How to Grow Your Wealth With an IRA-Owned LLC

by | BiggerPockets.com

This post is based on a real deal in Rhode Island and approximate numbers.

Our model involves primarily single family homes. But I always talk about becoming a master transaction engineer, and that means knowing how to handle any deal that comes your way. Real estate is forever evolving, so it’s important not to be pigeon holed into one particular technique or niche. If you’re generating leads properly, you’ll come across all kinds of different deals and scenarios.

Then, inside of the different deals, there are different ways to handle them relative to cash flow, wealth building, and various tax vehicles.

Related: How to Invest in Real Estate With a Self-Directed IRA

Self-Directed IRAs and IRA-Owned LLCs

I’m a big advocate of self-directed IRAs, because my real estate is something I can control and protect. I cannot control or protect myself inside the stock market. And one thing I do know for certain is that a stock can go to $0 value. My properties cannot. Now, you can set up a self-directed IRA pretty easily. But then in order to move those funds to a deal, you’ve got to do what’s referred to as a letter of direction of investment—meaning that you instruct the administrator for your self-directed IRA where to send your funds for the deposit, the closing, etc. Instead, I set up a one-time direction that funded (“invested” in) an LLC, and now that LLC can operate and do deals without having to go through the administrator and all the related paperwork.*

Keep in Mind, You Cannot Own it or Be a Manager of it

In my case, my wife and I have our IRAs own the LLC. So it’s actually owned by “Quest IRA, Inc., FBO Chris & Kim” (FBO stands for “for benefit of…”), and the manager is a non-related individual. Be sure to check with your CPA and attorney before doing anything like this, of course.

I mentioned above that if you’re doing lead generation, you’ll come across different opportunities. You can also pointedly target lead generation. Several years ago, we decided we’d purchase a few multi-unit buildings in addition to our core strategy. We selected “free and clear” (meaning no mortgage) as our niche, chose a zip code, and purchased a list. We then sent letters to that niche of only 400 or so owners of buildings with 4 to 10 units. From that one mailing, we purchased a 6-unit building. So, clearly you can watch for different deals to come your way by your normal lead generation, or you can pointedly seek whatever type of deal you’d like by choice. Incidentally, we liked that list, so we did another mailing and bought a 4-unit building. Everything you do can and should be predictable like that.

We purchased it with no money down. Sort of.

Here’s How it Was Negotiated

We agreed to a $5,000 down payment but structured the closing date to be on or about the third or fourth of the month. When you do that, the seller will give you full credit (less the three or four days he or she still owned the building prorated) for the rents for that month. This is a simple but effective technique when buying multi-unit properties, because if you closed, say, on the 25th or 30th, you would only receive a few days’ worth of prorated rent and you’d have to go collect rents due on the first. Why not have them collect them and you get paid at closing? So on this deal, we walked away at closing with several thousand dollars: We were paid to buy the building!

This was purchased with owner financing with principal-only payments (each month we make the payment to the seller, full principal is being paid down) at $269,900—the seller’s asking price. The seller’s dad had built the building in the ’80s and recently passed away. So the seller was living at the property but didn’t want to run it any longer due to business travel. He signed a lease with us and stayed as a tenant.

Related: Take Advantage of an Underused Law — and Invest Using Your Self-Directed IRA

  • $269,900 purchase
  • Monthly principal payments: $1023.00
  • Monthly net cash flow after expenses including property manager: approximately $1,100 deposited monthly by the management company directly to our IRA-owned LLC

We liked the property—it was easy to run via the management company, and it had very good cash flow. Ordinarily, we may have considered cashing it with the seller and keeping it still, but because it was held in our IRA-owned LLC, we couldn’t buy it out of the current arrangement (before the balloon date of 36 months)—that would be a conflict and against IRS rules relative to self-directed IRAs.

