Self-Directed IRA Hypothetical Question

[Jay Kaltenbach]

Buddy of mine asked me this the other day so I thought I would throw it out here for some responses.

You have $500,000 in a self-directed IRA account and you are looking for the best possible investment/investments to grow the account (minimum of 15% per year) in the next 3-5 years.... What do you do?

1.) Purchase an income producing asset (multi-family) and hire property management to run it?

       => This does not necessarily grow the account but could provide steady income in addition to owning the asset?

2.) Purchase a vacation rental property and, again, hire management to oversee it?

      => Same scenario as #1?

3.) Look into ground up development (1-4 units) and sell them off.....or keep as Airbnb properties.

4.) Private money lending?

5.) Any other suggestions?

This probably creates more questions that need answered, and I wasn't sure what to tell him, hence my post here.

Thanks in advance for your input

[Justin Windham]

@Jay Kaltenbach

That's a good question. The answer would depend on the results of running the numbers for each scenario, but I do have some thoughts. Scenario one could work out great as long as the IRA has enough money to purchase the asset. If it does not have enough money, a non-recourse loan can be used, though the UDFI tax and the cost of the related filing would need to be included in the analysis. I would consider this investment to grow the account because the value of the asset is included and the rental income would build on top of that. My thoughts are similar for option two. Option three might generate more earnings but I would prefer passive investments to any that would be subject to UBIT and these have the potential for extra taxation. The fourth option of private money lending can be a solid passive investment for the self-directed IRA. My additional suggestion would be to evaluate the Solo 401k as it would probably work even better than the self-directed IRA for anyone who is eligible. Among other benefits, the Solo 401k is exempt from UDFI tax on leveraged real estate.