Self Directed IRA For REI
I see that some co.(name originally inserted has been deleted as illegal advertising) is offering a service to set up investors with an LLC, transfer IRA $ into this LLC to fund investments for real estate.
Here are my questions:
1. For those of you who have used this financing option, what was your experience ?
2. What types of revenues and expenses are legally allowed to flow in and out of this account ?
Any other thoughts would be appreciated, Thanks
Mark 8-) [ Edited by JohnMerchant on Date 04/23/2004 ]
I have seen this done (though I have not done it myself). The essence of the deal I was around ran like this. Guy had $50,000 or something like that in his self-directed IRA. Used it to purchase a two-year option on a big parcel of land. During the two years he got all the approvals and permits to build a shopping center on the land. This clearly added a lot of value and he sold the property to a shopping center developer. A million bucks goes into his IRA tax free. He took a 100K or so out for himself and paid a sizable tax penalty for early withdrawal. But nowhere near the tax bill he'd have paid on the million dollar profit.
I've never used a self-directed IRA but have been researching them. I've found a company which allows the following type of investments to be purchased:
* Real Estate - Including apartments, single family homes, and duplexes
* Commercial property, developed or undeveloped land
* Mortgages/Deeds of Trust
* Publicly Traded Stocks, Bonds, Mutual Funds
* Private Limited Partnerships
* Private Stock Offerings Private Placements
* Private Limited Liability Corporations
* Secured and Unsecured Notes
* Judgments/Structured Settlements
* Tax Sale Certificates
* Car Paper
* Factoring
* Accounts Receivable
* Commercial Paper
* Equipment Leasing
If you'd like their name you can email me.
Shar
For the record, there are several SDIRA (self directed IRA) companies that handle thousands of SDIRAs, and SDIRAs do indeed permit all the investments just mentioned.
Some of those bigger companies in the business are MidOhio (now Equity Trust I believe) in Ohio, Entrust & Pensco. Also I think I've heard that an arm of Sterling Savings also handles SDIRAs.
All the above named have web sites giving lots of info.
This is no endorsement of any SDIRA company, and there are probably others that I don't know about.
I suspect even your local bank can open a SDIRA account for you and that they will be cheaper than any of the above.
I'm less concerned about who does SDIRA, but am looking for those investors who have used this route and what has been their experience (specific rules for cash flowing in and out, paperwork required establish, would they use this method again).
Talking with financial companies and reading their web sites are helpful, but you're getting their marketing spin.
Mark
"I suspect even your local bank can open a SDIRA account for you and that they will be cheaper than any of the above"
Really? Just go try it and you'll learn that your local banker has no clue about SDIRAs, and that's exactly what keeps those few big SDIRA Custodian companies in business.
Is there an IRS ruling or somewhere I can research this self directed IRA for real estate purchase. My accountant never heard of this and I am tired of stocks eating my lunch especially with me setting in Orange County CA where the prices are skyrocketing on homes I had no clue and think this is unbelievable
Out of curiousity, I went to "Google" and put in Real Estate and IRA...go & do the same, and you'll get a great quick education, free, that you can pass on to your accountant...on how & why to use IRA to buy RE.
This is far from new or untested, and the SDIRA custodian companies have jillions of IRA & other pension plan dollars happily invested for their customers.
Actually, earlier this month, an excellent article was written here on TCI and I missed it until today. The article was titled:
"Don't Overlook Real Estate in Retirement Investment Planning"
The article (and comments) get at the pro's and con's of using an IRA's as a financing tool. This was exactly the type of information I was looking for.
Thanks, Mark
Acutally, if you have self directed IRA and use the funds to buy real estate, you don't have to pay penalty. If you have regular IRA, of course you need to pay penaly for funds that you withdraw for REI purposes. I don't have self directed IRA yet, but I have researched some companies that offer this kind of IRA.
This is how I understand self directed IRA. If you decided to buy a property using the funds from self directed IRA, all the costs involved for acquiring, rehabing, or any other expenses for the property have to come from your self directed IRA. Then when and if you make revenue and profits from the property, they have to be deposited to self directed IRA. Of course, when you make withdrawral or deposit, you have to fill out forms and submit receipts and invoicese to document them.
Is that right? Does it mean that the property has to be bought outright?
I've always been itrigued by the SDIRA possibilities. I know they are done, however, I don't personally know anyone who has one. I would like to do one on a small scale if it is practical. I have about $25 K in my IRA and would like to start flipping lots with it. Does anyone know if this would be practical considering the fixed costs with the SDIRA? Are they excessive and would they wipe out any reasonable gain?
I recently joined a federal credit union in NC. I have been layed off and have decided to move my 401k (trustee to trustee) into an IRA account at the credit union. I have been told by the branch manager, I can then role it over one time with no penalty into a self directed IRA. I will be looking into that and I will try to find an accountant who understands what we do and how to direct funds out of the SDIRA into my LLC for investing. I chose a credit union because the are not for profit and the fees are low. Anyone can join credit unions if they jump through the right hoops. I had to join a consumer group first. Just ask a few in your area how you can join. I bring this up for the benefit of those who have 401k s with companies they use to work for. I agree no one seems to have the answers except the big inverstment companies and they charge a fortune to do this for you but in doing it, they prove that it can be done. Can anyone recommend an account in the Raleigh NC area who understands our business? Please email me. Thanks David
A couple comments.
