as a narrow exemption to UDFI taxation on debt-financed real estate and higher contribution limits.
There are several providers of such plans including our firm that are active here on Bigger Pockets. Get on the phone and start asking questions. You'll pretty quickly get to better understand the strategy and identify which providers just setup plans and who can act a a meaningful guide as you utilize this very powerful retirement strategy.
- Rental Property Investor · Torrance, CA · Member since 2018 · 7 posts · 2 votes7y
Hi Charlie, as others have stated, yes you can. I also transferred an traditional IRA into a self directed IRA (checkbook). I just purchase a duplex KC with the self directed IRA and is cash flowing, I'm looking at doing a cash out refi in 3-4 months. Actually was very easy, but could seem confusing and difficult. Follow the rules and you need to be very careful with wording on BA, as you will become the manager of the IRA that is placed into a LLC. PM me and I will be happy to tell you who I worked with.
- 7yRoger StPierreBusiness MemberLender · Rapid City, SD · Member since 2017 · 30 posts · 20 votes
Cash-out refinances to get some of your SDIRA or Solo(k) funds back to use for the next investment is very common. Expect about 60% LTV on the loan side of what you have invested in the property. No seasoning needed.
- Sammamish, WA · Member since 2018 · 36 posts · 8 votes2y
Quote from @Roger StPierre:
Cash-out refinances to get some of your SDIRA or Solo(k) funds back to use for the next investment is very common. Expect about 60% LTV on the loan side of what you have invested in the property. No seasoning needed.
Hi @Roger StPierre which SDIRA custodian, do you use?
- Sammamish, WA · Member since 2018 · 36 posts · 8 votes2y
Quote from @Charlie Shew:
I have been trying to learn more about the self-directed IRA because my potential investment money is currently setting in a traditional IRA. I find the BRRRR method most appealing. Would I be able to purchase a home, rehab it and refinance all inside of a self-directed IRA?
I have read a few free books on kindle about the IRA, most are sales pitches for the IRA company. One sounded very appealing but wondering if it sounds too good to be true. They said you can set up an LLC and invest in the LLC, not the rental. This would allow me to remove a lump sum from the IRA (one transaction fee) and transfer into my LLC to spend without needing the IRA company to write the checks.
My disclaimer! I am not looking for a loophole to spend my IRA on other things, I do not want to get into a gray area that could cause me more grief than it's work.
Thanks for any advice,
Charlie
Been listening to the BP Podcast started at Number 1 currently at show 170! Great information!
@Charlie Shew which custodian did you end up going with? How's this strategy going for you?
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