Simple IRA for REI?

Financing, Hard Money Lenders, Private Money
1

I’m becoming highly motivated to start investing in real estate (MFH). I’m in my early 30’s and most of my money is tied up in a Simple IRA plan. I’ve read Sharon Lechter’s (Rich Dad) Tax & Legal Secrets… which hit on the subject but I was looking for some real world advice or a source for more info on the subject.

As a newbie, this site is a wealth of info, and I really appreciate the time and effort that’s put forth by so many contributors.

2

Typically to invest in real estate outside of a mutual fund or REIT, you’l need to get your money into a self-directed IRA. There are companies like Guidant Financial and Entrust (and many others) who offer this type of IRA.

It’s structured as an LLC and your LLC invests in the projects. If your IRA doesn’t have enough cash to fund the deal on it’s own, you can get a non-recourse loan to buy in your IRA. Typically these go to 70% LTV and your IRA needs reserves.

The cash flow or profits flow through your LLC back into your IRA. Pretty sweet deal!

3

Most of these SD LLCs engage in prohibited transactions when real property is involved, which makes the entire IRA completely disbursed along with a penalty for those under 591/2. There is also no clear guidance from the IRS that the IRA owner can actually manage the LLC in anything other than an advisory capacity.

4

60 day IRA “loan”
Disclaimer: The following is highly risky but possible. I’m not advising you use this strategy just letting you know it exists.

For the investor that has good credit, no cash, but cannot obtain 100% financing and wants to purchase NOO property…

  • Locate property selling at a discount, say 70% ARV
  • Take IRA distribution to pay 10% downpayment
  • Purchase property. 10% down payment means you’re paying PMI.
  • Submit application for 80% LTV cash-out refinance 31 days after purchase. You got 29 days to close this refinance…
  • Close refinance. Get cash at closing.
  • Contact IRA administrator. Inform that you’re rolling your distribution back into IRA. You have 60 days from receiving distribution to do this.
  • IRS will have received notification of distribution. You will have to file form ??? (ask IRA Administrator) notifying IRS that distribution was in fact rolled into IRA.

Please note you’ll need a mortgage company willing to do a cash-out refinance 31 days after purchase – they used to exist but this may have dried up by now. Closing costs of refinance added to mortgage balance will approximately equal original mortgage + PMI. Also note this strategy has side-effects of sleepless nights, upset stomachs, and other health problems as well as a highly leveraged investment property. The IRS allows an IRA rollover once every 12 months. Again, I am not recommending this strategy, just offering some IRA trivia to the forum…