Edan Gelt – Minute of Mortgage – Become a Cash Real Estate Buyer with a Self Directed IRA

Eden Gelt – with interest rates rising, more and more buyers are hesitant to enter the real estate investment market.  At the same time, old 401K investments or IRAs are taking a hit as the market continues to plummet with estimates of 20-30% drops.  If you have buyers that are looking to become real estate investors, now is a good time to have them explore tapping into an OLD 401K.  I’m not referring to their active 401K that is currently being contributed to at work but something that may be sitting from an old employer that either is still in the 401K account or has been rolled over to an IRA.

A self-directed IRA allows the owner, through a custodian, to reinvest their dollars elsewhere other than stocks/mutual funds, with one possibility being real estate, LLC partnerships and more.  There are a lot of caveats to using the IRA and not being hit with an early withdrawal penalty or being taxed at today’s rate.  Since I’m not an expert, have your buyers reach out to a company experienced with self directed IRA rollovers.

If done correctly, an old IRA sitting can be used to purchase real estate for investment purposes only (the buyer can’t use the property at all).  If going this route, the IRA owner CANNOT take a loan or merge their IRA dollars with their own fund, so the amount in the IRA would have to cover the purchase of the real estate and any additional expenses.

For example, if the buyer was looking to flip a $125K property and add $75K in repairs, they would need to have at least $215K to cover taxes, utilities, insurance and overages to still have a reserve to feel safe.  The buyer can then flip the property with money going back to the IRA without paying taxes until the investment is used for retirement (just like a regular withdrawal when they hit the minimum age).  There are some caveats to the amount of transactions that can be done and scale of transactions to not be hit with UBTI.  Have your buyer talk to a CPA and an authorized self-directed IRA custodian to learn more.

I’m not an expert so all of my insight is based on being just a regular person highly interested in purchasing real estate.  If you want more information on how this works, do your own research and partner with a self-directed IRA company and/or accountant to learn more.