Let’s Sell

We decided to sell it with a real estate agent. We had several offers within a few weeks. One sure way to make sure you not only know your numbers but also get top dollar is to use the NOI (net operating income) calculator for 4+ unit buildings. We sold for a net profit of $116,000. Keep in mind that the proceeds went straight back into the IRA-owned LLC, tax free. Unlike single-family homes, a multi-unit is all about the match. Improve the rents and expenses, and that improves the NOI; improve the NOI, and the price goes up.

What Else Can You Do With Your IRA-owned LLC?

Relative to our main strategy, which is buying on TERMS (lease purchase, owner financing, and subject to with single family homes), we can and often do place them in the IRA-owned LLC for huge, tax-free returns. For example, you can use $100 or $500 down on a lease purchase deal to then have all three paydays (we create three paydays per deal we do: cash now, cash monthly, and large back-end cash out paydays) go right into the IRA-owned LLC.

*I’m not an attorney or tax specialist. I’m simply sharing my experience. Please consult your CPA and attorney.

What deals have you done with your IRA-owned LLC?

Share some examples in the comments below!

About Author

Chris Prefontaine

Chris Prefontaine is the bestselling author of Real Estate on your terms – Create continuous cash flow now, without using your cash or credit and real estate investor with over 26 years of experience in the field. He is also founder of Smart Real Estate Coach and host of Smart Real Estate Coach Podcast. He lives in Newport RI with his wife Kim and his family.

28 Comments

  1. Justin Waller

    Very interesting article, have you written other pieces about the structure of your loans with the bank? Does funneling through an IRA make you use a commercial loan? I am trying to educate myself on the process before I make my first buy. Thanks in advance.

  2. Costin I.

    An even better option if you have self employment income (or your spouse, like from a property management LLC managing your own rentals) is the Solo 401K. Investors should look into that before going the SDIRA with custodian/administrator route.

      • Costin I.

        I’m saying a Solo 401K is better than a SDIRA. You get same advantages you get with a SD-IRA, without the need for a intermediary party sucking fees from you. You get higher contribution limits, you can get loans from it, or if it gets loans it’s not subjected to UDFI/UBIT (I never remember which one is which). It’s the best option of all the investing retirement accounts you can have. The only negative I know is you can’t roll a Roth IRA into a Roth S401K.
        Just lookup “solo 401k vs ira” – here a sample – https://obliviousinvestor.com/sep-vs-simple-vs-solo-401k/.

  3. Michael P. Lindekugel

    for conventional financing which is 2-4 units you will have a very difficult time finding any non seller financing of any kind.

    for five or more units which is commercial financing there are many lenders that will lend to an IRA or an IRA owned LLC. i have yet to find a lender that is not capped at 60% LTV and most are 55% to 50% LTV. the reason is the loans have to be 100% non recourse to meet the IRC requirements for IRA which are considered trust accounts. Non recourse loans are widely available, but they contain carve outs of personal recourse for fraud and other bad deeds. all carve outs are not allowed when lending to an IRA or an IRA owned LLC which creates risk to the lender. the lender mitigates that risk with lower LTVs.

    • Chris Prefontaine

      HI Michael – I must have done a poor job explaining because you’re not the only one that chimed in about “loans”. We do not ever take out bank loans in or outside the IRA – ever, under any circumstances. We buy all our home s and our Associate partners around the country (students) do without banks and without their funds. Hope that clarifies, sorry for the confusion.

    • Costin I.

      Depending on who you ask, and what custodian/administrator you use, you’ll hear different opinions on this question. My conclusion, after talking with many providers, attorneys, custodians: you can manage your IRA-LLC as long you are not taking a salary (you can’t be paid by it). Be sure to check with your CPA and attorney before doing anything, of course. But then again, you can skip the IRA-LLC altogether and form a Solo 401K.

      • Bryan Miller

        For my fellow California investors, there is downside to the IRA owned LLC. The Franchise Tax Board will charge you $800 per year, even if your IRA is a Roth. You will also have to file a tax return for the LLC which will cost $400-$500 per year. Another option is to set up a single member trust. The IRA is the trustee and your IRA can then own property in the name of the trust. This avoids the annual fee and need to file a tax return. I learned this the hard way. 😉

        • Chris Prefontaine

          You all may want to simply check with your CPA about your options. NO we are not required to file the way we are set up and no we are not charged $800 per year. Please check with your administrator and your CPA . The Bigger Pockets forum is not the place for legal or accounting advice- that’s going to get you in trouble following that and create potential headaches.

