What would you do if you had $90k in a Self Directed IRA?

Question

If you had $90K to invest using funds from a Self Directed IRA how would you use it?

I have been thinking about this for some time. Here are some of my ideas and I would love to hear what you would do.

Option 1: Purchase a SFH/Duplex/Triplex in the Midwest all cash and hold as rental

Option 2: Use the money as down payment and purchase a single multifamily with a nonrecourse loan (this research has not been very successful).

Option 3: Use the money as a lender to fund other deals.

I feel like I have been thinking too long about this and found myself in an endless researach loop with no end in sight. I think a fresh perspective would be great.

Josh Walker · Answer

I agree with @Andrea Weule.  I have personally invested the vast majority of my IRA funds into syndicated deals and love that option.  Just make sure you fully vet the sponsors (GP).  There is no such thing as a good deal with a bad sponsor.

Andrea Weule · Answer

It depends on your goals and where you are in life.  We use our Self Directed IRA to private money lend and invest in syndications.  It will be several years before we can take distributions, so we're looking to grow it as quickly and effectively as possible.  Additionally, my IRA doesn't need write offs from the expenses associated with a rental.  One of my best friends, that I wrote an REI book with, is in her 60's they own multiple properties with their IRA.  They have started living off some of their IRA cashflow from the properties.  With rentals you never touch the principle, but you can enjoy the interest.

I think the biggest turn off of me with rentals through my IRA has been having to pay bills out of the IRA.  Having to make sure a check goes out for taxes, insurance, etc.  Since it would be owned through the IRA the IRA has to pay the bills and it just seemed like extra steps I didn't want to take.  Where as private lending and syndication investments I send the money out once and just collect until the term is up and all the money is back plus interest.

Again, its a personal decision and you should also consider the process you'd use to manage and if you need access to the funds at any point in the near future.

Best of Success!

Carl Fischer · Answer

Hello @Jamie Rost. You're on the right track in doing your research when it comes to self-directing your IRA. A huge factor in managing your self-directed investments is making sure you perform the proper due diligence. In terms of your options above, number 2 would not be allowed in your IRA because you cannot use IRA money for only your down payment on a property. This would be considered a distribution.As @Andrea Weule mentioned, what you choose to self-direct your $90K in is up to a number of factors. Things you should consider include what stage of life you're in (far from retirement, nearing retirement, or retired), risk tolerance, diversification vs. focus, knowledge level about the asset, time available/required to manage the investment (tax liens vs. note fund), and more. What you are most comfortable with is always where you should start. Lending is obviously more hands off, while purchasing a property in your IRA may require more interaction for things like bill pay, hiring contractors, and rental income. Choosing the right custodian that will help you facilitate your transactions within IRS regulations. BiggerPockets provides a list of self-directed IRA custodians for you to reference on this site. You can check out that list here. Things to consider when choosing a SDIRA custodian are customer service, knowledge, experience, and processing speeds, as they will be integral to ensuring that the investments you have chosen to self-direct are facilitated efficiently. Many investors have found success through investing in alternative assets with their self-directed IRA, including in real estate. You can own residential, commercial, raw or improved land in your IRA.  If you have any additional questions, I would be happy to connect.

Jamie Rost · Answer

Thank you all so much for the feedback and advice. Lots of great information.

Jerel Ehlert · Answer

Assess your resources - time, skill, expertise, ability, and interest - in light of your goal (growth v. preservation).  Whichever option you use, make sure you are able to assess the opportunity or have someone who can.  I have done my best to bail out lenders who gave money from their IRA accounts to fraudsters.  If you are going to lend, know or learn how to do so while protecting yourself.  If you are going to buy/flip or buy/hold, know how to be a flipper or landlord.  If you don't, find those you can trust to help.

Carl Fischer · Answer

@Jamie Rost. I wanted to further clarify my initial response. Number 2 would be possible if the property was owned in the IRAs name. NOT if the down payment was used for a purchase in your own name. Apologies for any confusion this may have caused. If you are looking to get financing for a property owned by the IRA, you are correct in the fact that it would have to be a non-recourse loan. However, you should be aware that, usually IRAs are tax-sheltered accounts, but in some instances do pay taxes. One of those instances is when debt-financing is used in a purchase of a property by an IRA. This tax is called UDFI, or Unrelated Debt-Financed Income, and it is best to talk over with your tax professional before going this route. For further clarification, please feel free to connect with me.

Dmitriy Fomichenko · Answer

@Jamie Rost

As others have said it depends on your personal preference but also your investment experience, risk tolerance, and few other factors. I personally prefer using my retirement funds as bank and lend to others. The main reasons for that is that it is completely passive, low risk and nice double digit returns.

If you can find a good rental and good property manager - that is also can be great way to put your money to work. Using leverage will require non-recourse financing. Here is a list of lenders who specialize in this area:https://www.biggerpockets.com/member-blogs/2810/50272-list-of-non-recourse-lenders-for-self-directged-ira-and-401k

What would you do if you had $90k in a Self Directed IRA?

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