Can I BRRRR with a self directed IRA?

[Charlie Shew]

I have been trying to learn more about the self-directed IRA because my potential investment money is currently setting in a traditional IRA. I find the BRRRR method most appealing. Would I be able to purchase a home, rehab it and refinance all inside of a self-directed IRA?

I have read a few free books on kindle about the IRA, most are sales pitches for the IRA company. One sounded very appealing but wondering if it sounds too good to be true. They said you can set up an LLC and invest in the LLC, not the rental. This would allow me to remove a lump sum from the IRA (one transaction fee) and transfer into my LLC to spend without needing the IRA company to write the checks.

My disclaimer! I am not looking for a loophole to spend my IRA on other things, I do not want to get into a gray area that could cause me more grief than it's work.

Thanks for any advice,

Charlie

Been listening to the BP Podcast started at Number 1 currently at show 170! Great information!

[Brian Eastman]

@Charlie Shew

Yes, a self-directed IRA or Solo 401(k) can execute the BRRRR strategy.

Keep in mind, this is not you investing in the transaction and having access to the IRA money to do so, but rather diversifying that IRA money into a real estate project you believe will produce better returns for the IRA than current investments do. All activities must be exclusively for the benefit of the IRA and conducted at arm's length. You cannot personally benefit from the IRA such as by receiving income personally, nor can you inject value to the IRA via the provision of goods or services. Basically, you get to be a fund manager and put the money to work.

In the BRRRR strategy, the retirement plan purchases the property and engages contractors to perform necessary work. Once rented, the plan can obtain a non-recourse loan to pull equity and place that into a new plan-held project - thereby projecting the growth curve of the plan forward more aggressively.

Non-recourse lenders will be more conservative on their view of ARV and on the LTV they will issue, so this strategy will be less aggressive than what you can do on a BRRRR transaction personally. That is OK, it is still a great strategy to put retirement money to work that is usually more productive then sitting on a handful of mutual funds.

In an IRA, the usage of debt-financing will create a small tax exposure on Unrelated Debt-Financed Income (UDFI). The concept is that the IRA is receiving income based on the use of non-IRA funds. The tax will not erase the benefits of leveraged returns, but will put a little friction on the boost in return that leverage produces.

If you are self-employed with no full time employees (like most realtors) then you would possibly qualify for a Solo 401(k). While similar in many respects to the Checkbook IRA LLC in that it provides full control and flexibility to invest without 3rd party intermediary processing, a 401(k) based plan will have some advantages such as a narrow exemption to UDFI taxation on debt-financed real estate and higher contribution limits.

There are several providers of such plans including our firm that are active here on Bigger Pockets.  Get on the phone and start asking questions.  You'll pretty quickly get to better understand the strategy and identify which providers just setup plans and who can act a a meaningful guide as you utilize this very powerful retirement strategy.