Does anyone have experience with self-directed IRA?

[tenant13]

We spend a lot of time here discussing asset allocation and it's all great but I'd like to go a step further and move some of my money as far away from the US stock market as I can. That could be done with a self-directed IRA investment into rental real estate. It's a bit of a hassle to set all this up and there are disadvantages (no write offs or depreciation) but for the purposes of diversification, splitting my IRA into equities, bonds, a physical real estate AND (possibly) some small emergency gold holding in Singapore or Austria (also possible with self-directed IRA) seems like a strategy I would feel better about than keeping everything in the market.

I did some research and you can even invest in a property outside of US. That would make it even better - there are really great deals to be had in places like Thailand, Portugal, Costa Rica or Panama. I already own two small flats in Europe (I happen to have EU passport in addition to US) and while they only bring around 5-6%, I already feel better insulated from the future US market fluctuations.

 

[euro]

So, what is the question you are after? You are right, all of what you describe is feasible. Just pick a custodian who will be able to provide the specific actions you want, and you are good to go.

 

[Bruceski44]

If investing in real estate property in a SDIRA, you must be cognizant of Unrelated Business Income Tax (UBIT) and Unrelated Debt Financing Income Tax (UDFI). I use my SDIRA to invest in notes, but there's still a small risk.

 

[bingybear]

I looked at it once and decided not to go that way.


Your IRA custodian will likely be more expensive.


no sweat equity.. all expenses must be paid for by the IRA... and not to you. (check other restrictions. You likely can't use any of the properties.



Loans I think need to be non-recourse loans.


bunch of other rules... breaking the rules can invalidate the IRA.
I decided not to go that way for investing on IRAs.



Also I would assume that owning things like commodities/precious metal (etc) might cause your IRA to file a tax return at it's rate. I know that etf's of these types of investments can cause UBTI that can cause an IRA tax return.


do your homework

 

[Onward]

If you're sweating, increase your bond allocation and leave landmines like RE in SDIRAs alone.

 

[OldShooter]

You're talking about what is called "unusual assets" not about "self-directed." It is do-able but somewhat fraught.

I used to buy limited partnerships and private placement stock into IRA accounts. That was maybe 20 years ago but I doubt that much has changed.

First, study the IRS rules very carefully. There are prohibitions on borrowing against IRA assets that may preclude your using leverage. There are also other rules and prohibitions. IIRC if a prohibited asset is acquired it comes out of the IRA and is considered a distribution to the beneficiary and you get all the fun and penalties that go with that.

The other issue is finding a custodian who will take the asset(s). On some deals I did the promoters already had a custodian lined up. On others it was my problem. Back then, surprisingly, Schwab would take some kinds of unusual assets but I'm pretty sure that is no longer the case.

 

[Sunset]

Sounds like a bad idea.

Currently your investments in real estate are poor performers.
While you feel at risk of US stock market, you are really trading that risk for foreign country real estate risk and currency risk.

Much easier, without the high costs, would be to trade your stocks in the IRA for CD's, or bonds issued by foreign companies, and of course TIPs. Or buy stock ETF's that exclude the US, such as VXUS

 

[wolf]

Also, agree, Bad idea.

For so many reasons. Much to long to list.

 

[tenant13]

Wow, not one person with anything positive to say about self-directed IRAs.... I'm listening...

I wasn't hell bent on that real estate idea - I know that it would have been 100% off limits for anything else but producing income and possibly growing value until it's cashed out. Which is very much like investing in dividend stocks within IRA. I would much rather have a property that I COULD use for a few weeks a year but that's not what this is. And I don't have enough cash to buy it outside of IRA.
I think this whole idea stems from my inherent distrust in US as a backer of my retirement savings. I'd like to get away from US dollar, equities, bonds and US financial institutions - at least partially.

 

[wolf]

Though not perfect by any means, US is one of the more "stable" countries, when it comes to financial stability. Not sure what your concerns are?

 

[OldShooter]

... I'd like to get away from US dollar, equities, bonds and US financial institutions - at least partially.

Maybe I'm missing something. Doesn't investing in an international equity fund (world ex US) solve your problem?

 

[tenant13]

Though not perfect by any means, US is one of the more "stable" countries, when it comes to financial stability. Not sure what your concerns are?

That is true for 2019 but my personal belief is that the next crisis - whenever it comes - will be way bigger than what we went through in 2008. So I would like to soften the blow by having some of my retirement assets as far from US financial markets and institutions as possible. I already sleep better knowing that I have two flats in Europe that can provide me with free housing (one can pay for the other's cost) in case US gov makes some unwelcome decisions about my IRAs or SS. Obviously if you don't have these concerns, there's no need to take me seriously

 

[tenant13]

Funny. I just reread my latest post from this thread and it seems like I was on to something, lol. I can't say that I hit the panic button before the corona virus took over but I did ok.

