Best use of Self Directed IRA

12 Replies

So my standard rei strategy is buy and hold rentals.  That works for me a my goals for a number of reasons.  One reason is that it fits well with my also having a full-time W2 career. 

In my W2 world, I am in the process of going to work for a different company and will have about $40k in an 401k that I will need to move elsewhere.  Not a huge chunk of money, but it's something.  I'd like to move those funds into an SDIRA (or Solo 401k, still not sure of the difference) and use them to engage in a different rei strategy - one that can offer a higher return than buy and hold, but likely doesn't carry the tax and leverage benefits. 

I've thought about private lending with a local flipper.  I'm also considering tax leins and note investing (although a little nervous as I'm less comfortable with the due diligence that would be required for that type of investing).  I'm also interested in syndications and the Fundrise platform. 

I would love to hear what the BP community thinks about the benefits of these different when the source of funds is a SDIRA of about $40k and I'm not interested in tax benefits.

Thanks in advance.

@Victor Robinson

I'm not recommending out of state investing but what returns are you seeing in a buy and hold?  Especially with an outlook to add a lot of value in targeting the right kinds of assets, you might check that assumption (that returns aren't to your liking).

Other than that, I don't really know what to tell you.  We've thought about but haven't done any of those investing strategies you list.

Hi Victor! Just wanted to chime in on the SDIRA portion of your inquiry - specifically the differences between a self-directed IRA and a Solo 401k (which can also be self-directed):

You can self-direct many different account types (Traditional IRA, Roth IRA, SEP, Solo, SIMPLE, HSA, CESA, etc.). The main difference between a Traditional or Roth is that the SEP, Solo and SIMPLE account types are designed for business owners. If you have a legitimate business (you have an EIN number), you can self-direct one of those account types.

You may also self-direct an of the other account types mentioned above. Whichever account type that will be best for you will be based off your specific needs. 

Please feel free to shoot me a message to discuss further. 

The main investment I put into my Solo 401k is Options or Hard Money Notes. When I'm out looking for Real Estate to buy, I come across unique situations that have huge upside potential, but the sellers may not want to sell right now. If they are in need of $$$, I can give them what they need and take back an Option. Example.... a property owner needed $4,500 to pay his back taxes and save his property from foreclosure.  As is value 50K and ARV 125K with a 40K rehab. I gave him the money for a 10 year Option to buy his property for 18K. I can not exercise my option for the 1st 2 years and the owner has the right to buy my option back within that time for $9,000. That's a 50% ROI if he does it on the last day of the 2 years and a higher ROI if he pays sooner. I've done several similar deals with that Solo401k this year.

Thanks, @Jim Goebel . I've not considered OOS investing as I'm very pleased with the returns from my buy and holds in MS.  So much so that I'm surprised that everyone is so hot on the Midwest. I can get the same returns in MS but MS gets no love. 

One of the reasons I like buy and hold is the tax benefits. I don't want to use SDIRA funds for that strategy because I would miss out on the tax benefits. I will continue to grow that side of my business with my discretionary income (and tenants' rent payments). 

As a general rule, flipping offers better short-term returns than buy and hold, but you pay a lot of income tax. Also, I don't have enough free time for that to be a viable option for me. I would be interested in meeting with a flipper (or apartment syndicator) and potentially partnering on a deal (because I think that would offer much better returns that stock market (or buy and hold) but the returns wouldn't get taxed (yet).

Thanks, @Jaime Raskulinecz . I think your comments helped me to better understand some of what I've previously read. The SDIRA would require the assistance of an IRA custodian whereas a self directed Solo 401k could be set up where I have check-writing authority and, as a result, can move faster on deals. Is that right?

Originally posted by @Victor Robinson :

So my standard rei strategy is buy and hold rentals.  That works for me a my goals for a number of reasons.  One reason is that it fits well with my also having a full-time W2 career. 

In my W2 world, I am in the process of going to work for a different company and will have about $40k in an 401k that I will need to move elsewhere.  Not a huge chunk of money, but it's something.  I'd like to move those funds into an SDIRA (or Solo 401k, still not sure of the difference) and use them to engage in a different rei strategy - one that can offer a higher return than buy and hold, but likely doesn't carry the tax and leverage benefits. 

I've thought about private lending with a local flipper.  I'm also considering tax leins and note investing (although a little nervous as I'm less comfortable with the due diligence that would be required for that type of investing).  I'm also interested in syndications and the Fundrise platform. 

I would love to hear what the BP community thinks about the benefits of these different when the source of funds is a SDIRA of about $40k and I'm not interested in tax benefits.

Thanks in advance.

 If you do private lending and never have before, your first couple of times you should probably lend with and experienced lender.  Say if the flipper needs $70K, you would fund $35K and the other lender would fund $35K on the same note (both would be in first lien position).  Watch and learn.  Ask questions.  Typically there are origination points, so if there are 2 points up front, offer the other lender 2.5 and you take 0.5 on the first round for showing you around your first.

Also, "he who has the gold makes the rules".  Borrowers don't dictate terms.  Your local market tells you how much you can get on interest and fees, not the Borrower.

However you do this, use an attorney familiar with REI to draft your docs. Not the title company's. Not the Borrower's. Make sure the attorney works for you.

Your job isn't over after funding the loan.  You must monitor and make sure the Borrower complies with loan terms (more than making the monthly payment).

OR... you could work with a reputable HML, and just lend it to them for a while.

@Victor Robinson – You can technically trustee your own plan with a self-directed solo 401k, which gives you the ability to sign on behalf of the plan on transaction documents, as opposed to marking them ‘read and approved’ for the custodian to sign. However, going through a custodian affords you the compliance oversight that can be critical when it comes to self-directed accounts; you want to be sure that your investments are compliant with IRS guidelines. A custodian will use specialized knowledge of the regulations to review documents for any red flags that could constitute a prohibited transaction. The consequences of a prohibited transaction can be severe, so it is important that you discuss your plans with an industry expert before signing off on any investments.

@Victor Robinson I would just make sure you understand the implications of UBIT and UDFI for whatever investments you do through a SDIRA. Many CPAs do not fully understand this subject, so make sure you get 100% clarity.

There are ways to legally avoid UBIT and UDFI when investing in leveraged real estate via retirement accounts. 

@Victor Robinson Since, you aren't interested in Tax Benefits, some hard money lenders will deploy that capital for you and give you a certain return on that money. 

You should ask around in your local meetups and you could find a HML willing to partner with you using this approach.

@Victor Robinson

If you are self-employed with no full-time w-2 employees, you can set up a Solo 401k & rollover funds from a non-Roth IRA as a tax-free direct rollover and then invest in real estate.

Solo 401k vs. Self-directed IRA

A Solo 401k has several advantages as compared to a Self-Directed IRA including the following which specifically apply to your situation:

  • Unlike a Self-directed IRA, you can have the account for the Solo 401k at a bank or brokerage that does not charge maintenance fees and where you will have checkbook control.
  • Unlike a Self-directed IRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income tax

General Considerations Re Investing Retirement Funds in Real Estate:

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

2. If you are self-employed with no full-time employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and if you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, you can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. In either case, you must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. In either case, you should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

@Victor Robinson

I have used mine for private lending and also syndications. Conventional wisdom is that it's the best vehicle for projects likely to generate a huge capital gains windfall. This is for the tax-shielding purposes.

I would try not to do less than $50k, only because normal custodial fees can wipe out anywhere from 0.5-1% of your return.