I have done a fair amount of leg work and this and coming to the final choice of trustee/custodian.
The fees are a bit high, but to save 15% (?) if long term gain or more, I think it's work it.
Most of the custodian have schedules of their fees.
The process described above is one way to work it.
You can also buy the lots as an individual and have the IRA "lend" you the money. This way you could get a std. 80% loan from the bank and have the IRA lend you the rest as a 2nd. 100% financing.
Watch that you don't break the rules on "personal benefit" (by say moving into the place)
What I plan on doing, is funding an LLC (liability limitation, and preferential tax rate) with the money from my retirement accounts.
So my IRA could own 100 shares (yes, in CA thay allow LLCs to issue stock), my simple-401k would own 150, and I as an individual own 250.
So if I make 50K on a house, 10K goes to my IRA, 15K goes to to my simple 401k, and 25K is left for me.
This is gross of the IRA/401 fees, and presumes no expenses at the LLC level.
As for self-directed or not, that's a misnomer. SEPs, IRAs, ROTHs, 401k, etc. are all self directed in that the beneficiary chooses what to invest in, subject to the trustee's or custodian's limitations.
99.9% of the places offering these account allow investing in only standard things like stocks, bonds, mutuals, etc. where as other, allow the LLC, private placements, trust deeds, etc.
A couple comments.
I have done a fair amount of leg work and this and coming to the final choice of trustee/custodian.
The fees are a bit high, but to save 15% (?) if long term gain or more, I think it's work it.
Most of the custodian have schedules of their fees.
The process described above is one way to work it.
You can also buy the lots as an individual and have the IRA "lend" you the money. This way you could get a std. 80% loan from the bank and have the IRA lend you the rest as a 2nd. 100% financing.
Watch that you don't break the rules on "personal benefit" (by say moving into the place)
What I plan on doing, is funding an LLC (liability limitation, and preferential tax rate) with the money from my retirement accounts.
So my IRA could own 100 shares (yes, in CA thay allow LLCs to issue stock), my simple-401k would own 150, and I as an individual own 250.
So if I make 50K on a house, 10K goes to my IRA, 15K goes to to my simple 401k, and 25K is left for me.
This is gross of the IRA/401 fees, and presumes no expenses at the LLC level.
As for self-directed or not, that's a misnomer. SEPs, IRAs, ROTHs, 401k, etc. are all self directed in that the beneficiary chooses what to invest in, subject to the trustee's or custodian's limitations.
99.9% of the places offering these account allow investing in only standard things like stocks, bonds, mutuals, etc. where as other, allow the LLC, private placements, trust deeds, etc.
"You can also buy the lots as an individual and have the IRA "lend" you the money. This way you could get a std. 80% loan from the bank and have the IRA lend you the rest as a 2nd. 100% financing."
Be very cautious about borrowing any $$ from your own IRA, as it could be an illegal transaction and might void your IRA.
As I understand the law, it's generally NOT approved to be a partner with your own IRA or borrow money from it (except for 60 days, which is permitted).
The big IRA trustee companies have great websites and well done FAQs that should be read before leaping. They've seen all facets of this & there's not much new to them.
The article mentioned above is located at:
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&articleid=543&mode=nested
I think the problem for most people comes with the "personal benefit". You cant directly send money into anything, you have to direct the administrator to do so. You can't for example use the $4 to buy a primary residence or summer house etc. You can buy a house in Europe however and have the SDREIRA deed it back to you as distributed assets upon retirement
I managed a large SDIRA operation in my prior life and would be happy to answer any specific questions if you want to email me.
The Treasury Regulations only spell out those investments and those transactions that are "prohibited", but do not spell out those that are permitted such as real estate, trust deeds, mortgages, tax lien certificates, tenant-in-common interests, etc. There are only about six national providers that have "entered" this service area. Banks, trust companies, broker dealers, life insurance companies, etc., are not set-up or equipped to administer these types of self-directed IRAs. In fact, most tax advisors have never heard of such an opportunity and will quite often say that "it can not be done" when it has actually been done for many years.
Quote:
On 2004-05-19 00:26, wexeter wrote:
I managed a large SDIRA operation in my prior life and would be happy to answer any specific questions if you want to email me.
The Treasury Regulations only spell out those investments and those transactions that are "prohibited", but do not spell out those that are permitted such as real estate, trust deeds, mortgages, tax lien certificates, tenant-in-common interests, etc. There are only about six national providers that have "entered" this service area. Banks, trust companies, broker dealers, life insurance companies, etc., are not set-up or equipped to administer these types of self-directed IRAs. In fact, most tax advisors have never heard of such an opportunity and will quite often say that "it can not be done" when it has actually been done for many years.
wexeter, would you able to write an article about sdira. We all have great interest in it. I have mine with entrust/midohio. But I still would like to learn more on how that work with LLc/trust. Thanks.