Self Directed IRA

[JohnGalt]

Has anyone ever set up a self directed IRA?

I researched these quite a bit a while back.  You can essentially transfer your IRA to be under custodian of a company that will set up an LLC and direct the IRA to invest in that LLC.  You can then use the LLC to invest in things outside of the stock market - in particular, purchasing real estate was what I was interested in.  As I understand it, you could even have the LLC pay you for services you provide it (such as property management) - though I'd think you'd have to be very careful with how you structured it. 

Since most of my assets are in 401k/IRA, I was looking for a way to access it for down payments on property.  I'm less interested in it now that I've started down a ERE/MMM path and my annual savings outside of retirement accounts is going to be about the same as my 401k/IRA contributions - but it still crosses my mind as an option if a deal came up before my other funds are enough to get me into it.

I was just wondering if anyone in this community has done anything like this.   

[Patrick Hagen]

Hello,

Regarding your post below, yes IRA/401(k) funds can be used to purchase and hold investment real estate. You mention the use of an LLC... that is one way to do it however you don't necessarily need an LLC. You IRA can hold real estate directly. That said, a lot of investors do structure their investments through an LLC that their IRA owns (member) and they personally control (manager).

Note however that you should NOT pay yourself to manage the LLC. You personally should not benefit in any way from the investments the IRA (or LLC) takes part in.

I am in the self-directed IRA industry. Please feel free to give me a call if you have questions.

Patrick Hagen
The Entrust Group
636-681-1312

[salmp01]

I have a self-directed IRA.  I was able to move funds from a ROTH and my 401k (at work) into a LLC that I manage.  I set this up two years ago and currently have 3 rental properties in this LLC.    There are all sorts of rules that you need to follow.  For example… I am not able to do any physical work to any of these properties since this could be seen as a contribution to my retirement account.  But so far everything has been going well.  I’ve averaged about 14% return on my investment (from rents) and that doesn’t include any property appreciation.

[JohnGalt]

I have a self-directed IRA.  I was able to move funds from a ROTH and my 401k (at work) into a LLC that I manage.  I set this up two years ago and currently have 3 rental properties in this LLC.    There are all sorts of rules that you need to follow.  For example… I am not able to do any physical work to any of these properties since this could be seen as a contribution to my retirement account.  But so far everything has been going well.  I’ve averaged about 14% return on my investment (from rents) and that doesn’t include any property appreciation.

So do you have a management company handling everything from maintenance to all tenant interactions for you? 

Are you at least able to pick out the properties?  I guess I don't see how that's much different from managing the property yourself or from actively trading stocks in your retirement account - theoretically you're contributing to your returns with that the same as you would be if you actively managed your properties - but then I guess it would be asking too much for the IRS to make sense...

[salmp01]

So do you have a management company handling everything from maintenance to all tenant interactions for you? 

Are you at least able to pick out the properties?  I guess I don't see how that's much different from managing the property yourself or from actively trading stocks in your retirement account - theoretically you're contributing to your returns with that the same as you would be if you actively managed your properties - but then I guess it would be asking too much for the IRS to make sense...

I do the management (showings, tenant interactions, etc) but I hire someone to do all the maintenance.  The way I understand it is that I am not able to do something as simple as swap out a furnace filter but I can act as the property manager and the general contractor when fixing up the property.

I have my real estate license and I chose the properties to purchase.  I just told the seller that could not take a commission so I just negotiated a lower purchase price. 

Another thing to keep in mind is that it gets a bit complicated if you only have enough money to put a down payment on a property.   If you wish to take out a loan you’ll need a nonrecourse loan and these can come at a higher interest rate.  I purchased these properties outright which made it a little easier. 

[arebelspy]

You can collect rent and screen tenants, but almost nothing else.

I've been to a real estate presentation by The Entrust Group (whom Patrick, above, apparently works for).

It seemed solid, and their fees seemed very reasonable.  IIRC it was a flat $250 setup and 100-200/yr?  Not percentage based, which is nice.

Definitely read a lot into it because you don't want to get in trouble with the IRS and start paying penalties.

But it doesn't seem to difficult, you just write your real estate offers in the name of your IRA, care of the entrust group (or whatever other custodian), and they write the check at closing from your account.  Rent checks go to them.  Don't ever mix money.

[salmp01]

I ended up going through Guidant Financial.  They had a package deal and it was 2,000.  That included attorney’s fees, the drafting of my LLC documents, and facilitating moving my money through a trust company to my LLC.  In addition to the 2k I need to pay my trust company (IRA Services) a couple hundred dollars a year.   I have checkbook control so I can write checks and deposit rents directly into my LLC account.   As Arebelspy mentions it’s very important not to “mix” money.   

I looked into going to entrust but if I remembered correctly they had a bit higher yearly cost but I could be wrong.   If you do it just make sure you go with a reputable company.  From my experience I would say that both Entrust and Guidant Financial are decent choices.