Can I use my SDIRA as the hard money lender for BRRRR investing?

Question

So I was originally planning on using my SDIRA independently of my savings for investing in real estate. Basically treating them as two different companies. I have heard you can partner with yourself when using SDIRAs but have to be very careful about it and keep detailed records. My question is specifically with flips or BRRRR method can I buy a property with my SDIRA as the money lender and then do the rehab with personal money then if I flip it pay myself back plus interest on the SDIRA side and keep the rest outside of the fund. Or in the case of the BRRR the cash flow would not go the SDIRA. Effectively using my SDIRA as the lender. Any insights would be greatly appreciated!

Cheers,

Patrick lloyd

Cheers,

Patrick lloyd

Jeff Cichocki · Answer

@Patrick Lloyd, the way you are describing it is a prohibited transaction. You need to change it up if you want to work with your IRA in your deals. Here's a couple of things to make sure you keep straight in the deal...

1. You can partner with your SDIRA. You cannot borrow from it. Your SDIRA and you may each own a % of the deal.

2. If you partner, your IRA must share in all profits and expenses at the exact percentage of the split. For example, if you put up 50% of the cash personally and your SDIRA the other 50%, any and all bills and profits must be split 50/50. You may not pay the bills with your cash and get reimbursed. You must each pay separately.

3. Because your SDIRA is an owner in the project, you can not do any work on the property your self. Your SDIRA would benefit from that and you would be personally benefiting from the use of the SDIRA. This would be a clearly prohibitted transaction and could blow up your SDIRA.

Personally, I try to steer people away from partnering with their IRA's. The reason being is that most borrowers are active flippers or Landlords and will show up on the project and help somewhere along the way. When your IRA is an owner, you can't even change a light bulb without being in violation. Too many people forget and help out. You would be bettor off borrowing the funds from someone else that is not a prohibited party to your deal. Use you're funds on deals that you will be 100% passive in. It's the safest way to do it.

As a small side note... Be careful who your custodian is. Some custodians are more prone to internal audit from the IRS than others. It's hard to know without directly asking them when their last audit was. I can say that the higher their profile, the higher the likelihood of an audit.

Be careful and good luck!

Carl Fischer · Answer

@Patrick Lloyd

What you suggest is prohibited. However, You can structure it differently from the beginning and accomplish part of your goal. Work with a professional to help you.

Brian Eastman · Answer

@Bryan Lyde

Actually, a quid pro quo arrangement where two parties agree to lend to each other from their respective IRA accounts would be viewed by the IRS as a prohibited transaction.

Odie Ayaga · Answer

A lot of really good info here from some of the best (FYI there's no shortage of SDIRA experts on this site. One of its strongest areas). Just shorthand, your SDIRA can't lend to or benefit to or from ascendants or descendants. You can't rent to your mother or have your son do the rehab etc. The same goes for yourself and companies you own. I'm not an expert so hopefully those who are will correct me if any of that is wrong.

Bryan Lyde · Answer

just meant in the course of normal business,  not as a means to skirt regs. it's all in the intent and the language of any agreement.

Bryan Lyde · Answer

@Patrick Lloyd you might consider partnering with someone else who also has an sdira and lend to each other which isn't prohibited.

Patrick Lloyd · Answer

Thanks for all the replies I would concur with you all. I will keep the two separate.

That being said any good strategies for getting loans against the SDIRA? Or do you just get them all 100% cash?

Thanks again,

Pat

Dmitriy Fomichenko · Answer

@Patrick Lloyd

Go with your original plan: treat your personal savings/investments completely separate from your IRA. You are considered "disqualified person" to your IRA and as such are prohibited from engaging in any transaction with your IRA. While technically it might be possible to structure investment jointly with your IRA, practically many of such joint investment will end up being considered "prohibited transaction" because you overlook minor detail. Because there is high risk it is not worth it. Again, stick with your original plan and make sure that all IRA transactions are "arms length".

Can I use my SDIRA as the hard money lender for BRRRR investing?

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