How should I utilize my self directed IRA

Question

I have $200,000 I’m thinking of moving to a SDIRA. Can anyone give me some ideas how to capitalize and a good Custodian?

Bob Ebaugh · Answer

@Gary Parilis

I will say we got lucky.  2014 was a great year to buy rental property.   We too didn't count on any property appreciation.   Just the 7%.    This after 2011/2012 in a PIMCO managed bond portfolio that returned about 1-1.5%.   No way we could retire on that! But the cash return on the properties exceeded our living expenses, allowing normal 401K distributions (we are old enough) to allow work part time on what and how much we wanted.

The 8 vs. 6% difference on non recourse loans looks like a timeframe difference.   We haven't shopped for awhile now.

Yes we do our own property management.   Including taking maintenance requests.  But we farm out the actual maintenance and improvement work to contractors and handymen.  If we farmed out the PM, that would probably take 2% or so off the cash flow.

Counting appreciation, the annual return is about 18% for the 6 full years 2014 thru 2019.   But our timing was perfect.   Today 7% cash isn't possible, maybe 4-5%, nor will we likely see property appreciation rates like the last few years.  But it's the closest thing to a pension we've found, meaning minimal downside risk that would impact retirement cash flow.

Gary Parilis · Answer

Thanks for your thoughtful response. Cash flow is no issue if no mortgage. To me, without leverage, much of the benefit of real estate is gone. I won't count on appreciation, and so equity growth comes from mortgage paydown. If all I'm getting is 6% or 7% CoCR and no equity growth, I'm not doing better than the stock market (though more stable, of course).

8% would be a very high rate. I can get rates below 6%, but with 1.5% fee and at most 60-65% LTV. I also have to put away 6 months expenses in escrow for reserves. All these details vary by lender, but this is about the best deal I can find.

Actually, the ideal situation would be seller financing, but that's hard to find.

Separate question: are you saying you self-manage? You're not permitted to do that under a solo K, right? I know you can't under a SDIRA.

Keith Boley · Answer

@Bob Ebaugh

I am so with you, regarding no to little leverage.

We have several properties outside an IRA and mortgages on only 2.  The process of going through banks was brutal when we had all the credentials, reserves etc.

Our intention of opening a Solo401K, is to purchase cash and/or do seller financing on purchases.

In the decision making process of Solo 401K or not, I ran the numbers today on a property we have outside of an IRA.  I

f I did that same property as a lease option, which is our real estate investing strategy we do on 99.9% of our properties, I would have had huge growth within the IRA, setting us up for tax free money in retirement vs paying taxes on the double digit gains we are going to have on this 1 property, which we have only held for 18 months.

We can hardly complain about making this type of return in or outside of an IRA.

But...Go Growth for retirement in a Solo 401K, is our mantra.

Ive reached out to Brian Eastman here. Prior to finding Brain on BP, I was looking for a true administrator due to fear of messing it up. However, after reviewing his website I must share, the information on there has made me feel with his help, I can make it happen through a checkbook LLC/IRA.

I think others still have the opportunity you tapped into, it is just like all other real estate investing "Buy Right" and we all have the same opportunity.

Hope this helps the OP (Original Poster)

Keith Boley

Roberta Eastman

Taylor L. · Answer

I would suggest you learn about the pros and cons of Checkbook Control IRAs before making any permanent decisions. Also research the Solo 401(k) and whether you can convert.

I agree with Curt that UBIT is largely overblown, but it is a factor to consider, have knowledge of, and have a plan to deal with. If he is using leverage I would wager he will ultimately end up paying UBIT. I am not a tax expert, though.

I have a custodian that has not been great. Not terrible, but also not great. I do not want to put them on blast publicly, but it is not ETC. I have no experience with ETC.

Learn the rules, decide your goals, make a plan, then proceed. The importance of your goals in this process cannot be overstated. How active do you want to be in your investments? What type of assets do you want to invest in? What results do you want your investments to produce?

