How to invest SDIRA funds into a rehab flipping business

Question

Our first post into the community!  Thanks to all for the great expertise, professionalism, and sharing that I've benefited from in the past.

Currently we have an investor with $250k that wants to put SDIRA funds to work in our rehab flipping business for a return of 50% of the profits.  After researching SDIRA's, UBIT, talking with multiple companies (Equity Trust, IRA Services, SunWest, etc.)

I'm still unresolved on the best way to structure the lending/investment of the SDIRA funds in our flip business and would love some real world experience from anyone out there.  Thanks for sharing.

Brian Levredge · Answer

If I'm using a SDIRA's funds for a flip (from an investor), I structure the deal as a loan with a balloon payment.  The balloon represents the expected equity split that the IRA would receive upon sale of the property.

Jamison Luther · Answer

With a last name like Leveredge you were born to work in real estate!  Thanks for the input and you certainly have some expertise beyond our business model.

We're researching the proper way to structure and handle the note.  If you have any professional advisors you use in creating your complex notes that you'd recommend please let me know.

Joey Budka · Answer

Try setting up a self directed IRA LLC. Doing so will give the investor control over the checking account connected with the LLC, which will give both parties more flexibility regarding the structure of the investment into your flipping business. It requires quite a bit of documentation for the setup of the entity. Also, you'll need to consult with a tax attorney and IRA custodian. I recommend going through Guidant Financial if you choose this route. Dealing with a custodian can be tedious, with all the red tape involved in releasing the funds. Its much more convenient and efficient for the IRA investor to setup the LLC so he/she can invest at their own discretion.

Just my two cents... good luck!

Jon Holdman · Answer

What do you mean by "out rehab flipping business"?  Your personal IRA cannot invest in any way in any business you own or control.

Now, if you mean you want to invest the money with a rehabber, keep it simple.  Make a loan to the rehabber.  Payments go back into the IRA.  Depending on the deal, you may make more or less money than a 50/50 split.  But it keeps the deal clean and avoids any UBIT.

Jamison Luther · Answer

Great article from the founder of Guidant regarding SDIRA's.  Useful for this thread in the mention that SDIRA's involved in flipping are probably subject to UBIT:

http://www.nuwireinvestor.com/howtos/how-to-keep-your-self-directed-ira-healthy-and-the-irs-51470.aspx

Also, our 2 investors have personally met with Kaaren Hall of UDirect for the SDIRA setup and had a great experience.  I also had a chance to "interview" her over a great phone conversation and found her knowledgable and responsive.  I'd recommend her to anyone considering an SDIRA setup.

Brian Levredge · Answer

@Jamison Luther - I'm flipping homes a little differently, so I'm not sure that what I do would necessarily work for you.  We purchase REOs, rehab, rent, resell to an investor, and carry back paper for the balance of the equity.  After minimal seasoning, we sell the loan to yet another investor.  In this scenario, I can wrap the existing SDIRA loan (we have a servicer process and make payments) with the new loan, which will be paid off once we sell the new loan.  The other option is to roll equity into the note we create when reselling the property, which will again be paid off once the note is sold.  Start to finish the process can take roughly 6-8 months.  I would also throw in the very big caveat that I'm doing this with friends and family mostly so there is already a level of trust there.

Before I ever close on a property, I know what I can rent and resell for as well as what it's going to cost to fix it up.  That makes it pretty easy to nail down the expected return.  I would also add that loans can be modified once they're made (which costs extra) but it does give you the flexibility to adjust on the go as well.

Jamison Luther · Answer

Will, any recommendations of brokers that would be open to facilitating the note creation?

Jake, I'd love to take you up on the offer and am emailing you now.

Will Barnard · Answer

As Jake mentioned, it can be done.
As to the IRA wanting better than 10%, then a licensed broker must facilitate the transaction (the loan).

Jake Kucheck · Answer

Jamison,

Not totally clear on what you're trying to accomplish, but our funds are set up to and have taken SDIRA money for trustee sale purchases.  Don't know exactly how I can help but I do know we've spent a lot of money with lawyers and CPAs setting this stuff up correctly, so you may want to talk with some of the higher ups here.  Feel free to email me (in signature) if you'd like me to set that up.

Jamison Luther · Answer

Couple issues I'm still working through:

1.) We flip trustee auction homes so cash is needed before there is a property to secure against.

2.) Since it's SDIRA money, it can't be an equity partner and must act as a lender only, which you already spoke to (UBIT)

3.) Usury law's prevent a return higher than 10% in CA for a private lender, but they require a rate higher than that.

Would we have to run the SDIRA loan through a licensed broker to offer a rate over 10%?

How to invest SDIRA funds into a rehab flipping business

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