Real Estate Investor · Columbus, OH · Member since 2013 · 153 posts · 92 votes
If I have personal retirement funds in a self directed IRA right now, what options do I have for investing this in real estate? And can I use this money to invest in real estate for my own business (to fund rehab costs for my own project, deposit money on a property, etc.)?
Sort of. You can use IRA money to invest in anything except life insurance, collectables and shared in S-corps. You have to have the right custodian. A Fidelity IRA might be called self directed, but they still won't let you buy real estate.
Assuming you have the right custodian, your IRA can buy rentals, do fix and flips or whatever. What it can't do is any transaction with you or other disqualified parties. So, the IRA could be a fixer, fund the fixup and sell it. You could not personally benefit from that, nor could you personally contribute money or labor into that project. The funds for the purchase, rehab, and anything else would need to come from the IRA and all proceeds would go back to the IRA.
With active businesses like fix and flipping, you also incur UBIT (Unrelated Business Income Tax). So, you IRA would need to file tax returns and pay this tax.
It is possible, supposedly, to "partner with your IRA". You put in, say, half the money and the IRA puts in the other half. The partnership does a fix and flip. The net profits would then be split 50/50. All the other rules apply, though.
From what I've gathered, I will opt to purchase outside of the retirement accounts. I'll still open up a SDIRA/401K, but will use that for other type of investments.
Thanks all for your feedback. Before, when researching for this type of information, I would "Google it". Now, the first thing that comes to mind when I need clarification on something is to "BP it". Corny, I know :)
3 pieces of advise given to me by my mentors who are very seasoned investors.
1) Keep things very simple & above board in IRA & other Retirement Accounts (401k's, SEP etc). Anything that crosses the IRS & ERISA rules can hurt you very badly & may cost you a lot of time & money to defend, even if you are right.
2) Hold Options, Notes, & Contracts not property
3) Document your deals properly so that they can be understood if they are ever scrutinized.
I was wondering about the logistics of how it works when buying notes in a SD retirement account.
Say you use you write a check to buy the note. I assume the note needs to be titled "John Doe Roth IRA" or however the retirement account is set up, correct?
Do you then send the actual physical note to the custodian of the retirement account to be held there? In other words, how does the paper trail have to be set up in order not to alert the IRS to an early distribution to buy the note versus the note is bought as an investment within your IRA or Solo 401k? Does my question make sense?
I keep my original notes. You just send a buy direction letter to the custodian who them wires the money to the note seller. The beneficiary on the note is "ABC custodian for Jane Doe IRA". A note servicer or the borrower would send payments to your custodian to deposit in your IRA account.
Early distribution would be triggered if you receive funds as an individual from your IRA account. Custodians & the loan servicer have reporting & filing requirements for any distribution to you directly that is not going to an investment.
If you have a checkbook SDIRA you can just have the LLC that is owned by the SDIRA write the check for the note and not bother with having to get the money from the custodian. Obviously the funds earned by the note must be deposited in the LLC account not yours or the IRS will come after you.
Actually, it's a Roth Solo 401k with no LLC but does have a checkbook.
@Ellis San Jose so if the custodian is Wells Fargo, then the title on the note should read "Wells Fargo custodian for Jane Doe Roth 401k", and the paper itself would be mailed to Jane Doe but the payments mailed to Wells Fargo, correct?
Who did you use to set up your 401k docs? Your custodian should be someone like uDirect or Equity Trust. I don't believe Wells Fargo would be your custodian. You would probably open a Wells Fargo bank account titled "ABC Inc 401k FBO Emma S."
Will and I will have to agreed to disagree. I have owned apartments in a SDIRA since 2007 and yes they have nonrecourse loans and I'm happy that I have guaranteed equity gain every month by the tenants paying down the loan. One of the biggest advantges that is rarely mentioned on biggerpockets is the diversification of assets that a real estate IRA allows you and is the main reason I did it. I no longer fear a big drop in the stock market as most people do who are dependnet on the market for their retirement funds. I would have lost a lot of $ in 2008 if I had not made the move to have a SDIRA and retirement would be a lot scarier if I had to depend on the market.
That is fine Dennis, but to be clear, I am not stating that it is bad or wrong to hold property in your retirement account, just that there are better uses of the funds within real estate. Ellis has also pointed out why and how other very experienced investors have come to the same conclusion. I am certainly happy to hear that your account made money in RE holding rather than losing in stocks. Nothing wrong with that, but have you done a comprehensive analysis and comparison had you invested in other RE related investments such as notes, options, trust deeds, etc? I believe that your very same money may have been better served in other areas of RE for the retirement account.
I have done it both ways so I am speaking from personal experience and I know many others who have done the same, all with similar experiences.
I concur with Will. I often suggest to clients and other investors to diversify their real estate investment portfolio. Certainly investing in cash-flowing rental properties is one strategy that should be utilized, but many investors are not well-suited to manage their real estate property portfolio, particularly remotely. However, they often don't know what else may be available. I generally quiz investors to understand their capabilities, skills, goals, etc, and often recommend they consider a variety of real estate investments that may be more suitable for them. There are excellent real estate investment funds with strong track records, and other options such as notes. confirm the experience and reputation of the companies and individuals that offer these investment options, and choose an option that allows you do do a thorough analysis of the offeror as well as the offering. I recommend investors look at loanmls.com, which is a loan/note market place, as a source of diversification.