Self directed IRA LLC

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Self directed IRA LLC

Mark Freeman
Hume, VA · Member since 2015 · 5 posts · 0 votes

New to the forum and until last week-end had never heard of Self-Directed IRA. That being said, here's my story:

A friend and I both have kids attending college in the fall. We've decided that we would save some money in housing and food if we bought a house close to campus and had them rent from us. In addition to the savings, we would then be able to turn around and sell the property. If we sold it for what we bought it for, the kids would have lived rent free for the years in school. That's the idea.

However, I don't have the cash for a down payment. (To put in prospective, we're only looking at a $60k house; my DP would be $6K.) I can borrow the money from a line of credit (LOC), but then with me repaying the LOC and the mortgage, it's money out of my pocket every month. (The rent won't cover both the mortgage and the DP)

So I've heard of self directed IRAs, self directed IRA LLCs, etc. If my friend and I go in on this together, what do you think would be the best route? We want to set up an LLC between us, but should I move my whole 50% into a self directed IRA? just the DP?IRA LLC? Is this even the way to go?

Any advise would be appreciated.

Thanks,

- Mark

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Taylor West
Baton Rouge, LA · Member since 2015 · 43 posts · 7 votes
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Mark,

@Dmitriy Fominchenko is the President of a Self-Directed IRA company. He can point you in the right direction as he did with me a week or two ago on a phone conference. Check him out and he can answer your questions.

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  • Jaime Raskulinecz
    Roseland, NJ · Member since 2012 · 73 posts · 20 votes
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    Hi Mark. No matter how you structure this with a self-directed IRA it is a prohibited transaction. There can be no transactions between disqualified persons. This includes ancestors and descendants and their spouses, the IRA owner and their spouse as well as any businesses these people own or control.

    Sorry for the bad news. However, now that you know about self-directed IRAs you should continue to learn about them as they are a great tool to boost retirement savings.

    Let me know if I can be of any further assistance.

    Jaime

    1Reply
  • Aaron Wyssmann
    Springfield, MO · Member since 2014 · 252 posts · 117 votes
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    Mark,

    I'm no expert on self directed IRAs but I'm not sure you can do what you are suggesting. There are very strict rules about how the money in these can be used, for example, I know that some of the restrictions don't allow you to use the money where a family member is going to be involved.  Say you were going to invest money in your son's business for example, that would not be allowed. So with your son being one of the tenants in the property I don't think you would be able to use the money but I may be incorrect.

    I'm sure you could search here on BP and find a company that administers these IRAs.  One company that I have called and gotten just my questions answered is Entrust Group.  You can google them, call and ask your specific questions.  

    Basically, make sure that you drill deep in asking questions about these IRAs.  You want a good administrator who knows what they are doing because if not you could get a big tax bill if the money is not used according to IRS law.

    0Reply
  • Mark Freeman
    OP
    Hume, VA · Member since 2015 · 5 posts · 0 votes
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    Thanks Jamie.

    Even if we set up an LLC to purchase the property then the IRA LLC invests in the LLC?

    This is very helpful information,

    Thanks,

    - Mark

    0Reply
  • Taylor West
    Baton Rouge, LA · Member since 2015 · 43 posts · 7 votes
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    Mark,

    @Dmitriy Fominchenko is the President of a Self-Directed IRA company. He can point you in the right direction as he did with me a week or two ago on a phone conference. Check him out and he can answer your questions.

    4Reply
  • Paul Brockmann
    Northborough, MA · Member since 2015 · 57 posts · 10 votes
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    A LLC is a good way to go, even if you can't do a self-directed IRA LLC.

    By creating a LLC, you and this partner of yours will have to get everything down on writing in the operating agreement. I and I'm sure others will say, put everything you can think of into this document. This will keep you and your partner fair and honest and should resolve most arguments.

    Now, to get the down payment, loaning against your 401k could be risky.  I would see if there's another way to get that small sum of money.  

    Buying and selling in within 5 years without making significant improvements probably won't get you significant returns.  Closing costs and taxes will eat those measly appreciation gains up.   I would make sure you can put down the possibility of holding the property as a rental after they graduate.  

    0Reply
  • Eric Anthos
    Investor · Amherst, OH · Member since 2015 · 2 posts · 0 votes
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    Mark,

    My background is in Self Direction and this was a common question with clients I spoke to. You have to respect the IRS and play within their rules. The last thing you want to do is them to knock on your door.

    The easiest way I can explain it, no matter how you structure the deal, inside of outside an LLC, if your retirement funds are involved and a disqualified individual is benefiting, it is prohibited. Think of a disqualified individual as someone who made you or someone you made.

