SD Roth custodians for Private Money Lending?

Tax, SDIRAs & Cost Segregation
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SD Roth custodians for Private Money Lending?

Anna Watkins
Investor · Atlanta, GA · Member since 2014 · 389 posts · 250 votes

I have done my "due diligence" by reading about 15 threads on SDIRAs, and still have a few questions.

Does anyone use a custodian that specializes (or is especially effective with) private money lending (not buying existing notes)? I am fortunate to have a reasonably healthy stocks&bonds 403(b) (401k for non-profits) and am trying to build up some extra in a Roth IRA for diversification. Since I have rentals I actively manage already, I'd like to use a self-directed Roth for private money lending. (it has to be a Roth, given the existing 403(b))

From all the posts, I gather that different SDIRA custodians are better at different kinds of RE investments.  Folks who have responded to various threads --

1) Do you mix different RE investment types within one IRA? or

2) Do you have different ones for different purposes (flip, hold, buying existing notes)?  

3) Have you worked with private lenders who use IRAs for their lending?  

3) Any chance I could talk with one of them?  I'm strictly small money, but want to be wise small $$ :-)

4) Has anybody heard of using IRA money for RE crowdfunding? Seems a way to start on a very small scale, but perhaps sketchy rule-wise.

I'm tagging y'all guys below since you've been helpful in the threads I read earlier.

Thanks!

@Abhi Golhar - How's the GroundFloor project going?  I'm following with interest.

@Rick Baggenstoss     @Will Barnard    @J Scott

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Jeff Rabinowitz
Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
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Pay attention to the fee structure of the different Custodians. Some charge an annual fee based on your account balance. Some charge for the number of assets in the account. Some charge for each transaction. Some charge a combination of fees. If you plan on lending small amounts and to receive monthly payments you may want a custodian that charges an annual fee rather than a per transaction fee as every payment deposited into your account could result in a fee no matter how large the deposit is. 

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  • Account Closed
    Investor · West Los Angeles, CA · Member since 2014 · 230 posts · 239 votes
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    Anna Watkins I use pensco for my self directed IRA. They are knowledgeable about the rules. However you need a Cpa in order to set one up. This is money well spent. I set it up to be a checkbook LLC. That means my money sits in my bank account under a seperate account. When I have a deal I'm funding I wire it from my bank account to escrow. When the property is sold the profits get wired back from escrow. I never touch the money. I strictly pm lend so I can't speak on mixing assets under the same account. Good luck
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  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
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    I use Equity Trust for both private money lending and crowdfunded lending.  They aren't perfect (I've had some issues with transactions taking too long to review and fund, and have had to fight to get some expedite fees returned when that happens), but they seem to be getting better as the years go on...

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  • Doreen Chaisson
    Professional · Portsmouth, NH · Member since 2014 · 175 posts · 108 votes
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    With respect to the RE crowdfunding question:  Do your due diligence on the crowdfunding portal you're working with.  See if they are backed by a licensed broker-dealer. If they are, then that means they have done the vetting of the underlying investment, and in offering it, are putting their professional license and reputation on the line.  That should give you some level of comfort.

    Generally this type of investment will be into a company that develops Real Estate, so it'll be a private equity investment and not a RE investment. Not all crowdfunding companies will accept IRA monies - you'll have to call and do your research.

    As far as mixing asset types within one Self-Directed IRA, this is perfectly acceptable.

    2Reply
  • Peter K.
    Investor · San Jose, CA · Member since 2013 · 115 posts · 76 votes
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    hello @Anna Watkins!  

    Good for you for saving for the future.  

    Most of the top IRA custodians offer a very similar mix of services and transaction types. So you shouldn't need more than one account.

    I've been with Pensco for well over a decade and have no major complaints. They are very knowledgeable, fund pretty quickly, usually in under a week unless I'm the weak link by not getting paperwork back quickly. They have a good web portal to get deals submitted and check status as well. They also offer a checkbook IRA option which I haven't switched to yet.

    The only relatively minor complaints are that they get pretty busy at times.  It can often take 10-30mins to get a live person in the phone, however they do give you option of pressing a number on a keypad for a call back so that you are not on permahold, which works well.  The 2nd complaint is that they are relatively expensive.  It you have a fairly large account...over 250k the costs are a small enough percentage of your profit, so it probably shouldn't be your main deciding factor. Saving $500 in fees per year with a sloppy custodian that loses you a deal, is not a good deal. 

    I've gotten great feedback from a couple of trusted investor about another custodian based in San Carlos Ca called IRA Services Trust Co.

    I called them because I'm seriously considering switching, primarily to lower costs.  They are roughly half the cost of Pensco.  They offer A very similar service offering to Pensco.  They were very knowledgeable and helpful over the phone. 

    I would narrow your search to the top few suspects and call, ask lots of questions about pricing, processes for each type of transaction and you'll get a good feel of how organized and helpful they are.  Don't worry too much about making the perfect choice as it is not too difficult to switch custodians if you choose to.  Even if you have active investments, they can switch over to another custodian before they are closed out. 

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  • Jeff Rabinowitz
    Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
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    Pay attention to the fee structure of the different Custodians. Some charge an annual fee based on your account balance. Some charge for the number of assets in the account. Some charge for each transaction. Some charge a combination of fees. If you plan on lending small amounts and to receive monthly payments you may want a custodian that charges an annual fee rather than a per transaction fee as every payment deposited into your account could result in a fee no matter how large the deposit is. 

