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Invest in Real Estate using a Self Directed IRA (SDIRA)

· Syndication,Retirement,Investing,Self Directed,SDIRA

*Disclaimer: I am not a finance or tax professional, contact your own tax professionals before attempting to do this.

Before getting into syndication I was in real estate. I knew what syndication was but hadn't dealt with it specifically, to learn more about it I thought I would invest in someone else's deal. The problem I had was that I didn't have any cash... I called up a bunch of syndicators that I had been following for a while to learn about my options and then one of them asked if I had any money from my W2 job in a 401K or IRA, the answer was YES.

I thought about this for a while. I knew that in my regular 401k my options were limited to what the brokerage account would allow, in my case this was stocks, bonds, mutual funds and the like. I wanted something that I felt as though I had more control over and being in real estate I knew that I wanted to invest more money into this asset class. I saw control in knowing the type of real estate - multifamily, office, commercial, etc. my money would be invested in, the location, and I would know the person who was controlling the asset(s). I found my option to be a self directed IRA.

What is an Self Directed IRA?

A self directed IRA / SDIRA is a type of retirement account that allows a person to invest in other investments that may not be typical. This account can be traditional or roth and allows you to invest for retirement on a tax advantaged basis. Some of the alternative investments include:

  • Real estate (investments only and not that you personally control)
  • Crypto
  • Private equity
  • Buying a business
  • Tax liens/deeds
  • Private lending
  • Precious metals
  • Notes
  • Mineral rights
  • among other things
Many individuals have the ability to transfer money into a self directed IRA from their accounts such as 401k's, SEP's, IRA's, etc.

Do the Research

This isn't a difficult process but it does take some time to do.

First you need to do the research and find a syndicator / asset manager that you trust. This syndicator should be someone or a group that you have been following closely for a long time. You want to know everything about their investment philosophy. What they invest in should be exactly what you want to invest in and the type of real estate that you trust. This is your retirement funds you are investing, know who you are placing it with.

Second you must find the intermediary / custodian to put your money with. An intermediary is a company that you put your funds with prior to them being invested. This is just like the brokerage company your money is with when you invest in stocks but in this case it would then be invested in the syndication.

When looking for an intermediary there is a lot to look for. You need to find someone reputable, that can complete transactions quickly and easily for you. Look and compare the fees that each company charges, just like when investing in mutual funds, make sure that the fees aren't eroding your gains. Talk to the representatives and find out the type of account that would work best for you. Also speak with your own trusted professionals before committing to any one company.

Note that some custodians offer self directed options and you may not need to find a new custodian / intermediary.

Converting Your Account to Self Directed

After you have chosen an intermediary company and syndicator they will walk you through the process of transferring your money. This includes selling all or a portion of your current account, having a check cut to the intermediary (not to you, you don't want to pay tax on this money). Although the rule is 60 days to deposit the rollover money into the new tax advantaged account I find it easiest to have the money wired over direct. Then you will fill out some paperwork telling the intermediary what investments you want your money to be in. All in all this is an easy step to go through, it does take some time and patience though as you are working with a few different companies to get everything set up.

Benefits of Investing your IRA in Real Estate

This is an opinion but I would argue that real estate is the best long term investment out there. When buying quality real estate you stand to gain equity, appreciation and cash flow through the life of ownership. Also in many instances the returns generated through RE are higher then other investments once you add in the equity and appreciation. Real estate is a huge builder of wealth and a great way to fund your retirement. Real estate uses leverage so when you invest in RE deals you are gaining a return on the value of the property despite only paying ~20% (plus closing costs and reserves) for the property. As your equity grows you can continue to roll this into new investments and grow your retirement portfolio.

Note that when investing in real estate with your self-directed IRA you can’t be involved with the management of these investment properties (there are other disqualified individuals as well, look at the IRS website for additional information).

Alternative Options

As with everything there are always other options.

Some people opt to use an IRA LLC opposed to using a custodian. Opting to go in this direction you may save some money on fees and also be able to save time on potential delays. When going this direction you should have a better idea of the investment process, you possess checkbook control, manage your money and make the investments directly.

The other option is the Solo 401k. This is another option for investing your retirement funds in alternative investments like real estate. The limiting factor with this is that it is only an option for small business owners without employees.

The Solo 401k also gives you checkbook control but the funds are held with the intermediary. This type of account also has the benefits of:

  • Higher annual contribution limits
  • You can invest in life insurance
  • You can take a loan against a solo 401k of up to 50% of the value up to $50,000
  • You can invest in an S Corp
  • Roth component is non-income restricted

Again, I am not a tax professional but I believe that partnering with a quality asset manager / syndicator like RYDON Asset Management is one of the safest and best investments you can make. The option to be able to invest retirement savings opens up real estate to many people that may not have the cash liquid or those that want to diversify their retirement accounts. Real estate is a real asset and has the power to create generational wealth for those that search it out and invest in it and that is good for your retirement.