        • Bryan Miller

          Chris, The $800 annual fee to the California Franchise Tax Board only applies to California residents. Many Californians who have set up a check book controlled IRA won’t know they owe this until they get a nice little letter in the mail asking for retroactive payments from the date the IRA was first set up. I agree it’s also good to check with an IRA specialist or administrator as someone with that specialization is often more familiar with the ERISA rules than an average CPA.

      • Chris Prefontaine

        Hi Costin! Is it really worth the risk? If someone disagrees with you – I do but I don’t matter to your IRA – then they can disallow your entire IRA and you’re cooked. Everyone who deals with us knows we only teach what we do. Does that mean other methods are not correct. 100% no – of course not. My opinion is just that – an opinion, based on what we do in our family business and 27 years in the field.

        • Costin I.

          All I’m saying is this is a gray area – there are custodians that don’t allow you to manage your IRA LLC and require 3rd party for that, and there are plenty other custodians/administrators and lawyers who think you can do it as long you don’t get a salary (and they use case law related to that as an explanation).
          To get a clear answer is very difficult as IRS is not specific on this, and requesting a letter of opinion takes time and even if you manage to get an answer, is specific to a particular datetime/timeframe and specific scenario/individual.
          And that’s the reason in the end, I didn’t implement SDIRA and IRA LLC and choose to go the SOLO 401K route.

  4. Greg Larson

    Hi Chris.
    This is interesting. So correct me if I am misunderstanding this. You got the seller to do a $5,000 down payment with a 3 year balloon and a principle only monthly payment with no interest? You essentially got him to give you an interest free loan of $265k for 3 years? Did you offer any other incentives? And then when you sold, did you sell after the 3 year balloon period? Did you have to pay him off or did you have an assumable or transfer clause in the agreement? Thanks.

      • Chris Prefontaine

        Actually Michael that’s incorrect. Our CPA provided the rules on that to us so you may want to google that one or check with your CPA. It’s about a page long that outlines over $1mil and certain class properties (“class being things like personal residence, farms, etc. – check it out). We’ve yet to do a $1mil plus like that – came close with a $945K!. Been doing them like this for years.

    • Chris Prefontaine

      Great questions Greg and the second piece super good question. Yes, what you outlined is how we do many of them. We just closed on a $945k ocean front home the same way – principle only payments. If you check out the deal structuring Sunday videos we publish for free on youtube you’ll see that many, many of our deals are the exact same structure. No on the second part, our loans we structure with the seller are due on sale and no assumable. The assumable would be a good one to try to structure if you could with your seller. Great questions, thanks.

    • Donald G McCartney

      I’m pretty knowledgeable in this area, and am pretty sure you are correct about not doing any blue-collar work such as painting or rehab. This is especially true if you are paying yourself for doing the work, which would be “self-dealing” and is prohibited. Also, you should not spend money on the IRA owned property directly from your own pocket, but should use IRA funds instead. That would be the equivalent of making an additional “IRA contribution” with non-IRA funds.
      You could probably justify doing some of the work on the property as long as the work was done on a purely “volunteer” basis with no compensation, and as long as any out of pocket expenses such as materials were paid through the IRA custodian, but even that may fall into the gray area. This is because the IRS may assume there’s some value associated with your labor, and that’s not really “managing” or “directing” the investment decisions, but actually doing the operations.
      But please, get some additional advice and/or research this before actually doing that.

  5. Lonna Hord

    I am using a Solo 401k but need entity structuring advice…series LLC, regular LLC? I also need someone familiar with Texas REI environment and advice on how to make this work with my investment partner. Any recommendations for a CPA/attorney we can hire to set this up right the first time?

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