OT: Anyone have experience with a “self directed IRA”?

[Ranger Dan]

i was at a neighbors Christmas party last night and one of the other guests was talking about how he set up his own “self directed IRA”. He explained that he had to creat an LLC, and then pay someone to oversee it, but his tax deferred investment is in real estate instead of the stock market. I thought this was very interesting, but am not sure i’d be able to do this. I do like the idea of not being subject to the ups and downs of the stock market, but then I don’t see other investments as lucrative. Anyway, I’m not necessarily looking for detailed advice on doing it myself, but was curious whether anyone on the board did this.

 

[BobPSU92]

ira lubert directs himself, much to our dismay.

 

[sluggo72]

i was at a neighbors Christmas party last night and one of the other guests was talking about how he set up his own “self directed IRA”. He explained that he had to creat an LLC, and then pay someone to oversee it, but his tax deferred investment is in real estate instead of the stock market. I thought this was very interesting, but am not sure i’d be able to do this. I do like the idea of not being subject to the ups and downs of the stock market, but then I don’t see other investments as lucrative. Anyway, I’m not necessarily looking for detailed advice on doing it myself, but was curious whether anyone on the board did this.

IRA are all self directed. The problem is putting real estate in them. Most custodians won’t allow Real Estate in an IRA account. Why? Because the custodian has to file a fair evaluation of the value. With stocks and bonds no problem. How does one get a fair valuation on real estate?? The last I knew there was only one custodian that allowed real estate and I can’t remember there name. Plus you’ll have to pay a third party to appraise the real estate each year
Good luck!
If your goal is not to stock market fluctuations in your IRA there are other ways to achieve that

 

[Ranger Dan]

IRA are all self directed. The problem is putting real estate in them. Most custodians won’t allow Real Estate in an IRA account. Why? Because the custodian has to file a fair evaluation of the value. With stocks and bonds no problem. How does one get a fair valuation on real estate?? The last I knew there was only one custodian that allowed real estate and I can’t remember there name. Plus you’ll have to pay a third party to appraise the real estate each year
Good luck!
If your goal is not to stock market fluctuations in your IRA there are other ways to achieve that

Thanks for responding. As I said in my post, I’m not looking for advice so I can do it myself, I’m just curious because I never heard of this. By the way, I’m not in the industry but I certainly don’t think all IRAs are self directed. My wife and I each have our own IRAs and we never had to form an LLC or take these other steps.

 

[sluggo72]

Thanks for responding. As I said in my post, I’m not looking for advice so I can do it myself, I’m just curious because I never heard of this. By the way, I’m not in the industry but I certainly don’t think all IRAs are self directed. My wife and I each have our own IRAs and we never had to form an LLC or take these other steps.

Relative to you and your wife, yes I know, that’s why I was confused as to why he set up an LLC to do anything. You don’t have to. All IRAs are self directed to the extend the custodian always the investments. Back in the olden days of IRA the banks only allowed purchases of CDs. Brokerage firms didn’t mess with IRA as the $2000 per year investment was not worth fooling with. It didn’t take long for the brokers to realize that’s where most people wealth is. And that’s when the investment options opened up and some people referred them as ‘self directed ‘
Again as far as real estate 1) the custodian has to allow the investment 2) some how it has to get a fair evaluation on it
Good luck

 

[Nitwit]

Wouldn’t you be able to invest in REITS or even REIT etfs if you want some real estate investments in your IRA?

 

[Ranger Dan]

Good luck

Again, I’m not going to do this. I just thought it was interesting.

He did say that there weren’t many custodians that would do this, presumably because they didn’t make as much money.

 

[Ranger Dan]

Wouldn’t you be able to invest in REITS or even REIT etfs if you want some real estate investments in your IRA?

I have no idea what thos3 acronyms mean.

 

[sluggo72]

Wouldn’t you be able to invest in REITS or even REIT etfs if you want some real estate investments in your IRA?

Yes you could especially if they are publicly traded
That said many people try to find a way to put individually owned houses , rental property into an IRA ( you can’t put your primary resident)

 

[mn78psu83]

I have no idea what thos3 acronyms mean.

REITs are Real Estate Investment Trusts. ETFs are Exchange-Traded Funds. You can buy individual publicly traded REITs (for example, Realty Income Corp/symbol O) or funds consisting of REITs. ETFs are one way to go. Both Vanguard and Schwab have low cost offerings. The Vanguard VNQ and the Schwab SCHH. There are many others. I just know these two.

