All Forum Posts by: Doreen Chaisson

When you borrow with your IRA, you will need to work with a lender who will structure their loan as a Non-Recourse Loan. There are a few we've identified - most will require 30% or more down, and most will only do 3 - 5 year ARMs. Some have restrictions on the types of properties they'll lend on. They'll also require you have a cash reserve in the account in the event you lose rental income. The mortgage payments are made by your IRA.

When you use leverage to purchase an IRA property, the income generated by that investment property will be subject to a tax called UBIT - Unrelated Income Business Tax. You'll need a CPA to calculate the impact this will have on your ROI, but roughly the income attributable to the leveraged portion will be subject to this tax. For example, iIf you finance 40% of a purchase, roughly 40% of the net income will be subject to UBIT tax.

You don't have to take Required Minimum Distributions until age 70 1/2, so no decision relative to selling or keeping the asset has to be made at 59 1/2. That's merely the age at which point IRA distributions can be taken without an early distribution penalty.

Many Self-Directed IRA custodians will allow traditional investments as well as alternative assets. You need to keep some in reserve for repairs, expenses and property taxes related to your RE investment. But you are free to invest returns, for example rental income, in other alternative assets (private equity, private debt, crowdfunding opportunities, etc) or in stocks, bonds and mutual funds. Most custodians will pay a modicum of interest, as uninvested cash is held in a money market account with FDIC insurance (cash only).

Welcome to Bigger Pockets!  This topic is discussed frequently on BP.  Check out posts by @Dmitriy Fomichenko, he has lots of good info on Solo(k) investing.  

There are many Self-Directed IRA custodians out there. It is advisable to do your due diligence and ask about such things as how long have they been in business, are alternative assets their sole focus, are they BBB accredited and rated, are they a regulated financial institution, have they ever been sanctioned by any regulatory bodies, how many accounts and how much in assets do they administer? What's their technology platform like, is it user-friendly or offer any self-service features? Do they allow electronic signatures and document uploads, as opposed to wet signatures and hard mail or faxing? And , as Joseph mentions, will they accept Single Member LLCs?

Brian is right, single member LLCs came under regulatory scrutiny back in 2009, due to abuses that were being discovered in these so-called "checkbook control IRAs". People were transferring IRA funds into their LLC's bank account, which the IRA owner has control of, and then using those funds for personal benefit: to funnel money to their own company, to pay personal expenses and so forth. There was no control, oversight or reporting. As a result, many IRA custodians will not accept them as investments.

However, some custodians do allow them; they will require that you appoint a special advisor, such as a licensed attorney or CPA, to review the transactions of the LLC to be sure you are not running afoul of any IRS prohibited transactions. That special advisor role must be called out in the operating agreement, and some custodians will have something like an "engagement letter" that the advisor has to sign, acknowledging he/she is familiar with IRS law pertaining to prohibited transactions, and agrees to review each LLC transaction for compliance.

The only true difference between using a Self-directed IRA and a Solo(k) when it comes to investing in real estate is that leveraged real estate held in a Solo(k) is not subject to UBIT tax on any income earned. Otherwise, the process and the prohibited transactions are the same across the board.

Solo(k)s do offer higher contribution limits, but the salary deferrals are tied to the income you earn in that qualifying business. I've seen people suggest you can have a Solo(k) by doing something as simple as setting up an LLC for selling items on CraigsList or Amazon. While this may be true, the salary deferral you would be eligible to put into that Solo(k) would be tied to the income you earn in that LLC - you can't take earnings from another fulltime job and claim them as salary deferrals into your Solo(k).

Because of this, most people fund the bulk of their Solo(k)s with rollovers from other existing plans. 

There are many different companies to choose from when deciding which IRA provider will help you invest your retirement funds into real estate. What often gets overlooked is the type of company you are choosing. IRA providers can be put into three separate categories: Custodians, Administrators, and Facilitators.

Custodians are the first type of company, and are usually the most common. They're either a bank, credit union, or non-bank custodian approved by the IRS (usually a broker dealer who obtains IRA approval). Custodians are permitted to custody assets held in an IRA under IRC Section 408(n). They're also subject to strict regulatory oversight at a State or Federal level. Custodians tend to take a more conservative approach when reviewing alternative assets for investment, as they want to avoid the custody of any assets that may be involved in prohibited transactions. Alternative Asset custodians cannot give any tax, legal or investment advice, cannot assist with the structure of an investment, and cannot endorse, promote or align with specific investment sponsors.

Administrators are the next type of company. Essentially anyone can be an administrator, and their main function is to perform administrative functions only. Because of this, they also need to have an identified custodian for the self-directed IRA named in the account disclosure documents. Administrators are only subject to regulation if required due to profession (CPA or attorney), not for role as administrator. This allows administrators to be much more liberal in accepting assets and allows the ability to align with investment sponsors. Review fee schedules carefully – there may be separate charges for whatever 3rd party custodian they are using.

The third company type is a Facilitator. They educate investors on the process of self-directed investing or assist in setting up single-member LLCs for either "check-book control" or to purchase a franchise or ROBS (Roll-Over Business Startup). They may also provide administrative services for the LLC. Like Administrators, Facilitators must have an identified custodian for the self-directed IRA and are only subject to oversight on a professional level. They are also much more liberal in accepting assets and can align with investment sponsors. Again, review fee schedules carefully – there may be separate charges for whatever 3rd party custodian and/or administrator they are using.

So when you're looking for someone who offers a self-directed IRA, make sure you know the type of company you're dealing with. This will help when determining which company best fits your investment scenario. Do your due diligence and ask about such things as how long have they been in business, are alternative assets their sole focus, are they BBB accredited and rated, are they a regulated financial institution, have they ever been sanctioned by any regulatory bodies, how many accounts and how much in assets do they administer?

Have you contact North American Savings Bank?

You may also want to consider a crowdfunding type investment like Prosper does, which allows you to invest your funds across multiple notes for varying amounts, at varying risk levels and interest rates.   Depends on your personal risk tolerance.