Investing with IRAs - comments, strategies?

Question

Hello!

Through Bigger Pockets I stumbled upon the idea of rolling my 401k into an IRA and using that to invest in real estate.  I'm thinking of using Entrust who advertises on this website.  Investing in real estate with an IRA sounds like a way to increase the amount in my retirement fund at a steady and faster pace than simple stock investment as it is currently doing.

I have 10k in my 401k and I'm wondering if that's enough to start with or if I should put more money in before trying it out?

Any comments or suggestions from people who have invested in real estate with an IRA?

Can you get a conventional bank mortgage loan using an IRA account or is there a lot of barriers going conventional?

I know Bigger Pockets would probably advice "just do something" because getting started is usually the biggest hurdle.  ;)

Keith Thompson · Answer

@Janis A.  I began investing in RE within my SDIRA about a year ago and so far it's been amazing.  10K will get you started, but you'll have to be selective so as to retain sufficient assets to initiate foreclosure if needed.

I heard about this avenue in a local REIA meeting where I listened to a presentation by Edwin Kelly, CEO of Specialized IRA Services. I was hooked on the idea and picked up a book that Edwin recommended by Mat Sorensen titled - The Self Directed IRA Handbook: An Authoritative Guide for Self Directed Retirement Plan Investors and Their Advisors.  Mat spends the first eight or so chapters scarring the heck out of you with what not to do and then goes into all the investment options and how-to's.

Based on what I learned and after some research, I ended up signing up with SIS as the Custodian and had Mat do the LLC paperwork. I'm not familiar with Entrust, but I did look at half a dozen other potential Custodians.  I went with SIS because they offered Checkbook Control within my LLC - which is perfect/necessary for auction situations.  I have relied on both SIS and Mat for consultation when I was uncertain if I was about to engage in a prohibited transaction or if there was a way around it.

You've picked a winning path - I suggest you read the book before selecting a Custodian in order to be better informed about what services you need from the Custodian.  They each offer different services and only a few offered Checkbook Control as an option.

@John Pate,  @Dmitriy Fomichenko and @George Blower offer great advice - they are clearly informed on this.  10K is enough to start with, more would obviously provide better options, but it's enough to get you started.  There are many ways to get funds into an IRA - converting some from of a Traditional IRA into Roth is the fastest I know of, with Solo Roth 401K an excellent option as well.  Partnering will also help get deals funded - regardless of IRA sourcing or not.  The book will explain it and who you cannot deal with - there are some prohibitions.

If you're going to invest anyway, I suggest you plan to use some personal funds to invest personally (or via business LLC with possible Solo 401K options...) AND ALSO... use some SDIRA funds (preferably Roth) to do other work at the same time - Without comingling the funds of course.

Good Luck!

John Pate · Answer

If your money is in a 401k the first question you need to answer is does your employer match money going into it? My company matches dollar for dollar up to a certain point. And, it would be foolish for me to close out my 401k and miss out on 100% return on my money.

The other thing is you cannot co-mingle money in an IRA with additional funds. So, let's say that you do well and have $40k in your IRA after rolling over your 401k in a couple of years. You find a deal that requires $50k and you wish to put after tax $ in to make the purchase. That could expose your IRA to income tax and/or penalties.

Just be careful and find a CPA to help you out to insure you stay on the up and up with the tax man.

George Blower · Answer

@Janis A.

Since you are starting out and most banks won't loan funds to an IRA with a balance of $10,000, a couple options may be to invest in tax liens and promissory notes. However, another option may be to pool your IRA funds with other investors in an LLC, for example, and then invest in real estate.

Dmitriy Fomichenko · Answer

Janis, welcome to BiggerPockets and congratulations on getting started in REI!

Regarding starting self-directed IRA. There is no minimum amount to open the account, it really depends on what you wish to invest in. If, for example, you wish to buy a rental property in your SD IRA for $80K you could use leverage, but conventional financing will not work, you have to use non-recourse financing, which normally requires 30-40% down payment plus 10-15% in reserves. So in order for you to buy a property for $80K you'll need about $40K in your IRA.

Most clients in my experience start with more money than just $10K. But I had a client few years ago who setup an IRA with just $3K, he was using it to invest in tax liens. That was enough for him to get started. So again, it depends on what you want to do, you have to have investment plan in place.

Hope this helps.

Janis A. · Answer

@Keith Thompson.  I did get the IRA book and I'm about half way through it.  I haven't started yet with any investing.  I did roll my two 401ks into an traditional IRA, so it's all in one place.  My time now is being taken up by looking at a lot of house and putting in offers to try and get my first BRRRR strategy house.  Yippee!

Keith Thompson · Answer

@Janis A. - going back over some posts and wonder if you pulled the trigger on SDIRA? It's still working well for my needs.

Best, Keith

Janis A. · Answer

@Keith Thompson, great things to consider.  I ordered that book and will see what fits best for my plans and needs.  And thanks for the encouragement!

Janis A. · Answer

I'm also not sure which is scarier, being a newb and investing in something like a tax lien or pooling money with other people!  I'm reading Robert Kiyosaki's Cashflow Quadrant and he talks a lot about the fear of risk and how that can keep people stuck in the Employee/Self-Employed quadrants and out of the Investor quadrant.  It's been making me look at my comfort level with taking risks.

Janis A. · Answer

Thank you so much for the information.  I suspected that 10k may not be enough to start out with property; however, I will look into tax liens and promissory notes as a potential investment as well as pooling with other investors.  Looks like I have more research to do!

Investing with IRAs - comments, strategies?

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