Self directed IRA

[emi guy]

So, I've been doing some research on how to minimize my exposure to the stock/bond/fixed income markets and possibly increase my real estate rentals using IRA money. I came across the "Self Directed IRA" and was wondering if it's legitimate and where any of the good folks on this board have any experience and or opinions? Thanks in advance. Emi Guy.

 

[Senator]

I know people that buy rentals in an IRA. If you do that, you have to hire a property manager. You cannot do any maintenance, showings, etc.

I think it can work out, but I also think that is you really need these type of investments in an IRA, you probably just need to save more outside the IRA.

Use a HELOC instead.

 

[emi guy]

Good points on the management. One of my motivations was to further diversify away from the markets. I'm not at all comfortable with the condition of our economy, debt, politicians, etc...and real estate is one way to hedge inflation outside of the market.

 

[Another Reader]

Rental real estate is correlated to the economy. Most tenants have jobs, usually not at the high end, irreplaceable level. Tenants often lose their jobs when the economy goes south. Rents decline, vacancy increases, as do evictions. It becomes more difficult to find decent quality tenants. Smart landlords lower their rents but not their standards. Most small landlords are not that smart, and a concentration of bad tenants can undermine an entire rental neighborhood. It's rare to have an event like 2008-2012, where foreclosures and short sales actually increased the tenant pool.

Real estate is an inflation hedge only when there are qualified buyers that want to buy. Property prices in desirable locations have risen dramatically over the last few years because there is too much cash out there chasing too few investments. You are late to the party. In your shoes, I would anticipate tougher times for landlords over the next few years.

 

[Sunset]

Rental real estate is correlated to the economy. Most tenants have jobs, usually not at the high end, irreplaceable level. Tenants often lose their jobs when the economy goes south. Rents decline, vacancy increases, as do evictions. It becomes more difficult to find decent quality tenants. Smart landlords lower their rents but not their standards. Most small landlords are not that smart, and a concentration of bad tenants can undermine an entire rental neighborhood. It's rare to have an event like 2008-2012, where foreclosures and short sales actually increased the tenant pool.

Real estate is an inflation hedge only when there are qualified buyers that want to buy. Property prices in desirable locations have risen dramatically over the last few years because there is too much cash out there chasing too few investments. You are late to the party. In your shoes, I would anticipate tougher times for landlords over the next few years.

Agreed, and nicely put.

I just sold one of my rentals, and am thinking of selling the other one perhaps next year, or so.
If I want real estate exposure, I can get a much more diversified type by buying REIT etf, so I own a tiny slice of a few hundred units instead of 2 units.

Currently I don't own any REIT's, and don't really plan on getting any.

 

[jw72]

Emi guy,
I use udirectira.com lowest cost I found with good service. There are some limititions vs a regular rental but there are advantages as well. I have a self directed IRA and it has worked well for me. Keep it simple, pay cash, get good property manager and keep a reserve of cash for repairs until balance builds.

 

[bingybear]

As I recall when using an IRA to buy property... all the support must come from the IRA. All taxes and maintenance, etc must be paid from the IRA. If you need a loan for purchase, it must be taken by the IRA. It may have to be a no recourse loan.
Some people thought they could buy a place with an IRA and rent it to themselves cheap... This type of stuff is not allowed.
You likely need a plan to unwind it. When RMD time arrives, I would expect this will need to be split up or withdrawn as a whole. I would expect this would loose the capital gains benefit as withdraws from T-IRAs are taxed as income.

Now a R-IRA might be more interesting