Anyway, I am still researching the SDIRA idea and am pretty much settled on setting up an offshore LLC and using it to purchase real estate in Europe. First, besides being a US citizen I have a the Polish passport and know the local market and laws well. Secondly, because dollar is so strong right now, prices are very attractive. Thirdly, foreign property value would be unrelated to US economy performance. And finally, I like the fact that foreign owned real estate is beyond IRS reach - they can't seize it. Plus, I'm sitting on all this cash in my IRA ... what are other sensible options? Treasuries with 0.25% interest rates?

 

[Lawrencewendall]

I had a small SDIRA in precious metals bullion. The holder of the bullion is now doing 10 years for using it as his personal piggy bank. All gone.

 

[Montecfo]

Well, for most people they make little sense. High fees, easy to mess up, don't run afoul of self-dealing rules, you lose the ability to leverage your real estate, you lose depreciation benefits, cannot tap your IRA for funds easily. In other words, you cancel out a lot of the reasons people wish to own illiquid, actively managed investments.

If you want to invest in real estate in a IRA, I would suggest you look at REITs.

If you want to invest in real estate directly, it is best done with taxable funds in my strong opinion.

 

[tenant13]

Well, for most people they make little sense. High fees, easy to mess up, don't run afoul of self-dealing rules, you lose the ability to leverage your real estate, you lose depreciation benefits, cannot tap your IRA for funds easily. In other words, you cancel out a lot of the reasons people wish to own illiquid, actively managed investments.

If you want to invest in real estate in a IRA, I would suggest you look at REITs.

If you want to invest in real estate directly, it is best done with taxable funds in my strong opinion.

I agree that taxable funds would be preferable - I do own properties already - but I don't have enough taxable cash for this purchase and I don't want to bother with loans. And I don't think that sitting on a pile of cash within IRA makes much sense.

 

[Lawrencewendall]

Well, for most people they make little sense. High fees, easy to mess up, don't run afoul of self-dealing rules, you lose the ability to leverage your real estate, you lose depreciation benefits, cannot tap your IRA for funds easily. In other words, you cancel out a lot of the reasons people wish to own illiquid, actively managed investments.

If you want to invest in real estate in a IRA, I would suggest you look at REITs.

If you want to invest in real estate directly, it is best done with taxable funds in my strong opinion.

I've done really well with AGNC (agency backed REIT). It has pushed so much monthly dividends that I needed to sell of some, twice. It was almost 9% of my portfolio. I am now playing with house money.

 

[Sunset]

I agree that taxable funds would be preferable - I do own properties already - but I don't have enough taxable cash for this purchase and I don't want to bother with loans. And I don't think that sitting on a pile of cash within IRA makes much sense.

So why would you not want to use loans , when interest rates are at historic lows.

My issue with buying foreign property is being spoiled with the USA mortgage concept. Here in the USA with 30 yr mortgages at cheap rates, that lock in what I pay per year for 30 years.
Easy to budget and predict.

It was a choice of a 3 yr, or 5 yr, or 7 yr, or 10 yr mortgage at increasing rates, all of them amortized over 25 yrs.
Meaning, in say X years I'd have to get a new mortgage and be at risk of rate increases, and do that over the 25 yrs period.

 

[tenant13]

So why would you not want to use loans , when interest rates are at historic lows.

My issue with buying foreign property is being spoiled with the USA mortgage concept. Here in the USA with 30 yr mortgages at cheap rates, that lock in what I pay per year for 30 years.
Easy to budget and predict.

It was a choice of a 3 yr, or 5 yr, or 7 yr, or 10 yr mortgage at increasing rates, all of them amortized over 25 yrs.
Meaning, in say X years I'd have to get a new mortgage and be at risk of rate increases, and do that over the 25 yrs period.

Because I want to divest from US as a whole. Not just from the stock market. And if I purchase foreign property as an offshore LLC funded by my SDIRA, IRS will never be able to seize that property (unless it's UK or France but it's not).

 

[Starsky]

I don't now how property is bought and sold in Poland, but could you work out a lowest-bracket-tax strategy to withdraw your IRA funds over a period of a few years to purchase the properties you want? Perhaps try to get some short-term owner financing with a lump-sum payout. The Zloty has been weakening slowly against the dollar, so maybe time is on your side. Lucky you! Poland is a beautiful country.

