Using an IRA LLC For a Fix and Flip

[Elbin Collado]

Hello BP,

I'm looking for advice on how to use funds in a IRA to assist in purchasing a property for a fix and flip. I have about $55k in an IRA that I would like to use $30k of towards a deal. I have another investor that will also be using $30k from his retirement account to put towards the deal. Together, I believe we can cover the down payment and rehab costs. However, we will need a loan to cover the majority of the purchase price. Does anyone have any advice on how to properly structure this deal? For example I've read/ heard that it's best to set up an LLC first and use that to buy the property while our IRAs invest in the LLC. Does this still limit us to using a non-recourse loan? If you have experience investing in this way, please share your experience and thoughts. Is anyone opposed to this investment strategy, if so, why?

Thank you in advance for sharing.

All the best,

[Dmitriy Fomichenko]

@Elbin Collado

Whenever IRA getting a loan (directly or through an LLC) - the financing must be non-recourse. Here is a list of lenders offering such financing to retirement accounts:

https://www.biggerpockets.com/member-blogs/2810/50272-list-of-non-recourse-lenders-for-self-directged-ira-and-401k

Most lenders will require you to have at least 30% down and 10-15% in reserves, so you must have 40% of the purchase price plus rehub cost available in your IRA to accomplish your goal. 

Another consideration that you need to be aware of is UBIT. It stands for Unrelated Business Income Tax and it is assessed on any tax-exempt entities (which includes an IRA) who receive income from an active trade or business. If you do fix and flip on regular and repeated basis in your IRA - be prepared that your IRA would have to pay this tax. Be sure to run the numbers with experienced tax expert. Remember that you supposed to invest passively in your IRA - that is when all incomes and gains will be sheltered from taxes.