Self Directed IRA New Construction

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Self Directed IRA New Construction

John Myers
Realtor · Albuquerque, NM · Member since 2014 · 109 posts · 79 votes

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $192,000
Cash invested: $192,000

This home was purchased with a self directed IRA owned by a LLC. This home was brand new when I purchased it. I bought it for $38,000 below their advertised price. The builder only had 3 homes in this subdivision left and was will to sell at cost. The self directed IRA paid cash and closed in a week to meet the builders goal.

What made you interested in investing in this type of deal?

The builder was desperate to get rid of the house and I purhased the home for $38,000 less than advertised price.

How did you find this deal and how did you negotiate it?

One of the builders sales reps called me and asked me to make an offer on the house. I made a low ball offer and they accepted it.

How did you finance this deal?

Cash

How did you add value to the deal?

The home was brand new, we landscaped the back yard.

What was the outcome?

Still own the house and it is a great investment.

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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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@Paul Vail

The IRA owned LLC is a standard structure used to provide an IRA account holder with "checkbook control" over the IRA. The IRA invests into the LLC and the IRA account holder can then direct the affairs of the LLC - so long as they adhere to IRS rules against self-dealing.

An S-corporation cannot be used here because a S-corp cannot accept an IRA as a shareholder.

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  • Louis Martinez
    Developer · Gainesville, VA · Member since 2021 · 26 posts · 7 votes
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    @John Myers my plan administrator Benetrends has told me any passive income stream like long terms rentals is forbidden by the IRS under a SD IRA. Curious to know how this deal was achieved.

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  • Jack Malpass
    Member since 2019 · 18 posts · 3 votes
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    When you say we landscaped the back yard, who is we? this sounds like sweat equity ( prohibited transaction) which is definitely an IRS issue.  

    @Louis Martinez I am curious as to why they told you that long term rentals can't be held in a SDIRA?

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
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    Quote from @Louis Martinez:

    @John Myers my plan administrator Benetrends has told me any passive income stream like long terms rentals is forbidden by the IRS under a SD IRA. Curious to know how this deal was achieved.

    Louis, you either misunderstood or the person you spoke with doesn't know what he is talking about. Long term rentals are very common investment in a self-directed IRA.

    There are few restrictions, IRS calls them "prohibited transactions". For example: you personally (or any other disqualified person) can't provide any services to the IRA (example: personally landscape a back yard) or receive any benefits from the IRA (using property owned by the IRA personally).

    1Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
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    @Louis Martinez not sure who told you that? There are issues with financing rentals (not prohibited just creates some tax reporting consequences), and it looks like Benetrends is a financier so maybe that's what they were talking to? Solo401Ks do not have the same financing issues that SDIRAs do...just a guess at what they were trying to convey. 

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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    @Louis Martinez

    Benetrends offers an entirely different type of plan designed to use retirement plan funds to capitalize an active business.  That is commonly used in the franchise space or sometimes for active real estate developers/flippers.  With that program, referred to as a Rollover as Business Startup (ROBS plan), there must be an active business at the core of the structure.  Rentals produce passive investment earnings and therefore do not qualify.

    With a self-directed IRA or Solo 401(k), such as @John Myers is referring to, it is entirely possible for the plan to hold rental property as an investment.  The IRA is holding that rental instead of the IRA holding shares of stocks or funds.

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  • Paul Vail
    The Triangle, NC · Member since 2021 · 189 posts · 117 votes
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    Why did you choose a LLC in this situation instead of a S-Corp (with the SD-IRA)?    Are LLCs better for passive income such as buy-n-hold rentals?   If you were flipping instead, which structure would you have chosen and why?
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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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    @Paul Vail

    The IRA owned LLC is a standard structure used to provide an IRA account holder with "checkbook control" over the IRA. The IRA invests into the LLC and the IRA account holder can then direct the affairs of the LLC - so long as they adhere to IRS rules against self-dealing.

    An S-corporation cannot be used here because a S-corp cannot accept an IRA as a shareholder.

