Portland, OR · Member since 2017 · 3 posts · 0 votes
I'm considering using my IRA as self directed to buy my first rental property and I have several questions. I have roughly 25K in a traditional IRA to invest. I'm looking at a turnkey property.
1. If I use the IRA to fund down payment for the purchase how much or what percent should I leave in reserves for the unexpected? I assume I need more than a normal investor in reserve due to needing separation of my personal finance and the IRA.
2. The basic understanding I have is for a self directed IRA or checkbook IRA a custodian company forms a LLC and you get a check book. Then you set up a trust which owns the property? Anyone have experience doing this? if so how did it go?
3.To set up the trust I'm assuming I use a lawyer? Should I consult with a CPA as well before starting the process?
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
8y
@William Harmon, welcome to BiggerPockets and congrats on your first forum post! You are in the right place to learn all about REI including self-directed IRA. Brian provided you with good answers, but let me add couple more things:
Custodian will not form an LLC for your IRA. Their job is simply to hold your IRA assets and follow your investment directions. To create a Checkbook IRA you will need a facilitator company (Brian, myself and few other contributors here on the forum can help you, do your due diligence)
Investment property can be financed in an IRA, you must use non-recourse loan, there is a handful of lenders who specifically offer this kind of loans, here is a list that I compiled, hope you'll find it helpful: https://www.biggerpockets.com/blogs/2810/50272-lis...
Using leverage will result in UBIT on portion of the income of the IRA, not a deal breaker, but you must be aware of this
An IRA must use a non-recourse loan. The banks that regularly offer such loans will typically require 30-40% down, 10-15% in reserves, and will lend a minimum of $50K. These banks will not be interested in your situation.
A private lender may be willing to accept a more aggressive LTV and lower loan amount, but would that really be a secure investment for them?
Generally speaking, when you have debt-financing in place in an IRA (where you cannot bring outside capital into the vehicle), you want to have 4-6 months of holding costs (mortgage, insurance, property taxes, etc.) as contingency capital within the IRA.
Your understanding of the vehicle also begs questions. An IRA will invest into a specially formed LLC. That provides you with the role as manager and signing authority on the LLC checking account. A secondary trust is not typically used, but could be. That would create an additional administrative layer and cost that likely exceeds the benefit provided on a single low dollar investment. With a half million dollar IRA holding multiple properties, perhaps that might make sense. Good landlord/liability insurance is generally effective.
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
8y
@William Harmon, welcome to BiggerPockets and congrats on your first forum post! You are in the right place to learn all about REI including self-directed IRA. Brian provided you with good answers, but let me add couple more things:
Custodian will not form an LLC for your IRA. Their job is simply to hold your IRA assets and follow your investment directions. To create a Checkbook IRA you will need a facilitator company (Brian, myself and few other contributors here on the forum can help you, do your due diligence)
Investment property can be financed in an IRA, you must use non-recourse loan, there is a handful of lenders who specifically offer this kind of loans, here is a list that I compiled, hope you'll find it helpful: https://www.biggerpockets.com/blogs/2810/50272-lis...
Using leverage will result in UBIT on portion of the income of the IRA, not a deal breaker, but you must be aware of this
I don’t think your first rental property should be done in your Ira. There is much to learn in rental buy and hold real estate not to be complicated with self direction. Do you own your own home? Using self directed qualified plans is more of an advanced strategy when you have your buy and hold process defined and implemented. There are generally no tax deductions with mistakes when using self direction. Finding the right property/turn key company, having the right forms, have your team in place, financing, leasing, management, repairs, insurance, taxes, etc.
great answers from @Brian Eastman and @Dmitriy Fomichenko to put into your “to do list”. I’m not trying to be a negative Nellie but Rome was not built in a day. Real estate in general is a get rich slow process. One property at a time. Good luck.
Investor · Jacksonville Beach, FL | NYC | Tamarindo Costa Rica · Member since 2014 · 182 posts · 130 votes
8y
I would definitely be careful using an IRA if you only have 25k to work with, because you definitely need to have funds available for the unexpected. I also suspect getting a loan will be more difficult since the bank will want to make sure reserves are in place.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
8y
We (two partners and I) own 13 of our 25 units in SDIRAs or SOLO401Ks. You are getting some great advice above about the 25K being too little to do a good job of starting.
What COULD work is to find one or more like minded people who ALSO want to do what you are doing and partner with both of you using SDIRAs or SOLO401Ks. That is how we did our first and every unit since them. We each put in 1/3..... mostly because the concept was new to us, and we had all partnered on 'cash properties' before, so we thought we'd try it out together.
Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
8y
@William Harmon
It may be best to purchase the property directly through a self-directed IRA instead of an IRA LLC. A company that offers self-directed IRAs is IRA Services Trust Company. They are well priced especially for being the leader in this space.
The IRA LLC is often used for creditor protection; however, IRAs are already fully protected from creditors in the state of Oregon.