All Forum Posts by: Brian Eastman

Cornelius,

The answer will depend on the state of your IRA, but the bottom line is that the IRA is the purchaser on the transaction.

If you already have a self directed IRA held by a trust company, they can help you with the paperwork they need. Vesting would be "XYZ Trust Co: FBO Cornelius Amos IRA".

If you have a checkbook IRA LLC such as we establish at Safeguard Advisors, the LLC is the party to the transaction and would be vested on title.

If you do not have a self directed IRA as of yet, then you will want to work to have one established. An IRA with a mainstream financial services firm will not be able to document the ownership of real property.

In either case, you want to ensure that having the IRA or IRA-owned LLC take title does not disrupt the existing financing so you can continue with the subject-to deal - just the same as if you were conducting the deal outside of an IRA.

AND NOW FOR THE KICKERS

The underlying financing must be non-recourse to the IRA. This means you cannot put a personal guarantee on the note and the underlying security is just the property itself. Using leverage in an IRA also introduces tax exposure through Unrelated Debt Financed Income. This is not a deal killer, but certainly something you want to be aware of from an administrative perspective.

If you are working with an existing self directed IRA, I would need to refer you to your provider or your tax advisor for additional details.

If you are interested in establishing a new self directed IRA, feel free to contact me and I'll be happy to provide more detailed guidance offline.

Naveen,

I would strongly recommend against this. Such a quid-pro-quo deal is simply inserting someone who is not a disqualified party to your IRA as a means to indirectly use your own IRA capital to benefit yourself. The IRS could easily see this as a transaction by each of you designed to benefit yourself, and therefore disqualified to your respective IRA accounts. The risk they find out is low, but the penalties are so severe if they do that it is simply not worth it.

@Scott Trench,

You really created a lively discussion with this question.  

I am a strong proponent of using the gift of tax deferral to grow retirement wealth.  Because the contributions you make a 401(k) are pre-tax (or potentially Roth), and because the investment gains are generally not taxed until you take distributions in retirement, the amount of wealth you can acquire is significantly boosted.  Think of the tax sheltering in the same way you would leverage on a real estate deal - it supercharges your cash-on-cash returns.

The comments about employer matches are spot-on if you work for an employer.  Free money is good, period.  If you are the employer, and have no employees, a Solo 401(k) is a wonderful tool as well.  

With a self directed Solo 401(k), you can have the best of both worlds - the ability to set aside income into the plan on a tax deferred or Roth basis as well as the freedom to invest in real estate and achieve the types of superior results we all like to brag about here on the BP forums.

Many of my clients have a 401(k) through their employer as well as a Solo 401(k) sponsored by their personal real estate business.  They contribute just enough in the employer plan to max out the employer match, and then defer some of the income they receive from flipping houses personally into their own Solo 401(k), thus reducing their tax exposure in that enterprise.  The employee contribution limit of $17,000 for investors under age 50 or $23,000 is split across the two plans, but the Solo 401(k) can accept profit sharing contributions independently of what may be occurring in the other plan.  The icing on the cake is when they take the tax-sheltered funds in the Solo 401(k) and put those into passive real estate investments such as rentals or notes.

I must, however, throw a bit of cold water on comments touting the benefits of taking a loan from your 401(k) or other qualified retirement plan in order to invest in real estate.  The factor most folks miss is that you are giving up on the initial savings achieved when you made pre-tax contributions to your 401(k).  Sure, you can borrow from the plan without taxes or penalties at a low interest rate, but you are repaying the loan with after-tax dollars.  If you are in the 28% tax bracket and borrow $50,000 from your plan, it effectively takes $69,000 of new earnings to repay the note - not including the interest.  Most hard-money lenders charge a lot less.

If you could offer advice to an investor looking to move their funds from the stock market and into real assets, such as real estate, what would it be and why?

It looks like most of you here are investing in real estate over stocks. Are you diversifying your investments within real estate? If so, how are you accomplishing that? Through different markets, rentals and trust deeds, tax liens, or other avenues?

All interesting responses.  Thank you.

I am a principal consultant at Safeguard Advisors, a provider of Self Directed IRA & 401(k) plans that allow a full mix of investments from traditional financial products to non-traditional classes such as real estate. Our clients have a wide range of asset allocation, either just starting out with non-traditional investments and therefore still weighted towards equities & bonds, or like Arlan & Elizabeth here, much more heavily tilted towards real property associated investments.

There is no perfect answer, of course, but one should always be aware of the need for diversification as economic conditions change over time, by location, etc.  Even for a portfolio heavily weighted towards real estate, having various types of holdings, such as a mix of rental properties and trust deeds, in a variety of locations, can provide a hedge against downside risks in one market.

We encourage those considering a self directed IRA or 401(k) for the first time to consider real estate and related investments as a means of diversification. In this BiggerPockets forum, I would expect a tilt towards real estate, but in other networks, we have of course seen investors with an allocation that does not (at least not yet) include real estate.

What percentage of your portfolio is invested in real estate? To create a hedge against loses, it's important to diversify your portfolio with a mix of different asset classes and types. Mixing higher risk investments for short term growth and stable investments that produce consistent income is a solid investment strategy. Whether you invest in real estate, bonds or equities, one should always strive for a well balanced portfolio.