    1Reply
  • John Myers
    OP
    Realtor · Albuquerque, NM · Member since 2014 · 109 posts · 79 votes
    4y

    @Jack Malpass

    When I say we, I mean I.  I did not do do any of the work myself.  I hire out all repairs or work to be done.  I am way too old to do any type of landscaping work.  LOL

    1Reply
  • John Myers
    OP
    Realtor · Albuquerque, NM · Member since 2014 · 109 posts · 79 votes
    4y

    @Louis Martinez

    My Accountant set up the LLC which manages the self directed IRA. I am not sure why the LLC was the better than an S Corp. But I do follow his expertise. You must be very careful with self directed IRAs as there are several IRS rules you must follow. I recommend you talk to an accountant or experts familiar with self directed IRAs if you are interested. There are many benefits of a self directed IRA as long as it is done right and you follow the many IRS rules.

    Owning Long term rentals is acceptable as a self directd IRA.

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  • John Myers
    OP
    Realtor · Albuquerque, NM · Member since 2014 · 109 posts · 79 votes
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    @Brian Eastman

    Thanks for your feedback.  Sounds like you understand this way better than I do.  I discuss everyting with my accountant and follow his directions.

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  • Jack Malpass
    Member since 2019 · 18 posts · 3 votes
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    @John Myers

    Interesting that your accountant set up your LLC under a SDIRA. I was not aware that could be done. I was under the impression that an ERISA attorney is needed for setting up LLC's in a SDIRA.

    AS Brian stated, S corps can't be held in a SDIRA

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  • Louis Martinez
    Developer · Gainesville, VA · Member since 2021 · 26 posts · 7 votes
    4y

    @Dmitriy Fomichenko sounds like since I did the ROBS transaction that is where the difference lies. But I did the transaction to fund construction projects and not buy rentals, and when I explored other options I asked about passive income streams and rentals. Short term rentals are allowed. Benetrends pioneer the process definitely trust them to know their stuff.

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  • Louis Martinez
    Developer · Gainesville, VA · Member since 2021 · 26 posts · 7 votes
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    @Brian Eastman hi Brian, you hit the nail on the head. I tend to forget it's not necessarily the same thing as a ROBS transaction despite being similar. I did a ROBS.

    Guess one thing people aren't discussing is how they extract cash out of their SDIRAs to pay for living expenses or do they just leave rent/ cash flow there and take dividends or pay a salary? Or use debt?

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  • Louis Martinez
    Developer · Gainesville, VA · Member since 2021 · 26 posts · 7 votes
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    @John Myers congrats to you! I rely on experts as well. Only so much time in the day. My corp was setup as a C Corp per the guidelines of the ROBs transaction and is different from what you did. I take it your rentals are held in your IRA or in your LLC name? I could see it being either. Especially if the IRA bought shares in your LLC or s Corp. Just curious and appreciate your response.

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  • Louis Martinez
    Developer · Gainesville, VA · Member since 2021 · 26 posts · 7 votes
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    @Jack Malpass I did a ROBS. Which is a different vehicle for this transaction. My plan wasn't for rentals initially.

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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    @Louis Martinez

    With an IRA, you do not extract the income from the investments, at least not before normal retirement age of 59 1/2. A self-directed IRA is still an IRA in all ways with respect to contributions, distributions, timelines, taxes, beneficiaries, etc. The only difference is a different plan architecture that facilitates investments other than just stocks and bonds.

    I am sure @John Myers is happy to have diversified a portion of his IRA into this property that looks at the very least like a good discounted acquisition. Maybe it will also provide good income to the IRA over time through rents and the eventual gain on sale, all of which will flow tax-sheltered into the IRA.

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  • Louis Martinez
    Developer · Gainesville, VA · Member since 2021 · 26 posts · 7 votes
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    @Brian Eastman thanks for the reply! Amen to tax sheltered acquisitions! I was definitely aware rental properties could be held in IRAs, just seemed as if there was something I was missing. The ROBS was still the right choice for me as it gave me complete access to my 401k funds invested into my corporation....just trying to get my first 3 builds done...at a very interesting time in the market! Slowly making progress.

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    4y

    @Louis Martinez,

    That is exactly the point, you were making a comment about SD IRA, but that is not what you have.