It's good to get personalized advice from a professional adviser like a CPA. I found that some CPAs think they understand things like UBIT, but really don't. So if you're seeking their advice be sure to verify that they have experience with SDIRAs and the specific investment class you're considering.

Curt Smith · Answer

@Dale Lanclos

Eddy Speed;  LOL LOL!!!!!!   You need $25k (fee) to just get into his "inner circle" where the "good notes" get sold.  The facts are today we are at 40 yr low of notes/NPN/pre forclosures.  Now come 2021 and 2022 its expected that to change back to 2010ish like situation.   But folks;  please be very careful who you pay / learn from.

My criteria for picking a mentor;  they must make 80% of their income from doing their own deals, and less then 20% from education.  Typically this mean local teacher which is who you want, someone in your local REIA.  Find REIAs in meetup.org.  BP is great online but local experts are mostly in local groups/REIAs.  Best to you.

We used our SD-IRAs to buy rentals.  Yes you can own real estate in a SD-IRA.   The unspoken problem with doing hard money  loans (funded from any / all sources including SD-IRA/solo-401k);  very very low deal flow.  Your money will spend 80% or more time in your account NOT in a deal.  There are so few deals to lend on I know private lenders move their cash back into the stock market.  :)   Same problem with buying notes (peforming or NPN etc) is also low deal flow.  The big guys scoop up the better notes and its just junk that ends up in front of newbies.   A $70k note on a 2bed 1 bath in podunk SC 1 hour from the nearest freeway.  Not making this up!

Look before you leap.

Dale Lanclos · Answer

@Justin Johnson

Quest is a good company, you can invest in notes, look up Eddie Speed, Notes Direct and Noteschool are his companies

Bob Ebaugh · Answer

@Gary Parilis

I don't understand the "cash flow" problems with SDIRA investments.   Maybe it's paying the 8% (not sure if that's a current rate) for non recourse loans?   We have several rental properties under a Solo K, but with no mortgages.  Back in the good days (2014) we rolled several IRA's and old employer 401K balances to a solo K and purchased with cash 8 rental properties.  Our target was to cash flow a minimum 7% return.   With 8% non recourse rates, it was the only way we felt comfortable with the risk.Sure we could have tried leverage.  In hindsight with the 15% or so annual property appreciation in our target market, it might have even paid off.   But we like sleeping at night.  Some sleep lost due to the risk, but also some to the headaches of managing 20-24 leveraged rental properties instead of 8.

I'm not sure the normal program of 20-30% down, roll the cash flow into the next deal works since capital isn't freely available to the "pre tax" retirement plans.  It's probably why you see note investing as a popular alternative option.   However, we really favored, for better or worse full control of our financial destiny.   Buying, owning and managing these rentals provided that.

It's an old person's strategy though...you need to have a big chunk of tax deferred funds to work with.   Probably need enough for at least 3 properties assuming you go all in like we did with no other diversified investments.

Gary Parilis · Answer

I've considered it, but my objective is to own properties.The problem with lending is that you have to have a consistent pipeline of borrowers or else your funds sit idle. I'd be interested to know how others manage that.

Taylor L. · Answer

Have you considered getting into private lending or note investing? I haven't done either myself but I know folks who do both in their SDIRA. Both strategies seem to lend themselves well to the SDIRA strategy

Gary Parilis · Answer

One thing to be mindful of, beyond the UBIT issue, is that you can only borrow from non-recourse lenders. There aren't many and the most you'll be able to borrow is 60-65% LTV (and with higher rates than other lenders). Don't even consider this for a BRRRR, because they will generally only lend you that LTV based on the purchase price, not appraised ARV.

SDIRA is still a good way to make use of your retirement funds, but don't expect to get nearly the cash-on-cash ROI you'd get in other cases. In my view, the great advantage of real estate comes from leverage (having tenants pay down your mortgage) -- and you get less of it under your SDIRA. I have funds in a SDIRA and I've had a tough time finding deals that will cash flow enough to be worthwhile.

How should I utilize my self directed IRA

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