Advise on leveraging a Self-directed IRA to purchase real estate

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Nate HerndonPro Member
Lender · Springfield, MO · Member since 2023 · 277 posts · 195 votes
1y

Hi @Maria Jeanette, that's a great question. I had a response on a previous post this year about what the private lending restrictions will be here --> https://www.biggerpockets.com/forums/22/topics/1174919-bough...

Here's a re-post of that information though:

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I do have a DSCR lender who can assist with a limited recourse loan that will close in the name of a self-directed IRA. I have been able to do this for both purchases and cash-out refinances on multiple deals for clients of mine.

Typically your max loan-to-value will be 75-80% LTV, but this specialized program will limit you to 10% LTV/LTC less than what you can traditionally do. For a purchase or rate/term refinance, that would be 70% LTV; for a cash-out refinance, that will be 65% LTV. 

I have had the "limited recourse" language vetted by attorneys representing our clients. It passed muster upon close inspection from their entity formation team. As mentioned by others, you cannot personally guaranty the loan and the limited recourse aspect navigates that requirement.

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  • Nate HerndonPro Member
    Lender · Springfield, MO · Member since 2023 · 277 posts · 195 votes
    1y

    Hi @Maria Jeanette, that's a great question. I had a response on a previous post this year about what the private lending restrictions will be here --> https://www.biggerpockets.com/forums/22/topics/1174919-bough...

    Here's a re-post of that information though:

    ------------------------------------

    I do have a DSCR lender who can assist with a limited recourse loan that will close in the name of a self-directed IRA. I have been able to do this for both purchases and cash-out refinances on multiple deals for clients of mine.

    Typically your max loan-to-value will be 75-80% LTV, but this specialized program will limit you to 10% LTV/LTC less than what you can traditionally do. For a purchase or rate/term refinance, that would be 70% LTV; for a cash-out refinance, that will be 65% LTV. 

    I have had the "limited recourse" language vetted by attorneys representing our clients. It passed muster upon close inspection from their entity formation team. As mentioned by others, you cannot personally guaranty the loan and the limited recourse aspect navigates that requirement.

    [email protected]417-605-2196
    2Reply
  • Brett SynickyPro Member
    Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 876 posts · 499 votes
    1y

    @Maria Jeanette Educate yourself on the difference between Checkbook IRA and Custodial IRA. I believe Equity Trust does both. They are a reputable company. Understand the difference between owning RE personally versus in a retirement plan. It can make more sense to do PML's in the IRA instead of rentals, particularly if you use leverage since the IRA will incur UDFI on that portion of the income derived from the mortgage. Also Solo 401k is exempt from that tax if you qualify instead of using SDIRA.  

    2Reply
  • Jake BakerBusiness Member
    Flipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 696 votes
    1y

    @Maria Jeanette

    Tax Advantages: Income and gains grow tax-deferred (or tax-free if using a Roth SDIRA).

    All Costs Through the IRA: Expenses (repairs, taxes, etc.) must be paid from the IRA, so ensure it's well-funded.

    You might also want to consult a CPA or attorney experienced with SDIRAs to ensure compliance with IRS rules and maximize benefits.

    Best of luck!

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  • Ryan IrwinPro Member
    Investor · Ankeny, IA · Member since 2022 · 161 posts · 130 votes
    1y
    Quote from @Maria Jeanette:

    I am considering using Equity Trust to set up a self-directed IRA to purchase properties. Any advise? What are pros and cons or restrictions?


    Thanks for posting this.  I recently opened up my SDIRA thru Equity Trust and am trying to decide which direction makes the most sense for me; purchasing a fix & flip property through it or dedicating the funds for PML to other investors.  

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  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    1y

    The main negatives are UDFI (unrelated debt financing income), but that applies when there’s income. 

    In addition, real estate is already tax advantaged, so you’re losing the tax advantages of owning real estate.

    Personally, I think real estate notes are better suited for self directed IRAs personally because you can get decent returns and notes not held in IRA is not tax advantaged.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    1y
    Quote from @Maria Jeanette:

    I am considering using Equity Trust to set up a self-directed IRA to purchase properties. Any advise? What are pros and cons or restrictions?


     As mentioned the main downside to using a SDIRA to purchase properties is you get no tax benefit upside (depreciation) and have to pay taxes on UDFI. For me I invest my SDIRA money in debt investments which typically are ordinary income when using w2 income and use my hard earned cash to buy properties. 

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  • Chris Barrett
    Investor · Madison WI · Member since 2021 · 176 posts · 103 votes
    1y

    I'm using my SDIRA for PML. 

    1Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    1y

    @Maria Jeanette

    are you experienced or would this be your first property?  if this would be your first property and you're just doing this because you don't otherwise have funds - i would start a different way.

    0Reply
  • Bill HamptonBusiness Member
    Accredited Investment Fiduciary, AIF®, Financial Planner, Tax Strategist, Real Estate Investor · Atlanta, GA · Member since 2012 · 2k+ posts · 979 votes
    1y

    @Maria Jeanette

    Here are some of the downsides of putting real estate into a self directed IRA or 401k.

    No tax deductions: You can’t claim deductions for property taxes, mortgage interest, depreciation, repairs, improvements and other property-related expenses.

    Property expenses: All expenses, repairs, and maintenance costs must be paid with IRA or 401k funds. You cannot use personal funds.

    You must pay others to do repairs and manage the property. You can't even change a lightbulb.

    You or your family can't use or live in the property.

    You can't sell a portion of a property like you can sell portions of stocks, bonds, mutual funds, etc. You may have to sell the whole property to access the funds in the IRA or 401k when you retire and for required minimum distributions.

    If you violate any of these rules you could blow up your IRA or 401k and the IRS could force you to distribute all of the assets in the IRA or 401k. This could lead to a huge tax bill and penalties.

    Think carefully before you do this.

    Good luck. 

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    @Maria Jeanette Using a self-directed IRA (SDIRA) for real estate investment offers control over asset selection and tax advantages, such as tax-deferred growth (Traditional IRA) or tax-free growth (Roth IRA). However, strict IRS regulations apply, including prohibited personal use and mandatory income and expense management through the IRA, with penalties for violations. Real estate's low liquidity can complicate required minimum distributions (RMDs). Also you might have UBIT taxes. Buying tax efficient assets like RE in retirement in not very tax efficient strategy.

    This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y
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