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  • John Myers
    OP
    Realtor · Albuquerque, NM · Member since 2014 · 109 posts · 79 votes
    4y

    @Louis Martinez

    I had a 30 year career in the utility industry and contributed to my 401k for many years. I rolled the proceeds into an IRA when I left my job. I then had a Self Directed IRA created and rolled over some of my IRA into the self directed IRA. I used those proceeds to purchase the home. At this time, I just leave the rental income in the self directed IRA and there are no tax consequences at this time. Obviously there will be taxes when I make withdrawals from my IRA. So I don't use that income to live on.

    I have several other rental properties that I own and use that income to live. My real estate brokerage is an S corp and I earn money from the S corp. There are definitely pros and cons of the S corp. I will be meeting with my accountant to determine if the S corp is still in my best interest at this time. One of the big pros of the S corp is that I have created a defined benefits retiremant plan. The defined benefits retirement fund owns rental houses also. Lots of complexities here also but it has been very successful. The real estate investments are performing fantastic.

    There are so many ways to make money in real estate. You need to surround yourself with a good team and a great accountant is an important player for your team.

    I don't pretend to understand all of the behind the scenes details, but I pay professionals to guide me through the legalities and IRS issues.  I make the money and the professionals give me options and handle the details.

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  • John Myers
    OP
    Realtor · Albuquerque, NM · Member since 2014 · 109 posts · 79 votes
    4y

    @Brian Eastman

    Thanks Brian for your input, you are correct in your explanation.  You obviously understand all the details, legalities, and IRS issues.  I leave that to the professionals.  I make the money and they give me options, I make the big decisions, and they handle all of the legal and IRS issues and filings.

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  • Louis Martinez
    Developer · Gainesville, VA · Member since 2021 · 26 posts · 7 votes
    4y

    @Dmitriy Fomichenko Great we are on the same page now. I certainly was misunderstanding the SDIRA side and this post has really cleared it up for me. Will be good for others to read and learn the differences between ROBS and SDIRAs.

    1Reply
  • Louis Martinez
    Developer · Gainesville, VA · Member since 2021 · 26 posts · 7 votes
    4y

    @John Myers well done sir! I've put in many good years of investing in my 401k as well. And my current company drops a 20% company contribution into my 401k now. I extracted funds under the ROBS to build homes. When my first deal fell thru, due to my GC selling the land as inflation was skyrocketing, I started asking about other opportunities...because all of a sudden I had significant funds in a bank checking account and not earning a return. Not to mention missing a great market run up too. Since then I've acquired 10 acres and I'm moving towards the goal. During this time June2021 to now, I've acquired 4 doors and renovated 3 doors on properties. Completed my first long distance BRRR.

    I've got a good team in my market area and looking for next deal.

    Thanks for the thread and appreciate your replies and time.

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  • Ron Singh
    CA · Member since 2014 · 244 posts · 47 votes
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    @Dmitriy Fomichenko

    can you guide on the process to buy using sdira ? if j have traditionally or roth ira , can that be used as well ( without additional fee, tax or penalties )

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    4y

    @Ron Singh,

    First step is you have to create a self-directed IRA (open account with the IRS-approved custodian who allows alternative investments). 

    Second step is to rollover funds from your existing retirement account. Please note that you can not combine traditional and Roth IRA together, unless you do a Roth conversion, which is a taxable event.

    Once your self-directed IRA account is funded - you can begin making investment.

    There is a fee to establish the account, which varies. There are no taxes for the rollover. The ongoing cost depends on which structure you use. If you go with custodial SD IRA - there will be transaction, investment and quarterly or annual custodial fees (varies by the custodian). You would have to go through the custodian for each transaction, many investors don't like that and go "checkbook IRA" route for more control, which also eliminates all transactions and asset based fees because you are not doing any investments on the IRA level, but inside of the LLC (that your IRA owns) instead.

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  • Grant Keaton
    Salt Lake City, UT · Member since 2016 · 13 posts · 2 votes
    4y

    @Brian Eastman I love this discussion. I want to learn as much as I can on SDIRAs, any resources you would point me to? Thanks!

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