Need Some Guidance on Self Directed IRA with financing

[Jim Etheridge]

I am looking into the possibility of a self directed IRA for real estate with owner financing. I am trying to decide and gather more information to see if it makes financial sense. I have read about self directed ira and gathered some information but just need a little bit more help to clarify some issues that need further clarification.

I am looking to use owner financing and the deal I am trying to work on would be similar to this. 

• Purchase Price: 20,000
• Down Payment: approximately 4,000 (20%) (Seller needs this to pay back taxes and assessments, attorney's fees)  
• Monthly Rent: 625  (7,500 a year)
• Rehab: Approximately 5,000 would be needed to get property in rental shape (probably will end up being much less but I like to over hedge this for worst case scenario)
• Loan Terms: 16,000 @ 6% 5 year term 5 year amort (payment on this would be 270.66 a month once loan starts)
• I would only pay interest only for the first year of the loan ($772.67 total interest paid for year, would be $64.39 paid monthly) So Really 6 year loan with one year interest only and then just regular 5 year amort for remaining 5 years
• Self Directed IRA Fees That I know about right now: 50$ set up fee and 206 yearly fee

I am trying to decipher if this is worth doing and makes financial sense.  The unknowns I would like to get clarified are the UDFI taxes.  Do you get to take interest deduction, managment fee deduction, property tax, the 27.5 year residential deduction, etc. when calculating UDFI taxes?   I am trying to figuire out my UDFI taxes and  if I have to pay them sense I have financing and I am not clear on it.  Also once the loan is repaid in 5 years do I have to worry about any other UDFI taxes like when I sell the property?  This is the unknown that I am unsure about.

I have always been interested in doing something like this but the oppurtunity never presented itself because of the non-recourse loan affecting the way I usually purchase property. The thought process for me is I could take some money out of IRA for a year, pay the intital investment back into the ira within a year because of interest only loan first year (this all depend on UDFI taxes though). Essentially I would be into the property with no money down after a year and in five years own it free and clear and it would still be producing income that would go back into the ira. I would plan to hold for around 10 years and after ten years hope to sell for around $65,000 (this is pretty safe estimate) and I think that may even be a low number.

In ten years I could potentially turn little to no money into an asset worth 65,000 plus would be adding to the ira each year with rental income.  To me it is a faster way to add to my ira.  I am self employed in real estate so it is hard for me to always add cash to my ira.  Once I sell the property in ten years I would then move the money back to traditional ira and let it sit and hopefully get some compounded interest. 

I am a broker, appraiser, general contractor and already have owned properties in this same neighborhood for the past 5-8 years.  I would just like some real insight on how exactly the UDIF taxes could affect me because that is how I feel the deal could be adversely affected.  If anyone has any other suggestions on how to structure the deal to provide a better financial gain I am all ears (Ex. paying higher interest rate, shorter/longer term, loaning from my ira to myself, etc.).  I do not have to use a self directed IRA to do the deal but have always been curious about this opportunity and if anything I just want to learn all I can so in the future I have a better understanding of it.