Investing in RE in your IRA, options

[knowbuddy]

Of course everyone here knows you can invest $ in your IRA in real estate by opening a self-directed IRA. The question is, do you think it’s worth it?

For one thing, you have to hire a manager — the property(s) in your IRA has to be “at arm’s length” — you can’t be involved directly. Second, you can only get “non-recourse” loans, which mostly means you have to put down 40-45%, and the rate will be a little higher. So, leverage is difficult and there is added expense.

As such, I’m considering a real estate investment opportunity and I’d like to hear your opinion of it. Basically it’s a company that aggregates investors’ $, buys rundown apartment buildings in LA, fixes them up, and repopulates them with better tenants at higher rents. They leverage with 5-7yr ARMs, with a planned sale of the property at about 5 years out, and about 30% of the gain is projected to come from appreciation (upon sale). They take 1% up front, 1% at the tail end, and $1000/mo for management (these are typically $1-2M+ properties). They promise 6-8% net gains as dividends from rental income, and a total gain upon sale of 12-15%. Their profit starts after the investors get their 6% back, and is 40% of the return above 6%.

Does this sound like a good investment to you? If so, why? If not, why? And what else would you recommend for an IRA?

Many thanks!

[(former)FormerSanDiegan]

There are tax advantages to owning real estate outside an IRA.

I think the only reason people consider owning RE inside an IRA is when they do not have enough cash outside their IRA to do it.

Inside the IRA if you want to diversify into real estate use REITS or Real estate ETFs. Consider the Rental REIT index ETF: REZ. It maybe a bit overpriced as it has had a nice run the past couple of years. But, it pays a reasonable dividend and will presumably grow as rents grow.

[(former)FormerSanDiegan]

As to investing in a company that aggregates investor pools to rehab aparments …

Who regulates this investment ?

I assume this is probably a privately-held joint venture of some sort. Maybe a lmited partnership.
Before going down that road, I would want to be more educated in real estate, finance, liability, and the mechanics and pitfalls of various forms of partnerships.

Investing in a single company like this can be risky. Personally I think it’s less risky to invest in regulated financial instruments (e.g. funds and ETFs) that trade on the stock exchange or purchaing individual properties myself.

[knowbuddy]

All good points… You’re making me lean toward buying a single property in another city, say one where a sibling lives or an aunt, so they can either live there or at least manage it when necessary. There seem to be opportunities to net 10% or more with a decent rental property in some markets. It could be more work, but if the ish really hits the fan, having a house to live in will be a heck of a lot more important than having a diversified portfolio.

[La Jolla Renter]

You could lend hard money at 3pts and 12% to guys that are flipping properties with a 120 day turnaround. (so about a 20% annual return) At 75% loan to value, it is pretty secure if you get with guys that have a track record of getting properties cheap and do a good job doing quality fast rehab on the cheap.

I have been using Sterling Trust out of Texas for my self directed ira. Anyone have an alternative that they are really happy with. Sterling takes longer than I would like scrutinize my investment structures.

[carlsbadworker]

I won’t consider it mainly because it will result in poor asset allocation.

[SD Realtor]

knowbuddy the example you originally posted about is common with many investment clubs. They have them pretty much all over the country in many cities. Understand that it is difficult, and I think impossible to have a self directed IRA and finance a purchase of a property. If you know of a lender that will finance a property that is held by a self directed IRA shoot me that lenders name! What you can do though it buy the property for cash using the IRA. Of course the property including all of the income it generates along with all of the bills must be paid by the IRA.

I have been looking into that as well and have checked out several organizations that provide self directed IRA’s but man they nickel and dime you to death on fees….

***********

The example you posed above is common for private clubs, investment groups etc that purchase complexes for groups of investors. The pools usually have a minimum of 50k, it all varies. There are two types of investment strategies for these types, value and rehab. The value play is usually done on complexes where rents are below market. The play is that with a minimal rehab, maybe a few thousand per door, you can get rents up and improve vacancy level. Thus you will see a nice yield on your investment. The rehab is more of what you were describing, maybe 5 figures per door, then over the next few years you improve vacancy and stabilize the property. the improved rents will get you a different cap rate and you should be able to flip the property at a significant gain.

Each individual investment is generally run by a lead investor. That lead will get a percentage of income and equity on the flip. These amounts vary by 10-20%. The investors split the rest. Commercial financing is obtained with a 10 year note. Finding assumable notes is possible as well…. The lead also sets the entire project up including how it is run. It is all set forth to the investors prior to them investing.

************************************

I have looked into a few of these clubs, especially in the midwest. The cash flow to investors is alot better then on the west coast but have not done anything yet. Honestly this is pretty bubble like. The apartment sector has been heating up and the refinance issue troubles me down the road. (Many of these projects intend to cash out equity within a short period of time to return equity back to the investors) Prepayment on commercial 10 year notes is an entirely different beast and the investments never quite spell out those costs when they show you their fantastic returns you can get.

