Using self-directed IRA to purchase buy and hold properties

[Ryann Kluthe]

I would like to learn more about the use of an IRA for the purchase of buy and hold properties. Are these properties held in an LLC that your own or in your personal name? Can you use these funds for any property, whether it be single family or multi unit/conversion, or does it need to be an approved property? My cash flow from this property would go back into the IRA correct? If we need any repairs or updates would those come from the IRA? How does this work if I use funds from my IRA for a down payment and take out an a loan for the rest? Would my mortgage payment come out of the IRA? How does that work when it comes time to taxes and write offs?

Out of curiosity, what did you pay to set up your self-directed IRA and how much do you pay annually?

[Brian Eastman]

@Ryann Kluthe

A self-directed IRA can be used to diversify your retirement savings into real estate such as a rental. The key thing to keep in mind is that this is about the IRA investing in real estate rather than investing in stocks - not you investing in real estate and getting to use your tax-sheltered IRA money to do so.

All aspects of the investment are conducted via the vehicle of the IRA (which can take a few formats - more below). The IRA owns the property, pays for all expenses of acquisition and maintenance and receives all income. Of course, the income is tax-sheltered into the IRA, just as income from stocks/funds is sheltered.

An IRA may invest in any kind of property and you will choose the investment. We have clients investing in land, single-family rentals, commercial complexes, apartments, etc.

You may invest in property using the services of a self-directed IRA custodian or 3rd party administrator. In that model, the institution holds the funds, signs every document, pays for all expenses and receives all income. They are the processor for the IRA, following your instructions. This works OK for more static deals like buying into a syndicated apartment deal, for example.

For direct ownership of rental property, having such a self-directed IRA invest into a specially formed LLC is generally more efficient. The LLC is owned by the IRA but you can be the manager and direct the affairs of the LLC without needing to go through the custodian for each and every interaction with the property. This is called a Checkbook IRA. This can also be done in a Solo 401(k) plan if you are self-employed with no full time employees.

An IRA may use a mortgage. The loan must be non-recourse, meaning no personal guarantee from you. The use of debt-financing in an IRA does create a small tax liability via UDFI taxation. This is not a deal killer at all, but something you will want to understand.

There is lots of good info here on BP and several providers are active on the forums.