Managing Self-Directed IRA Rental Properties: Can a PMC Help?

Source: Photo by Keenan Beasley

You may have heard of using a self-directed individual retirement account (IRA) to invest your money and grow your retirement savings. But did you know that you can also use them to invest in real estate?

Alternative investments, like real estate, are a great way to cushion your retirement savings, acquire alternative assets, and diversify your rental property portfolio.

However, if you're thinking about using your self-directed IRA to invest in real estate, make sure that you hire a property management company to do it for you. That’s because IRAs do not allow the IRA owner to manage IRA owner rentals directly. You must always use a third party, often referred to as a custodian or trustee.

Let’s explore the options you have to manage your self-directed IRA homes.

What are Self-Directed IRA Homes?

A self-directed IRA is an alternative retirement account. A financial institution oversees it, but you can choose how you want to use the money and if you want to self-direct those investments. For example, you can invest in mortgages, private equity, and rental properties for monthly income.

This type of IRA is entirely different from a standard IRA, where a custodian dictates the investment types you can own. In that case, they'll usually opt for highly-liquid products such as mutual funds, stocks, bonds, and exchange-traded funds.

Instead, you can pick your investment types—as long as you don't go against tax regulations.

There are far too many prohibited transactions for us to list here. But, in general, you can’t use the IRA to:

- Buy stock or other assets from a disqualified individual

- Lease assets from or to a disqualified person

- Buy stock from a corporation where a disqualified fellow has a controlling interest

Other than that, you’re free to use the money for rental property investment. That sounds great! But how do you manage these properties and what are your property management options?

How Can You Manage Your Self-Directed IRA Homes?

With an IRA-owned rental property, you have to ensure that the management structure allows the IRA to receive the rental income and pay for the expenses. The IRA owner (i.e., you) and other disqualified individuals (e.g., your spouse) can’t be the “middleman” to handle transactions from a personal account and forward them to the IRA.

Instead, here are 3 ways real estate investors with a self-directed account can collect rent, pay expenses, and manage the property properly:

Method One: Manage Directly Through the IRA

Through the IRA, you can directly manage where the money coming in and going out goes through the IRA custodian under the direction of the IRA owner. Again, to reiterate, you are not managing tenants yourself and you must manage the properties through a third party.

This method usually involves a lease between the IRA and tenants directly, where the tenant will pay the IRA custodian and have them deposit the amount into the respective IRA. If any expenses are due, the IRA owner will have the custodian provide a written authorization letter to instruct the custodian and have the IRA pay for the expenses.

This method is tedious and incurs multiple fees (e.g., the fee for issuing an instruction letter to the custodian). So, it isn’t the most common nor preferred way of managing self-directed IRA properties.

Method Two: Hire a Property Management Company

The more popular way of managing self-directed IRA properties is through a property management company (PMC) or individual property managers. The IRA will hire a PMC to receive rent, pay for property expenses, and handle other financial aspects—with the cash flow returning to the IRA.

Here’s an example of how it’ll go:

- The IRA will enter an agreement with the PMC.

- Then the PMC will enter an agreement with the tenants.

- The IRA then receives the rental income minus any property expenses and fees charged by the PMC (often a dictated percentage of the monthly rental income).

As always, you should be sure that the PMC or property manager isn’t a disqualified person to the IRA owner. Thankfully, you can easily acquire the professional management help of a PMC to handle your properties.

Method Three: Build an IRA LLC Structure

Finally, you can use the self-directed individual retirement arrangement for a limited liability company structure (or IRA LLC, for short). In this case, the IRA owner is the manager who receives income and pays expenses from a designated IRA LLC checking account.

This method is also pretty standard in the IRA-owned real estate world of investments.

Here’s how it goes:

-The IRA invests in a newly-created LLC and becomes the owner of the LLC.

-The IRA will then invest an amount determined by the IRA owner into the LLC and deposit the funds into an LLC checking account under a bank identified by the IRA owner.

- As the manager of the LLC, the IRA owner then signs a contract for the LLC to acquire real estate. The property should include the LLC name with funds from the LLC bank account.

Finally, the LLC will rent the property, receive rent, and pay expenses from the checking account.

Note that the IRA owns the LLC, which means all the funds in the LLC checking account will eventually return to the IRA when the IRA owner decides to take a distribution.

Get Experts to Handle Your Self-Directed IRA Homes

There are multiple ways to manage an IRA-owned rental property and hiring a property management company is certainly one of the best ways. As long as you implement one of the management methods correctly—you can manage the IRA’s income, expenses, and property without worries.

Venture into your ideal real estate investment with a capable team of managers by your side!

Our team of property managers has decades of experience handling multiple kinds of rental properties. If you have any other questions about self-directed IRA homes, comment down below or for professional guidance.