Investing in Real Estate in Your Self-Directed IRA

Secrets to Retiring Wealthy and Leaving a Legacy

Gabrielle Dahms, Steffanie Moyers

• Publisher: PublishDrive
• Year: 2021
• ISBN:
  9781733147385
• Topic: Personal Development
• Subtopic: Personal Finance

Worried about financial security in your retirement years? Discover how self-directed IRA can fuel amazing investment returns for you.

Investing in Real Estate in Your Self-Directed IRA: Secrets to Retiring Wealthy and Leaving a Legacy is a transformative guide that focuses on essential insider knowledge about real estate investments in a self-directed IRA. An alternative to Wall Street investing, it shows how to grow your nest egg in exponential ways in an SD-IRA.

This volume of The Real Estate Investor Manuals' series is a must-have manual for Americans and US expats struggling to fund their golden years. If you like simple strategies, personal anecdotes, and refreshing approaches to an often dry subject, then you'll devour Gabrielle Dahms's eye-opening writing.

You'll discover:

How to create a profitable real estate portfolio inside your SD-IRA.

How accumulate retirement wealth.

Strategies for accounts with low balances

The dos and don'ts of SD-IRAs.

How to find the right team.

What resources you need.

Tools for identifying scammers

… and much more.

Set the stage for living your sunset years the way you imagine!

Chapter 1: Supercharge Your Retirement Funds

Start from wherever you are and with whatever you’ve got. -- Jim Rohn

Real estate investing in your SD-IRA

What SD-IRAs are.

Real estate investing in a self-directed IRA (SD-IRA) is the subject matter. If you've never heard of an SD-IRA or thought you already had one in which you can only invest in stocks, bonds, ETFs, and mutual funds, you are not alone. The next several chapters demystify these instruments.

SD-IRAs are specialty accounts, set up by the United States tax code. The term "self-directed" refers to the account holder’s ability to direct which investments the account holds. By that definition, all IRAs are self-directed and that is why your brokerage claims that your IRA with them is just that.

However, regular brokerage IRAs that invest funds into stocks, bonds, ETS, mutual funds, and money markets offer these products only. Because the investor decides which of the options to invest in, they are self-directed. If you ask the same brokerage to invest your funds into all assets permitted by law, the broker will tell you they cannot accommodate this.

A truly self-directed IRA, then, is an account that allows you to invest in assets the law permits. Such investments include so-called alternative investments. One of them is real estate, the focus of this book. Chapters 6, 7, and 8 delineate real estate investment options and how to screen them.

Confusing, huh?

To re-iterate, brokerage houses call their accounts self-directed because the customer can choose which investments to purchase and hold, but only brokerage house products are on offer. The investment options are stocks, bonds, ETFs, and mutual funds.

They do not include real estate investments other than REITs which trade like stocks. For REITs, the investment is in a company, not in actual real estate. REIT investors do not own a piece of the company’s real estate holdings.

Please don’t misunderstand me. Stocks, bonds and mutual funds can serve investors well. Freshly minted millionaires and billionaires emerge from the stock market just as they do from real estate markets. Interestingly, I am unaware of such individuals coming from mutual and bond investing.

One reason the confusion about which accounts are self-directed accounts persists is that brokerage houses make money on the investment products they sell. If you decide to move that money to a custodian that allows you alternative investing, the brokerage house loses your capital and your business, at least to the extent you move assets and money. That clearly lies outside the brokerage house interests. While your broker cannot prevent you from moving your money to a custodian specialized in alternative investments, the broker can resist such moves.

Only IRA custodians (trust companies) who specialize in accounts that allow for non-traditional assets as investments will enable you to take advantage of investing your money into real estate. These custodians are specialty operators who handle real estate, private placement, note investing, and precious metal investing in your IRA.

Unlike brokerage houses, custodians make their money with fees on the account and the transactions. They have no products to sell, meaning they receive no commissions on the investments you choose for the accounts. However, in recent years, custodians like Equity Trust have shown companies that offer investments to their clients on their website. They may well get some compensation from those companies once you direct an investment to them.

Back to a self-directed IRA that accommodates real estate investing: truly self-directed IRAs allow investors to hold assets such as

➢ Multi-family properties

➢ Single-family homes

➢ Tax liens

➢ Land

➢ Mortgage notes

➢ Businesses

➢ Private Placements

No matter which of these options the investor chooses, it must be for investment. The IRS has specific rules on what qualifies as an investment and what does not. That means you cannot own your own home or the home of anyone related to you in your self-directed IRA.

