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Updated over 9 years ago on . Most recent reply

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Charles Worth
  • Investor
  • New York City, NY
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Best Investments For an IRA (SDIRA)?

Charles Worth
  • Investor
  • New York City, NY
Posted

I have recently been evaluating what to do with my IRA. I first thought I would use it to do crowdfunding investments but I believe they gives you part of depreciation deduction in most cases so I lose that valuable deduction (though the gain on sale would be tax free). As such, I am not sure it is the most efficient investment and the same applies for owning homes in the IRA, not to mention the headaches with UBTI and other issues (doing work yourself etc.).

The other option most people talk about is note investing but the amount I have is less than $100K so the people I know that do notes and HML at greater than 15% returns won't take me. I know you can't lend the money to yourself. I could obviously lend but rates are coming down and 12% is a decent return but I could defiantly find better uses for the money.

Does anyone have any better ideas for using SDIRA money? Or am I mistaken about my analysis above?

Most Popular Reply

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Brian Eastman
  • Self Directed IRA & 401k Advisor
  • Wenatchee, WA
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Brian Eastman
  • Self Directed IRA & 401k Advisor
  • Wenatchee, WA
Replied

@Charles Worth

The best use of your IRA is the asset class that provides you with the best mix of security and return. That can mean different things for different investors based on their experience, age, network and location.

@Daniel Dietz Makes an excellent point that I often make myself. Where there are limitations or potential tax implications internal to the IRA - while something you surely want to understand - should not distract from the real analysis of what is the net return to the IRA.

The IRA money is what it is, and is treated differently than after-tax money in all investment scenarios both in and out of the stock market. Comparing IRA investments in real estate to after tax investments in real estate is comparing apples and oranges.

If you can get 12% on notes, is that better than other things that you could invest the IRA into? If not necessarily superior in overall return, is it a good, consistent return relative to other riskier assets?

Same for rental property. The net return you can expect from cash flow (with appreciation being a bonus if you get it) should be compared to other investments the IRA could make with respect to risk-reward. A deed to real property does not evaporate when the news gets into hype mode over the small economy of a country 1/2 world away.

Leverage is a powerful component of IRA investments into real estate. You cannot leverage in the stock market with an IRA. You cannot leverage into the purchase of notes (easily anyway), but you can leverage the purchase of real estate with a non-recourse mortgage. This does introduce a tax implication with Unrelated Debt-Financed Income (UDFI) but the tax cost is generally pretty low and your IRA should certainly receive a higher cash-on-cash return than with an all cash purchase of the same property.

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