************************************

It is all fairly enticing however we have held off and are sticking with what we know which are single family stuff, 4 plexes and under. That way we can commercially finance them. We are also still looking at using ira money for a property but have not yet done so.

[BKlawyer]

Wouldn’t touch RE with an IRA. I’ve stripped off a number of 2 mtgs. which were IRAs in Chapt. 13 BK cases and the holder ended up getting next to nothing after a 3-5 yr. plan. Additionally, with the mortgage fraud/meltdown continuing, I anticipate Congress to change the BK law at some point in the future to allow strip down on 1st mtgs. as well. If you’ve invested your IRA in a mortgage you will be stripped down and get next to nothing.

[bearishgurl]

[quote=BKlawyer]Wouldn’t touch RE with an IRA. I’ve stripped off a number of 2 mtgs. which were IRAs in Chapt. 13 BK cases and the holder ended up getting next to nothing after a 3-5 yr. plan. Additionally, with the mortgage fraud/meltdown continuing, I anticipate Congress to change the BK law at some point in the future to allow strip down on 1st mtgs. as well. If you’ve invested your IRA in a mortgage you will be stripped down and get next to nothing.[/quote]

Thank you for your post, BKlawyer.

When do you anticipate Congress will look into repealing the current BK law (as it applies to lien-stripping on real property secured by a 1st trust deed)?

Would you agree that if Congress DOES take action for BK judges to have the authority to “strip down” 1st mortgages or PM mortgages in BK proceedings that “non-recourse” as we know it will have to end in CA?

And do you see ALL TD’s originated in CA as being “recourse paper” a good or bad thing for the RE market as a whole?

[Kingside]

Investing in real estate with a self directed IRA can make a lot of sense if 1) you buy the property cheap with no financing; 2) the property throws off a lot of net rental income; 3) it is not to much of a headache to manage; and 4) Your IRA is a Roth IRA so that the accumulated net rent and asset appreciation can ultimately be withdrawn, or reinvested and withdrawn, tax free.

[knowbuddy]

Anyone have any experience with this self-directed IRA provider:

udirectira.com

?

[BKlawyer]

Great questions/comments. A SCOTUS case recently came down that said BK judges don’t have the Constitutional authority that other Federal judges have so their decisions are not valid or binding. This hiccup will confound Congress, members of which are not sure where to find their copy of the Constitution for reference since they don’t make decisions based on it. So I don’t think Congress will act until citizens are in the streets with pitchforks and torches (this summer??).
I’ve seen a number of RE scams whereby people invest trust deeds for houses which are rehabbed, sec. 8, etc. I know of one where the proponents neglected to file the trust deeds so all the money invested (many millions) was unsecured (ooops!).
Our Cal. Gov. Crusty the Clown recently amended the law to give relief to those who short sale houses to get around the recourse effect of Non-PMSI 2d mortgages. Problem is, he has no control over the IRS, so even if you are the camel who can fit through the eye of the needle, you still may end up with a substantial federal tax liability.
My crystal ball is cloudy other than no good will come from the Govt. any time soon. Everyone proceeds at their own risk and many will end up on my doorstep.

[bearishgurl]

[quote=BKlawyer]Great questions/comments. A SCOTUS case recently came down that said BK judges don’t have the Constitutional authority that other Federal judges have so their decisions are not valid or binding. This hiccup will confound Congress, members of which are not sure where to find their copy of the Constitution for reference since they don’t make decisions based on it. So I don’t think Congress will act until citizens are in the streets with pitchforks and torches (this summer??).
I’ve seen a number of RE scams whereby people invest trust deeds for houses which are rehabbed, sec. 8, etc. I know of one where the proponents neglected to file the trust deeds so all the money invested (many millions) was unsecured (ooops!).
Our Cal. Gov. Crusty the Clown recently amended the law to give relief to those who short sale houses to get around the recourse effect of Non-PMSI 2d mortgages. Problem is, he has no control over the IRS, so even if you are the camel who can fit through the eye of the needle, you still may end up with a substantial federal tax liability.
My crystal ball is cloudy other than no good will come from the Govt. any time soon. Everyone proceeds at their own risk and many will end up on my doorstep.[/quote]

LOL…

Thanks for sharing your experiences, BKlawyer!

[SD Realtor]

knowbuddy I think I found a good one. http://www.iraservices.com

[knowbuddy]

[quote=SD Realtor]knowbuddy I think I found a good one. http://www.iraservices.com[/quote%5D

They don’t offer solo(k). Automatic non-starter.

It’s looking like uDirect is the best choice so far.

[Author]

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