    The good news, you are learning about a Self Directed IRA's and there are great opportunities to invest in Real Estate with them. You just have to know and play by the rules.

    Good luck!

    Eric Anthos

    Portfolio Relations Manager

    [email protected]

    Office: 901-505-0734

    Mobile: 440-822-4758

    www.MemphisInvest.com

    0Reply
  • Mark Freeman
    OP
    Hume, VA · Member since 2015 · 5 posts · 0 votes
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    Thanks All!

    Back to the drawing board!

    - M

    0Reply
  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
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    @Mark Freeman 

    If you are self-employed, look into opening a solo 401k and transferring IRA funds into it. Subsequently, you can process a solo 401k loan. To learn about the solo 401k loan rules, see following link:

    http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Loans

    When you borrow from your own solo 401k, you can use the funds however you wish. Therefore, you could use the borrowed funds for investing in real estate.

    Here are some quick solo 401k loan facts:

    • The Solo 401k loan term is 5 years for general loans.
    • The Solo 401k loan term can be more than 5 years not to exceed 15 years if used to purchase principal residence for you as trustee/participant of the Solo 401k.
    • Solo 401k loan payments are made either monthly or quarterly
    • The interest rate for solo 401k loan is either: A certificate deposit rate plus 2 percent or theprime rate plus 1 percent.
    • Loan payments are fixed payments consisting of interest and principal
    • Solo 401k loan rules do not allow for Interest only payments or principal payments only.
    • The maximum Solo 401k loan amount is either 50% of account balance or maximum amount of $50K.
    0Reply
  • Mark Freeman
    OP
    Hume, VA · Member since 2015 · 5 posts · 0 votes
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    Originally posted by @Paul Brockmann:

    A LLC is a good way to go, even if you can't do a self-directed IRA LLC.

    By creating a LLC, you and this partner of yours will have to get everything down on writing in the operating agreement. I and I'm sure others will say, put everything you can think of into this document. This will keep you and your partner fair and honest and should resolve most arguments.

    Now, to get the down payment, loaning against your 401k could be risky.  I would see if there's another way to get that small sum of money.  

    Buying and selling in within 5 years without making significant improvements probably won't get you significant returns.  Closing costs and taxes will eat those measly appreciation gains up.   I would make sure you can put down the possibility of holding the property as a rental after they graduate.  

     You're probably correct about the significant returns in only five years. However:

    • If we sell it for what we paid for it, then that means the kids have lived rent free for their college career
    • We are thinking about converting the 2-1/2 car garage into an additional 2 bedrooms with a full-bath and sitting room. This should GREATLY increase the value as well as the rents.

    Something we're chewing on...

    0Reply
  • Paul Brockmann
    Northborough, MA · Member since 2015 · 57 posts · 10 votes
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    @Mark Freeman

    Before you go into converting the garage into more rooms (Attached or unattached), you may be devaluing your home as a single family home.  Be careful of that.  Most families would like to have a garage and don't need 5 or 6 bedrooms.  You would shrink your pool of potential buyers to just investors.  I would just run the numbers on what that would cost you to convert to a livable space, what kind of income that change would bring in, and what happens to the overall market value (since your exit is in the short term).  

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  • Mark Freeman
    OP
    Hume, VA · Member since 2015 · 5 posts · 0 votes
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    Originally posted by @Paul Brockmann:

    @Mark Freeman

    Before you go into converting the garage into more rooms (Attached or unattached), you may be devaluing your home as a single family home.  Be careful of that.  Most families would like to have a garage and don't need 5 or 6 bedrooms.  You would shrink your pool of potential buyers to just investors.  I would just run the numbers on what that would cost you to convert to a livable space, what kind of income that change would bring in, and what happens to the overall market value (since your exit is in the short term).  

    This is all very true and will be taken into consideration once we get there. Our initial thought is, since this is less than one block from campus, it may be more valuable as a multi-room student housing unit than a SFH.

    Thanks,

    - M

    0Reply
  • Paul Brockmann
    Northborough, MA · Member since 2015 · 57 posts · 10 votes
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    Ahhh, great find then!   

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
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    @Taylor West, thanks for the shootout! 

    @Mark Freeman, feel free to reach out to me and I'll be glad to help out any way I can.

    0Reply
  • Jaime Raskulinecz
    Roseland, NJ · Member since 2012 · 73 posts · 20 votes
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    @Mark Freemanundefined it doesn't matter if directly through the IRA or in an entity. The same rules apply if the IRA is a member of the LLC.

    Please feel free to call my office and speak to any staff member who would be happy to help and answer any questions you have. Just let them know you spoke with me here.

    Jaime

    973-533-1880

    2Reply
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