Loans vs. Property in SDIRAs

[Matthew Paetz]

Originally posted by nationwidepi:

Originally posted by Mathew Paetz:

start buying properties using my SDIRA [/quote

I wanted to thank you for your advice. If you dont mind taking a second and explaining why making loans rather than investing in property is a better option?

[Jon Holdman]

I've split the two posts above from another thread to avoid distracting from the topic of 2010 goals. The two posts above are out of order since its really Matthew who's asking the question, even though its in response to Will's post.

I've investigated this quite a bit and come to the same conclusion as Will. There, IMHO, two reasons.

One is that making loans with IRA money is simple, efficient and lower risk. You make a loan and get a deed of trust. You get payments. You get a payoff. You avoid the ugly unrelated business income tax. You (mostly) avoid the risk of needing to spend money you don't have. That is, if you own a property in your IRA, and its needs a roof, only the IRA can pay. If the IRA doesn't have the cash, you are completely stuck. You cannot put in your money, or pay for it yourself. Nobody's going to loan your IRA the money. So, you're forced to sell a damaged property.

Second is that buy and hold real estate only really makes sense with debt. If you're paying cash, its really tough to find a deal good enough to give you better returns than making loans. OTOH, if you can finance your rentals, your cash on cash return can be good enough to be interesting. But getting debt in an IRA is difficult, expensive, and typically requires 35% or more down. Further, the fraction of the profits from the debt financed part is subject to the evil UBIT. Even worse, that fraction is very likely to increase over time because your basis decreases (because of depreciation) faster than you pay down the debt.