 

[sluggo72]

Again, I’m not going to do this. I just thought it was interesting.

He did say that there weren’t many custodians that would do this, presumably because they didn’t make as much money.

That’s not the real problem, it’s the evaluation process of the asset. As mentioned the last I knew there was only one

 

[Ranger Dan]

REITs are Real Estate Investment Trusts. ETFs are Exchange-Traded Funds. You can buy individual public traded REITs or funds consisting of REITs. ETFs are one way to go. Both Vanguard and Schwab have low cost offerings. The Vanguard VNQ and the Schwab SCHH. There are many others. I just know these two.

This wasn’t real estate trusts, this was a plot of land and a rental property in Pigeon Forge TN. He was explaining that he (or his family) wasn’t allowed to use the rental, and he had to pay people to do everything, no sweat equity.

 

[mn78psu83]

This wasn’t real estate trusts, this was a plot of land and a rental property in Pigeon Forge TN. He was explaining that he (or his family) wasn’t allowed to use the rental, and he had to pay people to do everything, no sweat equity.

Understood. Just following up on the post from Nitwit. Most people I know would advise that an individual only allocate a modest portion of a portfolio to REITs - whether it be your own special basket of individual companies or one of the REIT ETFs. Of course, there are others who prefer an overweight position. I would not.

 

[JJTopp99]

Wouldn’t you be able to invest in REITS or even REIT etfs if you want some real estate investments in your IRA?

I used to have REITS in my IRA. In fact, my wife still has one (it invests in nursing homes). It has done quite well over the years...

Here's more on the many "self-directed" real estate pit-falls (SNIPPET: That’s right: Income inside the tax shelter would be taxed as it is earned and, because you’ll also have to pay taxes when you withdraw funds from your IRA, you’ll be taxed twice.: https://www.kiplinger.com/article/real-estate/T010-C000-S002-using-your-ira-to-buy-real-estate.html

 

[burghBuck]

Again, I’m not going to do this. I just thought it was interesting.

He did say that there weren’t many custodians that would do this, presumably because they didn’t make as much money.

The LLC is used to purchase and manage the interest in the real estate. The IRA actually owns the LLC, not the real estate, so the IRA custodian does not have to directly manage/value the property. As Sluggo said, you still have to get an annual valuation, but typically the custodian will accept the valuation from the LLC's accountant. There are at least a handful of custodians who will do this, but you have to be careful, because there are some unscrupulous ones and some others who don't know what they're doing.

You also should be very careful about investing in any property that you or any relatives may have a personal interest in (like a family member leases an office in the building owned by your LLC). Due to fiduciary rules that apply to IRAs, if you get involved in an arrangement that even indirectly violates those rules your IRA can lose its tax-deferred status...which is not a good result

 

[psualt]

IMO this isn’t a great way to invest in real estate. Lose many of the tax benefits including capital gains when you sell. Given you can’t do any of your own work it seems plausible there won’t be much income anyway.

 

[heckmans]

i was at a neighbors Christmas party last night and one of the other guests was talking about how he set up his own “self directed IRA”. He explained that he had to creat an LLC, and then pay someone to oversee it, but his tax deferred investment is in real estate instead of the stock market. I thought this was very interesting, but am not sure i’d be able to do this. I do like the idea of not being subject to the ups and downs of the stock market, but then I don’t see other investments as lucrative. Anyway, I’m not necessarily looking for detailed advice on doing it myself, but was curious whether anyone on the board did this.

I have not done it yet, but plan to at some point, specifically for real estate.
Many/most serious RE investors have self directed IRAs.
No brokerage is going to do it. There are essentially attorneys that manage the paperwork and execute whatever you say, hence, "self-directed" vs taking the advice of a broker.

 

[Fac]

I thought you were buying a desk.

 

[tboyer]

IMO this isn’t a great way to invest in real estate. Lose many of the tax benefits including capital gains when you sell. Given you can’t do any of your own work it seems plausible there won’t be much income anyway.

Indeed, real estate is already so rich in writeoffs, an IRA is irrelevant. If you build up a large real estate portfolio and can afford good accountants and attorneys and you're willing to fight the IRS, you can pay an obscenely low tax rate in the range of 5%. Ask our president.