Self-Directed IRA

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Self-Directed IRA

Theresa Pereira
Bay Shore, NY · Member since 2016 · 6 posts · 2 votes
Hi. I really just have one question that's alot confusing to me. I have a basic IRA which was rolled over from a 401K. Right now it has about $83,000 in it and I still contribute $80 a month into it. I want to change it to a self-directed IRA to buy, rehab and flip properties. We live on Long Island, so the houses out here are around 130k-300k as a mid-range. Of course you will see houses below and above that, but most houses are around that price. So my $83,000 to buy a house isn't enough, I would need to get a mortgage to cover the rest and for the rehab expenses. My question: I've read that all expenses related to the property owned by the self-directed Ira must be paid from the self-directed Ira. If all the money from the Ira was invested in the property how can you use that money to pay any expenses related to it? Thanks for any insight you might give! Teri
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
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Theresa, you are correct, all of the expenses related to the property must come from an IRA (if you buy it inside of an IRA). However, you don't have to purchase the property all cash. You can get a non-recourse loan. The reason you can not use a conventional financing is because you are considered to be a "Disqualified Person" to your IRA and are prohibited to provide a personal guarantee.

There are only handful of lenders specializing in this type of financing and because it is a higher risk for the lender you normally will be required to put 30-50% down.

Here is a list of such lenders that I've compiled over the years that our clients use, hopefully it will be helpful to you as well:
https://www.biggerpockets.com/blogs/2810/50272-lis...

There are also private lenders you can find locally (might be helpful depending on the property condition, LTV, speed, etc.) but expect to pay premium for those.

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    10y

    Theresa, you are correct, all of the expenses related to the property must come from an IRA (if you buy it inside of an IRA). However, you don't have to purchase the property all cash. You can get a non-recourse loan. The reason you can not use a conventional financing is because you are considered to be a "Disqualified Person" to your IRA and are prohibited to provide a personal guarantee.

    There are only handful of lenders specializing in this type of financing and because it is a higher risk for the lender you normally will be required to put 30-50% down.

    Here is a list of such lenders that I've compiled over the years that our clients use, hopefully it will be helpful to you as well:
    https://www.biggerpockets.com/blogs/2810/50272-lis...

    There are also private lenders you can find locally (might be helpful depending on the property condition, LTV, speed, etc.) but expect to pay premium for those.

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    10y

    @Theresa Pereira

    If you establish a self-directed IRA to do property investing, then the IRA will be responsible for all expenses and income. This is not you investing in real estate and having access to IRA funds to do so, but rather the IRA investing in real estate. You cannot personally comnigle funds with the IRA in any way.

    The IRA could obtain a mortgage, either from a private lender or hard money lender. The note needs to be non-recourse, as you are not allowed to put a personal guarantee on any debt-instrument for the IRA. The commercial banks that do this kind of lending may or may not be interested in flip transactions, so private money is probably the better option.

    The IRA could also join-venture into deals with someone who is not lineal family.

    If you choose to follow your path of flips, with the use of debt-financing, you will want to find a very skilled CPA to assist you. There are two tax implications involved in what you propose. UBIT applies when an IRA engages in a trade or business (i.e. flipping). The use of leverage triggers a 2nd tax known as UDFI.

    A simpler strategy may be to use the IRA to be a hard money lender to other folks who are out flipping houses. This would create passive interest income with no tax implications and eliminate the need to source debt-financing for the IRA's deals.

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  • Theresa Pereira
    OP
    Bay Shore, NY · Member since 2016 · 6 posts · 2 votes
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    Hi Dimitriy, Yeah I read about that non-recourse loan. So what I'm think I would have to do is use a portion of my self-directed ira to purchase the property along with the non-re-course loan and use the remainder of the Ira for rehabbing...but I would need to come up with that 30-50% deposit for the loan right?
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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    10y

    @Theresa Pereira

    I suggest you contact one of the lenders and discuss your situation with them to get a better handle on the process. But you will need funds to put for a down-payment, then get the loan to acquire the property. Then you will need funds to do the rehab. The funds for the rehab could come from the IRA if you have the funds available, or you could potentially finance the rehab cost as well, or bring in a partner, etc. There are some options but you need to work out the details.

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  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
    10y

    Theresa Pereira

    If you are looking to flip real estate inside a retirement account, you may want to consider the rollover business startup 401(k) (ROBS) which will allow you to do real estate flipping without having to pay UBIT. However, specific rules apply, such as the following: 

    Your exiting IRA funds would be processed as a direct rollover to a new 401k sponsored by your new C-Corporation real-estate operating company. The operating company rules in connection with real estate must be satisfied so make sure to work with competent compliance professionals if you decide to pursue the use of 401k rollover funds to finance a start up. To give you an idea of the requirements, at least half of the Corporation's assets would need to be invested in real estate that is directly managed or developed by the Corporation.

    Below is a written description of the steps in a ROBS transaction

    • A new C-Corporation is formed/registered with the secretary of state
    • The C-Corporation sponsors a prototype 401k profit sharing plan that specifically permits plan participants to invest their retirement funds in employer stock (i.e. shares of common stock of the C-Corporation).
    • The business owner and, if the business has full-time employees, elect to participate in the 401(k) plan.
    • The 401k participants elect to transfer former employer retirement funds such a 401k, 403b, 401a, 457b, DBP or IRAs to the newly established C-Corporation 401k profit sharing plan.
    • The 401k participant(s) then self directs the newly established 401k to purchase the C-Corporation’s newly issued common stock.
    • The new C-Corporation uses the proceeds from the stock offering to purchase an existing franchise or to start a new business venture.
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  • Bryan O.
    Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    Also keep in mind that YOU won't be allowed to flip! If you buy the property with your IRA, you are not allowed to go do the work on it. You will need to hire out all of the remodel, so make sure your numbers support that.

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