The cost, risk, and hassle of doing it within an SD Offshore IRA is very tricky and opens you up to a ton of scrutiny and risk unless you are an expert in international tax law. This is a hedge fund manager's strategy. Because you have total control, you and you alone must understand the IRA rules and and follow them perfectly. Your custodian won't be much help since they won't want the liability. It can be done, but even those who sell those services will tell you how risky it can be. One wrong move and the whole mess becomes instantly taxable. (I wouldn't want to wing this one. I like to sleep too much.)

 

[Time2]

Because I want to divest from US as a whole. Not just from the stock market. And if I purchase foreign property as an offshore LLC funded by my SDIRA, IRS will never be able to seize that property (unless it's UK or France but it's not).

Why would you want "divest from US as a whole"?
Is this over Covid 19? It's world wide.
Do you have good reason to think the IRS will seize your property?
I don't think that's something most people have any concern about.
Maybe under world figures or drug dealers, but very few people.
Can we talk you out of this?

 

[tenant13]

I don't now how property is bought and sold in Poland, but could you work out a lowest-bracket-tax strategy to withdraw your IRA funds over a period of a few years to purchase the properties you want? Perhaps try to get some short-term owner financing with a lump-sum payout. The Zloty has been weakening slowly against the dollar, so maybe time is on your side. Lucky you! Poland is a beautiful country.

The cost, risk, and hassle of doing it within an SD Offshore IRA is very tricky and opens you up to a ton of scrutiny and risk unless you are an expert in international tax law. This is a hedge fund manager's strategy. Because you have total control, you and you alone must understand the IRA rules and and follow them perfectly. Your custodian won't be much help since they won't want the liability. It can be done, but even those who sell those services will tell you how risky it can be. One wrong move and the whole mess becomes instantly taxable. (I wouldn't want to wing this one. I like to sleep too much.)

I'm not crazy about the risks and certain scrutiny that will follow this type of transaction. The only way for this purchase to be perfect would have been if I had enough money in my ROTH IRA. Alas that's not the case: my spare cash is in tIRA so as you mentioned a false step may result in a hefty tax bill.

I'm looking at new developments. They are financed by buyers depositing money in stages in open escrow accounts. Which is essentially an interest free loan (or loans) given to developers. As you can imagine it comes with its own set of risks (is the developer dependable, which way are real estate prices heading, and in my case: how strong the dollar will be 2 years down the road). The more completed the construction the higher the prices (provided not all units are sold early) so if everything goes well you don't even have to move in. You can cash out before that. Or you can keep it and rent it out - some developers would manage that for you.

 

[Happyras]

Tenant 13,
I was just looking into this SDIRA idea when I found this thread. I was working on a sale of a triple net lease property we own, but the cap rate is too high making the valuation too low to sell at a reasonable price. However this led me to consider buying a triple net lease property in our IRA's. Since I moved to a nice qty of cash in our IRA's, buying a recession resistant property, like an urgent care facility with a 20 year lease term and corporate guarantee seems like a good option. I found a company that offers high quality TIC shares that could be purchased through a SDIRA. I am considering moving a good chunk to an SDIRA with a validated custodial firm and then buying these shares. They are deeded TIC shares, no debt, with a net cap return much greater than corporate bonds. Having been through the whole corporate sale and triple net lease back for our business, I know enough to be dangerous doing this. I am looking at DirectIRA.com, as they are a full serve custodian, and the fees are small to the assets they would hold. I would be interested in what you are considering for a custodian if you go forward. The one I mention has good resources and guidance for legal, tax, and risk considerations.

 

[tenant13]

Tenant 13,
I would be interested in what you are considering for a custodian if you go forward. The one I mention has good resources and guidance for legal, tax, and risk considerations.

I was looking at uDirectIRA, myrealestateIRA, mysolo401k and premieroffshore. This last one in case I wanted to get even more adventurous than real estate.
For some reason SDIRAs get a lot of flak on this forum. I'm not sure why. As long as I go into them with my eyes open and treat them as a way of diversifying my portfolio I don't see the problem.

 

[OldShooter]

... For some reason SDIRAs get a lot of flak on this forum. I'm not sure why. As long as I go into them with my eyes open and treat them as a way of diversifying my portfolio I don't see the problem.

Hmm ... I think most of our IRAs here are self-directed. Certainly DW's and mine are.

Possibly you are referring to IRAs that hold unusual assets. I used to do that with some private placement/venture capital investments and once held a real estate limited partnership share in a Schwab IRA. Unusual assets are, well, unusual so they do take some extra care.

One problem is finding trustees that will take them. Schwab used to but a decade or more ago they stopped. The promoters of deals that I was involved in usually had a cooperative trustee lined up.