Self directed IRAs for dummies?

Question

Good morning. As the owner of two investment properties now I'm looking at a third. However cash flow being short I'm looking for alternative means to purchase the property. One of those that I've looked at is the self directed IRA in which case by my wife and I would partake.

I get how it works and have no issues with the nuts and bolts of it all. I understand the limitations on things and feel comfortable working within those rules.

What I don't feel comfortable about is WHO to use to handle this transaction. I spend time at a class offered by Vantage here in Phoenix. I will likely go back and take one of their other workshops also. The real issue for me is this: how do I know they are on the up and up? Has anyone done business with them here that they'd care to talk about? Their management fees seem ok (not cheap, but I get they need to make money too) but I don't see any controls on it that limit them from raising fees in a year or two. Do you negotiate a cap on fees for a given time period?

And feedback on the basics here and Vantage in particular would be greatly appreciated. Thanks for your time.

David Beard · Answer

Holding rental property in a normal SDIRA will be a major PITA, with all the money flows having to go through the custodian, with all the inevitable delays and frustrations.  The SDIRA providers are completely unobjective because these types of plans are their bread and butter.

I would highly advise going with either the checkbook IRA/LLC, or the solo 401k.  The latter is actually better, but you will need some sort of business (it can be a very small business, so anyone can meet this criteria with minimal effort).

Cost - both can be set up for $400-600 one-time fee plus ~ $150/yr administrative costs.  However, if you use the LLC you will also have initial and annual LLC fees if applicable in your state.

Checkbook Control - both have it, run out of your local bank

Loans from the account - not allowed with the IRA, up to 50k from the solo K (can be used for any purpose whatsoever)

UBIT on loans made to your plan - applicable for the IRA, NOT applicable for the solo K

IRS concerns - SDIRA providers frequently say that the IRA/LLCs may be "shut down" by the IRS, and even though this is a doubtful claim, you hear nothing of this regarding solo K's

Contribution limits - won't get into, but solo K is generally better

Rollover capability - you can roll over qualified plans into either the IRA/LLC or the solo K, no difference.  These include old employer 401k's and 403b's, lump sum payouts from pension plans, and of course IRA's.

Note -- I just set up an account with http://www.mysolo401k.net, and can't say enough good things about Mark Nolan and the folks there.  They can open either the soloK or the IRA/LLC for about the same price, and I have no affiliation with them, just happy with the experience. :)

Jon Holdman · Answer

Todd Cook there are quite a few posts discussion different custodians.

Fees are an issue.  I'm in the process right now of moving my last investment out of Sterling Trust/Equity Trust over to IRAServices specifically because fees.  A few years ago, other stuff was moved from Trust Company of America to IRAServices, again, because they raised their fees.

I think owning real estate in an IRA is a bad idea, for several reasons.  Real estate is often more profitable with leverage.  But leverage is hard to get inside an IRA.  And if you do get it then you end up paying UBIT.  And if your IRA runs out of money to do some major repair you're really stuck.  You either have to keep significant cash in reserves in case there's a problem or just let the property sit in disrepair.

I thin there are better uses of IRA funds for real estate.  Lending from the IRA, in particular.

Eliezer Davidson · Answer

You can get a checcbook ira.

The way this works is, an LLC is opened for the IRA and the IRA ownes all the shares, so there is no prohibited transaction.
The LLC can then purchase the real estate directly and you don't have to deal with the custodian.

Jaime Raskulinecz · Answer

Disclaimer: I own a self directed IRA firm.
We haven't raised our annual asset admin fees in over 2 years. As with most things, I think the adage is true that you get what you pay for.  In our case, you get a lot more than you pay for. Our customer service is second to none.
Regarding single member LLCs, they are a viable option. However, we find that most investors aren't familiar enough with the IRS regulations to keep themselves out of trouble.
One of the benefits of owning property directly in the IRA is we can help keep you within the guidelines in order to protect the tax advantaged status of your account.
Once someone invests their IRA into an LLC we no longer know what happens within the LLC. 
Did you know that if the LLC applies for a credit card and the IRA owner signs for it that it is a prohibited transaction?
There are many things that seem harmless and really aren't.

Jaime Raskulinecz

Todd Cook · Answer

Thanks for the replies. I shall digest it some more.

Michael B. · Answer

Hey Todd,

I tend to disagree with Jon on this subject. I think real estate in an IRA is a very good idea. I have 1 house in my SDIRA, and plan to add about 2 more over the next year.

Specifically Real estate is good for an IRA because owning non leveraged real estate is a relatively safe investment -- the type that should be in a retirement account. It's not that hard to hit 8-10% return in most places not counting appreciation. And I know that folks here pooh-pooh such returns -- getting good returns year after year with low risk is what retirement planning is about. At a time when the risk-free rate is about 2% that's outstanding.

As to lending -- others may disagree, but for me it's too risky for a retirement account. Retirement accounts are about equity preservation and growth, in that order. Specifically there are 3 classes of risk that you run into:

Liquidity Risk:  When you buy a note or lend money there's usually not a way out except for waiting for the payments. Usually the bid and ask for a given not is too wide to contemplate getting out. Real estate, too, has some liquidity risk, but there are a lot more buyers for a SFH than for a note.

Adverse Selection Risk: People borrow from hard money lenders and sellers when they can't go to the bank, and there's often a reason for that. Banks finance the vast majority of real estate purchases in this country. Getting in a position of taking those they reject isn't good.

Governance Risk:  If a deal goes bad its often hard to get your money back. Laws vary across states on what has to happen. There's even some variance between courtrooms. People may think they know what will happen if a deal goes bad, but the number of variables is considerable, and that creates risk.

Successful retirement planning is about minimizing risk while getting good returns. Hits to the principal balance is to be avoided. Retirement savings should be in places that allow you to sleep at night.

As to fees:  There are 2 options. Go with an SDIRA vendor and get relatively low fees at the start and slightly higher ongoing fees. Or go with a vendor that allows an IRA LLC and get clobbered up front, but see lower fees going forward. I did the latter. I'm not sure yet that I made the right choice, but I'm hoping it pays for itself over time.

Pat L. · Answer

The company we used charged an initial setup fee then nothing after that.
It's total checkbook control held @ our own local bank, no custodians, no hidden costs etc
When we find a deal its quick & easy.

Todd Cook · Answer

Thanks Jon. Yes one of my concerns is seeming to be 'stuck' with a custodian and knowing it will cost more time and money to move the account etc. Good point.

I'm reasonably comfortable with the amount of money and figured we'd tap no more than 80-85% of the funds necessary for the purchase and some minor rehab thus leaving a cushion for the future. But I do follow you on a vacancy and that would be bad.

I'll try to read up on other companies here also and see if we find anything or company that seems to take the lead on this field.

Self directed IRAs for dummies?

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