    3Reply
  • Account Closed
    Lender · Hot Springs Village, AR · Member since 2014 · 274 posts · 92 votes
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    I have had a SDIRA for about 20 years. Equity Trust has been adequate but sometimes for no reason start to clamp down on how checks are written. I have had no problems the last few years. The problem I have is that if one wants to manage their own properties it is very awkward. For example, a renter called with a plumbing problem that needed immediate attention. I called a plumber but they would not come without a cc #. ETC will not allow cc's for their accounts. Because of situations like this I decided to open a checkbook IRA. As ETC will not allow checkbook IRA's I went with a custodian that does. Notes do not have the same problem. I have all of my notes with ETC and my rentals with Advanta. I have been very happy with this arrangement.

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  • Dale Stevens
    Investor · Downers Grove, IL · Member since 2015 · 353 posts · 213 votes
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    I would highly recommend Midland IRA based in Chicago. I have dealt with them on several different occasions, and everytime they are quick to review, communicate and wire the funds.

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

    A lot of our IRA LLC clients use IRA Services Trust Company. They have been in business since 1978 and are a big player in this field.

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  • Jeff Rabinowitz
    Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
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    @Account Closed, there is a school of thought that managing a rental property as actively as you do (taking tenant calls, calling contractors, and paying them) could be considered self dealing. My understanding is that the IRS is taking a harder look at SD IRAs and auditing them more frequently. This is a grey area but the penalties are quite onerous if your account is flagged. It may be worth investigating this a bit further.

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  • Crystal SmithPro Member
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    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
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    Originally posted by @Anna Watkins:

    1) Do you mix different RE investment types within one IRA? or

    2) Do you have different ones for different purposes (flip, hold, buying existing notes)?  

    We started out w/ one custodian, Equity Trust, but ran into problems when we needed to close transactions quickly so we moved a portion of funds to a CheckBook IRA.  So the only difference between the types of transactions is speed.

    3) Have you worked with private lenders who use IRAs for their lending?

    We have used our IRA to lend $.

    4) Has anybody heard of using IRA money for RE crowdfunding? Seems a way to start on a very small scale, but perhaps sketchy rule-wise.

    We've not used our IRA in a crowdfund.  Not sure why this would be considered "sketchy rule wise"

    312-681-7487
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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
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    @Anna Watkins

    you can invest in different type of alternative assets within the same SD IRA, you don't need multiple accounts to do that.

    Also, you mentioned flipping in your comment above... If you do multiple flips in your IRA this will be considered active business and special tax (UBIT - Unrelated Business Income Tax) will be assessed on all gains and profits as a result of that activity. This tax tops at 39% so be sure to speak with the expert if you decide to go in this direction. It still might make sense but you need to be aware of the tax consequences.

    1Reply
  • Anna Watkins
    OP
    Investor · Atlanta, GA · Member since 2014 · 389 posts · 250 votes
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    Thanks to everyone who's replied -- I'm always amazed by the incredible wealth (and variety) of experience and expertise in the BiggerPockets community.  The willingness to share is what makes BP truly priceless!

    (apologies for not calling you all out by name -- my @mention still doesn't work.  Does anyone at BP know if this is connected to the Firefox shutdown of Flash Player??)

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  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
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    In my opinion, the best option is the self administered 401k (known as a solo401k) as it has higher contribution limits, ease of investments, and lots more control, including checkbook. It is by far superior to any IRA. You can roll over IRA accounts into a solo401k plan, the main prerequisite is that you must be self employed with no employees other than a spouse.

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
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    @Will Barnard

    The Solo 401k is a great self-directed retirement plan.

    Unfortunately, an existing Roth IRA may not be rolled into a Solo 401k, and this thread is specific to a Roth IRA.

    A Checkbook IRA LLC would allow an investor to have the same kind of direct control over the funds as a Solo 401k.

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  • Rick Baggenstoss
    Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
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    @Anna Watkins  I think you have to first characterize how many checks you're going to write.  Less than 10 per year, and you should go with a local company like AdvantaIRA.  Much more than that and for a larger account, e.g. $200k, you should evaluate some of the bigger players who offer online check requests, longer hours, etc.

    Fees do vary wildly.  

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  • Anna Watkins
    OP
    Investor · Atlanta, GA · Member since 2014 · 389 posts · 250 votes
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    Excellent point, @Rick Baggenstoss, I definitely wouldn't be writing many checks to start with (if ever).  I will add this to the list of questions to ask.

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  • Abhi Golhar
    Investor · Atlanta, GA · Member since 2014 · 378 posts · 82 votes
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    @Anna Watkins

    The project is going well! It funded on the platform in less than 10 days, and we were off and running. 

    Currently, project status is:

    • Interior demo complete
    • Added master bath to rear of home
    • HVAC rough is in
    • Electrical rough review will be complete by Monday, Jul 20

    :-).

    0Reply
  • Rick Baggenstoss
    Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
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    @Anna Watkins Local SD IRA providers all provide local networking and education as well.

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  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
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    Originally posted by :
    The Solo 401k is a great self-directed retirement plan.

    Unfortunately, an existing Roth IRA may not be rolled into a Solo 401k, and this thread is specific to a Roth IRA.

    A Checkbook IRA LLC would allow an investor to have the same kind of direct control over the funds as a Solo 401k.

     Good point Brian. Roth IRAs can't be rolled into roth 491ks but non Roth IRAs can. I didn't see the "Roth" in the title of the thread. Thanks for clarifying, none the less, 401ks are by far better options over IRAs.

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