Self-Directed IRA for Real Estate Investments

[Stefan Shirley]

My wife and I each have ~$100K in our Roth IRAs and we would like to explore individually buying turn key investment properties using a self-directed IRA; however, although I've read quite a bit about this investment vehicle, I'm still a little fuzzy. Is there a step-by-step guide or a particular custodian I should reach out to in order to learn more?

What I think I understand about it is this:

1. Open an account with a self-directed IRA custodian

2. Set up an LLC (necessary or not?)

3. Transfer funds from my Vanguard Roth IRA to the self-directed IRA account (add some reserves for incidentals)

4. Go house shopping and purchase through new account

5. Manage all incoming and outgoing funds through this self-directed account

Am I being too naive with my logic?

[Keith Thompson]

@Stefan Shirley

As  @Carl Fischer says, You have the basics, but I'll add – there is so much more that is possible. The SDIRA/LLC RE investment construct is - HANDS DOWN - the most powerful investment strategy that I've employed in the 30-ish years that I've been dabbling in RE. My wife and I lament that we only discovered this approach in late 2015 – our retirement accounts could have been so much more productive if we only knew about this earlier. But you know the old saying, "the best time to plant a tree was 20 years ago, the second best time is now."

I’ll recommend a book to you that has served me well - The Self-Directed IRA Handbook: An Authoritative Guide For Self Directed Retirement Plan Investors and Their Advisors by Mat Sorensen – the book comes in First and Second editions with the 2nd edition putting more emphasis on Solo401K and legislative updates. I own both of those books and another book on the subject by Adam Bergman titled Turning Retirement Funds Into Start-Up Dreams. There are other authors and titles and I highly recommend that you find one (or two) books on the subject to help you formulate your plans. I preferred the Sorensen books for his matter of fact style the copious Code and case references – I’m a little bent that way and enjoy reading the foundational rules in order to find the language behind the Black and White activities, and just as important – to see where the Gray zones are.

I also used Sorensen's group (KKOS) to set up SDIRA LLCs, with Custodian approved Checkbook Control – because those worked for my needs and Mat seemed to be the guy to do it. But Carl is also right in that using or not using the LLC construct is a choice to be made based on need. Identifying the puts and takes for your situation will require some effort and I highly recommend you work through that. Although it would be great to make that decision right up front, I do not believe it is critical at this juncture. Rest easy knowing that the property(is) can be moved into a subsequently established SDIRA/LLC from the SDIRA Account and vice-versa if the management burden warrants or for other reasons. There is paperwork to do in both instances, but it is a manageable task.

I’ll offer a slightly different perspective than @Larry Fried.  His post absolutely reflects conventional wisdom and general consensus that will keep you clearly in the White areas. However, as @Daniel Dietz points out, there are some White areas and lots of Gray areas where your direct involvement is (White), or likely is (Gray) permissible. I have used Mat Sorensen's group to remain in the White areas, navigate some Gray and to avoid/correct some Black. For example, you can Manage the LLC that invests in RE; you can locate and hire contractors to do the repairs, and can interview and hire a Property Management Company. There certainly are many permissible things you can do. I have looked for and cannot find much case law/Field Guidance/Advisory Opinions/Private Letter Rulings/Prohibited Transaction Exemptions or other information that is helpful as an individual who manages an SDIRA/LLC. The large muscle movements seem rather well covered, but the finer muscle motions are less covered and that's where you will need some counsel from an SDIRA Attorney and from a good Custodian. I concur with Fred's advice about other funding/investment options as well. I like the crowdfunding/syndication options conversationally and know that many have done well in those, but have not yet pursued them myself - yet.

Solid recos from @George Blower, not surprisingly as I see he is an atty specializing in retirement accounts. I echo the benefits of Solo401K as it is my understanding that the IRA account is partially protected in the event an otherwise catastrophic error is made in the Gray/Black areas.

I found the Equity Trust/SmartLand Webinar on SDIRAs and Private Equity investing (previously mentioned in this post) to be a great primer on the topic. I recommend caution though. This approach is spreading and I am concerned that the On-Line-Trading mentality of easy trades and easy gains will lead to too reduced due-diligence and retirement account losses. I have looked into this avenue a bit, and will end up doing more investigation, but have not yet taken the plunge. There are a couple of BP Podcasts that touch on this too and I found those intriguing – but I can’t find my notes on the specific podcasts – a quick search in BP Podcasts shows a couple references:

> Podcast 030: Conservative Real Estate Investing and Starting Out with Kenny Estes.

> Podcast 219: Private Lending, Turnkey Investing, and Crowdfunding Real Estate with Dr. Kenyon Meadows

But there’s a nagging tickle that makes me think - Andrew Cushman – I could be wrong.

I was really attracted to Equity Trust in the beginning of my inquiry into the SDIRA strategy because of their track record and learning library. I would probably have landed with ET but they would not allow checkbook control for my activities, which included auctions. That was a deal breaker. Puts and Takes – do your analysis…

I agree with concerns cited by @Marina  @Marina Wong over the management burden and suggest that it might be lessened through a checkbook control SDIRA/LLC – again, requires a "to do or not to do" analysis. Doing, for me anyway, has meant that owning the RE in the LLCs has followed a rather predictable trajectory in terms of cost and benefit. @David B. has a good take on reducing the complexity while not using an LLC (if I have read that correctly).

This is a complex topic with massive upside potential. Careful consideration is clearly warranted as is seeking out accessible professional help from a qualified attorney and custodian. I emphasize the “accessible” part since I have tried consulting with a high BP profile RE CPA with zero success and I have to let go several attorneys go for various reasons, accessibility and expertise among them.  

I tried to buy some RE CPA consultation time from the BP resource but the contact process was unnavigable – even though I had a reliable counsel structure set up, I just wanted to get another perspective. I gave up after the online questionnaire and documents submission process, several emails, voicemails and a screening telephone call had still not netted a consultation appointment. Knowledge and Expertise is meaningless if you can’t get facetime or even someone on the horn remotely. Don’t get me wrong, few of the experts I use are local and email/phone calls are fine with me - often preferable, but zero traction for that level of effort was simply not acceptable. I just went back to my existing network. There’s a saying I heard from Robyn Thompson in a bootcamp – Excellence will never be realized when Mediocrity is acceptable – how very true.

– Best of luck with your decision process and I wish you much success.