Self directed IRA

[Mike jay]

29 and my company got bought out. I get too keep my job. The 401k and the pension are better. I've been pretty good at maxing out my 401k. I have a brokerage account where I'm not too aggressive, consist of consistant dividend payers and raisers and low cost index funds, (s&p, dividend aristocrats). I've only been alive for the great bull market, I'm comfortable with my positions though.

Now down to business. 350k in my 401k. It was at 400 before this last little hiccup in the market. So I can roll this old 401k into a IRA, I want to go self directed, own my home with about 8 years to go and I've always thought I'd own rentals, debating if I should buy a rental or rentals with a self directed IRA. Or keep my money in the stock market? I feel buying rentals is less risk, but I'm also not educated in owning rentals which is inherently a risk. Looking for some advice. Also I live in the SF bay area and I dont plan on buying a home around here or even California, I was thinking utah(where I plan to retire) or texas. I think i could only afford 1 rental In Utah, could probably pull 2 in texas. Any advice or criticism is welcome.

 

[Sunset]

Absent landlording is harder and more expensive.
Using your IRA for landlord purposes has lots of issues, I never did it.

 

[DrRoy]

I suggest that you search earlier threads on rentals. It seemed that much of the success or failure of the venture was due to the tenants. Good ones gave good outcomes, bad ones were nightmares and big $ losers.

 

[FreeBear]

I suggest that you search earlier threads on rentals. It seemed that much of the success or failure of the venture was due to the tenants. Good ones gave good outcomes, bad ones were nightmares and big $ losers.

Congrats on a good chunk of change $$ for your age. You must have done something right!


Are you thinking about cashing out your 400K IRA to buy one or two rental properties in cash? Aside from the potential tax hit, I'd be concerned about trading a presumably well diversified equity portfolio for one or two rental units as a first time landlord in remote, unfamiliar location. One or two people, your tenants, at any time in the future, can suddenly make your life a living hell.

On the other hand, some here have made good money in rental real estate. They do seem to really know what they are talking about and have a natural high tolerance for BS. Successful landlords seem to put a fair amount of time, at least a first, to learning the business and fighting through mistakes. Only you will know if you have what it takes to deal with people and their BS. This may be you since you've been a business owner.

I'd rather just ride the stock market roller coaster as a passive index fund investor. I just close my eyes when it gets ugly! I've also noted on this board that many successful landlords transition out around retirement, preferring to hold passive investments to minimize the work/hassle, but you are young so this may not apply.

 

[pjigar]

I have few rentals, all SFH. Search my name in the forums about my earlier comments on rental advice. I NEVER do remote rental and I ALWAYS personally manage the properties. If you can't do these two then your profits may evaporate between unnecessary repairs/evictions and commissions.

I prefer to hold rentals outside the tax sheltered accounts since rentals are very tax efficient and you get better leverage. Either way, now is not the time to buy rentals since the numbers don't work. My advice:
1. Stay with equity in 401k/IRA.
2. Build after-tax savings to buy rental when the numbers work in your local market.

PS: I do agree with the comments by others. Rentals are not for everyone. It takes special talents and temperament to be a landlord.

 

[Onward]

Owning real estate in a self-directed IRA is a cauldron of complexity and restrictions, with draconian penalties if you slip up.

Suggest you get very, very educated about the tax/legal issues before you proceed.

 

[Another Reader]

I have few rentals, all SFH. Search my name in the forums about my earlier comments on rental advice. I NEVER do remote rental and I ALWAYS personally manage the properties. If you can't do these two then your profits may evaporate between unnecessary repairs/evictions and commissions.

I prefer to hold rentals outside the tax sheltered accounts since rentals are very tax efficient and you get better leverage. Either way, now is not the time to buy rentals since the numbers don't work. My advice:
1. Stay with equity in 401k/IRA.
2. Build after-tax savings to buy rental when the numbers work in your local market.

PS: I do agree with the comments by others. Rentals are not for everyone. It takes special talents and temperament to be a landlord.

+1.

I have only one rental locally because the numbers have never made sense. There are definitely frictional losses with property managers. You have to watch them carefully. Even the good ones make mistakes, especially when directed by their attorneys to liberalize rental standards to avoid legal complaints. And their vendors are never as good as the ones you would use if you lived in the area.

I look at the cash flow and rate of return, which are good even with frictional losses. Can't duplicate it in my local markets.

I would avoid markets that you are not completely familiar with. Texas can be good and bad. Have not looked at Utah. Almost all major markets west of the Mississippi are grossly overpriced to have strong rentals right now. Markets will change, so be patient and study investing principles and the markets that interest you. If you do not understand the math, read Frank Gallinelli's book.

https://www.amazon.com/Estate-Inves...d=1548429526&sr=8-1&keywords=frank+gallinelli

It should be available at your local library.

Skip the self-directed IRA. You lose the tax benefits and you risk making a mistake that could cost you the tax deferral status. Most people that push self-directed IRA's for real estate are trying to sell you something anyway. Run from those folks.

The only time you can make good returns in the Bay Area is when properties are on sale at a deep discount. Even then, the cash flow will be weak, but you buy then for appreciation and future cash flow. Be sure to use a higher discount rate in your spreadsheet if you ever do one or those deals, because the risk is high.

 

[OldShooter]

I was a landlord fot 20 years. All local. Managed everything myself. Never bought anything that wasn't a 10 minute drive from home. Financially, it was good but no home runs.

With remote ownership especially your gain will come from property appreciation. If you think about it, though, residential properties overall cannot get very far out of synch with family incomes, which in turn are mostly inflation driven. So you are trying to identify markets where prices will increase faster than family incomes, at least temporarily. How's your crystal ball?

Don't do real estate inside an IRA for reasons already stated. You may even have trouble finding a custodian who will allow "unusual assets." I used to buy private placement stocks in my IRA from time to time and had the same problem finding a custodian who would take the account.

 

[pb4uski]

Besides, wouldn't any gain on sale in excess of depreciation recapture be a LTCG at 0% or 15% if held outside an IRA and tax-deferred ordinary income when ultimately withdrawn if held inside an IRA.