The United States government, specifically the IRS, also protects against anyone going after these accounts. Predators cannot obtain judgments against these accounts. SD-IRA accounts do not appear in public records. Maintain the integrity of your SD-IRA by taking title correctly, which means never taking title to any asset in your own name. Assets are titled to the account, not to you.

After I just told you this, please be aware that your state may have laws on the books that affect how safe your SD-IRA is to protect you from creditors and judgements. Although custodians may be an initial resource for you, they can never provide the full picture. Please check with your attorney about this issue.

How well SD-IRAs are protected is state specific and layered on top of federal rules and laws. This subject is beyond this book. However, since I am in California, please be aware that 401(k)s carry better protection than IRAs in California. In the case of a personal injury lawsuit against you, a court may assign assets from an IRA to satisfy a judgment. 3

Real estate investing in an SD-IRA gives you control over your investments and the potential for excellent returns. They are fantastic tools to get you to the retirement you deserve after many years of contributing to the U.S. economy. If you already have a traditional IRA, a Roth IRA, or a 401(k), you are familiar with the structure of these accounts. Any IRA is a retirement account set up by an individual.

A person can have more than one IRA account, but the annual allowed contribution must be the total contributed to any such account. It cannot be more. For example, you could contribute $3000 to one of your IRAs and $3000 to your other IRA. That totals your annual contribution limit of $6000 if you are younger than 50 years. The contribution limit sits at $7000 for those over 50 years old.

While contributions alone are unlikely to make you rich, wise investments in the account will. Your decisions about how to leverage the dollars in your account drive its value.

The Power of SD-IRAs

You may already be a homeowner. If you are, you understand the power of leverage. Leverage is the ability to control an asset and even borrow against it while putting up a fraction of your own money. That is what happens when you take out a mortgage. In that way, you gain financial advantage and power through good debt. 4

In effect, this is a smart use of other people’s money (OPM). However, you can also leverage time, knowledge, expertise and other resources, which is good news for those who lack sufficient cash reserves.

Many Proptech companies and start-ups aim to make home buying and investing easier by systematic application of technology. Imagine how powerful it is to see options populate on your screen with a few keystrokes. The entire process potentially saves you time and money. It makes your life easier.

Well, consider self-directed IRA investing with leverage in mind. A few examples of this include taking out a non-recourse loan to buy property, optioning property or its underlying paper, lending money to other investors, real estate syndications, and crowdfunding. When you invest in your SD-IRA in this way, your ability to hold multiple assets and to increase your returns expands. More on this later.

The power of investing in real estate in self-directed IRAs lies in the immense growth potential. Roth IRAs hold significant advantages for a high dollar value portfolio because the account grows tax free. In contrast, traditional IRAs eventually incur taxes, though the hope is that the account holder will presumably pay taxes in a lower tax bracket. I get excited about growing my investments tax free and hope you do too. Just that equals leveraging the resources at your disposal because now money that is ordinarily taxable incurs no taxes when in a Roth IRA.

Self-directed IRA (SD-IRA) accounts strictly are instruments for investments to grow people’s retirement accounts. The basics of the self-directed IRA account set-up and several other account mechanics follow, but the focus here is on real estate investments. I provide examples of such investments and how they grow and function within the account.

Said another way, this book is about growing wealth: your wealth. It is about using self-directed IRAs to their best advantage. Become an expert in making such investments in your account, know the basics of the account, and find an excellent and trustworthy custodian to help you navigate IRS rules. The book will show you how you can do that—legally. Always keep in mind that examples are examples only. All investments carry risks and require proper vetting.

A big thank you to the U.S. government for writing that wonderful investment instrument into law in 1997. Read IRS Publication 590, all one hundred and fourteen pages of it, or let your knowledgeable custodian direct you to the most pertinent rules. 5 Some of what Publication 590 contains also appears in this book. 6

Let’s take advantage of the blessing the U.S. government proffers. Open an SD-IRA, contribute the maximum allowable annual amount, and invest the money. If you are married, maximize the power of SD-IRAs through an account for each spouse. SD-IRAs are also inheritable. Consult with your attorney about the correct way to assign beneficiaries. Briefly, it is best to assign your trust as a beneficiary.

