Residential Investor · Allentown, PA · Member since 2012 · 95 posts · 29 votes
This question is only for advanced investors who have financed deals with other peoples's SD IRAs. I have my first "private" investor willing to devote her IRA to my deals. I would put some "skin in the game", she would provide the rest. We will probably be doing a flip. is there a way to "partner up" without actually doing a partnership, and at the same time NOT have to file paperwork with the SEC? or is she limited to being a debt investor? (holding a note/mortgage on the property)?
How have you LEGALLY done it in the past, and stayed within SEC guidelines. ??
SHE has ALMOST NO flipping experience, I am providing all the experience and know how.
What are "best practices" for using OPM from an SDIRA ?
the easiest way is to structure this as private loan. The IRA investor will be the lender and you will be the owner and doing all the work. You will have to agree on the loan terms ahead of time. If the IRA becomes a partner on a flip that would expose it to UBIT tax.
It is possible to create a joint venture or other type of equity sharing arrangement, but it gets more complex to do so.
If her IRA is a lender, she has a simple transaction with the mortgage as a secure instrument. The income to the IRA will be passive in nature and therefore 100% sheltered under the IRA.
If you and her IRA were to form some kind of partnership - such as a LLC where you and her IRA were the members - and then split the profits, that changes the nature of the transaction for her IRA. The IRA would be viewed as receiving income from a trade or business activity. This exposes the IRA to UBI taxation at trust tax rates.
Lastly, just be sure to work with a reputable attorney to draw up your contracts and record things like a mortgage via a title company. Good documentation is ethical and protects both parties.
If the rental property investment is not a flip but rather a buy and hold or a rental, then UBIT will not apply. UBIT would apply if done as a flip because the IRS views it as business activity and wants to even the playing field between those that fund real estate deals using personal funds vs those that use IRA or 401k funds for that matter.
The first $1,000 in gains is exempt from UBIT but the additional gains are subject to UBIT which is close to 40%.
Investor · Shawnee Mission, KS · Member since 2014 · 77 posts · 54 votes
9y
Eric- The way you phrased your question...
"is there a way to "partner up" without actually doing a partnership, and at the same time NOT have to file paperwork with the SEC? or is she limited to being a debt investor? (holding a note/mortgage on the property)?"
indicated that you might be interested in having her as more than just the lending party on this deal. If that is the case, it can be a bit tricky (see posts above) and there will be more to consider than what I'm offering in my post.
However.... If her IRA is only acting as the lender, the process is very easy. As @Dmitriy Fomichenko and @Brian Eastman mentioned, her IRA can function as the lender, just as if you were taking a loan from a bank.
Your transaction will require a few documents between you (or your entity) and her IRA, including a promissory note and a mortgage or deed of trust. You will also want to be sure that your insurance lists her IRA as the mortgagee/loss payee and be sure your agent provides her with a certificate of insurance. Her IRA should also receive a title policy so be sure to also request a lender's title policy from your title company.
Of course, I'm assuming already she has a self directed IRA with a custodian that allows real estate transactions.
As others have mentioned, it's best to have an attorney draw up these documents, but using another's IRA as your lender is a pretty easy process.
Congrats on finding your first private lender. Best of luck on your flip.
Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
9y
I just closed a deal today with a friend's IRA. I have done some over the last 10 years or so. Everything is negotiable. It is always a NEED situation. Do you absolutely need the lender to do the deal? If so, give them what they want. If you dont need them, you could always pass on them and find someone else. I always use my lenders as lenders only. If I am in a position that I NEED them to close a deal, I am more likely to give a higher interest rate.
Way in the past, I have paid up to 4 points and 18%. Because the deal went well, it was still better than doing no interest and splitting profit 50/50. It all depends on your situation.
You would not have SEC issues if you do a profit sharing situation. I would get legal advice though, just to cover your backside.