The IRS has several rules for self-directed IRAs that underscore the intent of these accounts. For instance, the accounts disallow one's own home. Their goal is to enable account holders to grow their retirement funds. Our specific focus here is to invest in real estate in these accounts.

Obviously, there are many more IRA rules surrounding SD-IRAs which your custodian, whoever you decide to set your account up with, will be able to explain in great detail. I will only touch on the basics and then showcase real estate investments. Unfortunately, I cannot help you get around the rules of the IRS. I mention this because I've met quite a few creative people who think that purchasing a home for one of their relatives in such an account will help them stay off the radar of the IRS. Personally, I would not chance it. The IRS imposes severe penalties.

It may sound like a downer, but you stand to make tidy returns with an account’s intended use. Follow the rules and learn about real estate investments that work in the other chapters. First, though, an overview and discussion about additional reasons for you to continue reading these pages.

Retirement in America in 2021 and beyond

What does retirement look like to you?

The perfect retirement is the one you want to be living. Some of us envision a sunny locale where we listen to the birds or the sound of the surf. Others want to travel the world or to visit museums, to have lunch and dinner with friends and family, to play golf or to paint magnificent pictures.

Whatever your perfect retirement may be, making your scenario a reality takes considerable planning. Without such planning, your retirement reality may be a Social Security check that covers some basics and little more. In that scenario, there may be too many months at the end of the month and too little money to cover it.

Unfortunately, many Americans fall into this category, something which requires them to work longer and to live on (much) less. This sad state of affairs begs for a remedy. To start, it is important to know how much money you might need. Put a number on it. How does that number compare to your current income? Will you need the same amount you are earning today or can you get by with less? If so, how much less?

Consult a retirement income calculator to see how the numbers work out over, say, twenty years of retirement. See the Resources section for retirement and savings calculators.7 You may also find them online.

Note that the savings calculator asks at what interest rate you are investing your money . If your current savings generate less than 10% interest, it will be difficult to grow sufficient retirement savings. Unless you already have a sizeable sum in your account.

Many company retirement plans generate much less growth than that. Some of my friends and acquaintances hardly ever look at their plan balances for this reason. It is just too discouraging. Now, if you have such a balance, however paltry, to look at, count your lucky stars.

Some 33% of Americans have no retirement funds at all, while of the remaining 77% fall short in their savings. 8 According to the U.S. Census Bureau, over sixty percent of Americans will depend on Social Security, charity, friends and family for their retirement. Only roughly 5% of American have the means to retire in comfort and style. 9

What a scary scenario!

Most of us are vaguely aware of these sad facts. We now even see movies like Nomadland that show us this reality. When movies such as this one hit the mainstream, they are testament that the problem exists. And it is vexing not to know what to do about the situation. Living in a van is hardly a perfect or a long-term solution.

Yet, many of us continue to invest in stocks, bonds and mutual funds without realizing that [our portfolios] will never grow large enough to support the over 50 million hopefuls who continue to send their monthly retirement savings to Wall Street. Talk about risky behavior!10

Compound this state of affairs with other components that affect retirement and are beyond our control. These include health care costs, inflation, and stock market fluctuations. What I just described in its simplest form is a recipe for disaster. The good news, however, is that retirement planning with an SD-IRA offers such upside that we must do all we can to use this instrument. That is one big factor we can control, rather than worry about those outside our control.

How well are your retirement investments doing?

To progress to our retirement dreams, we must understand our current situation as regards retirement. Congratulations if you regularly check in to find out your account balances. You are in the minority.

Many people are clueless about the balance of their retirement accounts. Perhaps they dread the numbers and descend into depression because their account nets low returns. Are you ...

Table of contents

• Other Books in This Series
• Why this book?
• Chapter 1: Supercharge Your Retirement Funds
• Chapter 2: The Nitty Gritty
• Chapter 3: The Pros of SD-IRAs
• Chapter 4: Cons of SD-IRA Investing
• Chapter 5: How to Find the Right Professionals
• Chapter 6: Real estate investment strategies in your SD-IRA
• Chapter 7: Locating the Right Investment Properties
• Chapter 8: Tying It All Together
• Parting Thoughts
• Acknowledgements
• About the Author
• Other Services
• Selected Real Estate Investor Resources
• Appendix
• Bibliography
• End Notes