Complete Guide to Self-Directed IRA Real Estate Investing 2020

July 17, 2020
July 17, 2020 disrupt

Complete Guide to Self-Directed IRA Real Estate Investing 202016 min read

Throughout this article, you will get a full look into the ins and outs of exactly how you should use a self-directed IRA to invest in real estate to build your retirement portfolio

Your Future Self Will Thank You  

Saving for retirement is a huge aspect of an individual’s savings, financial future, and in most cases their worries.   

Whether you are a newbie to saving for retirement or you have generated a sizable portfolio, investing in low interest producing assets will not be the best decision for your financial future. Nor would tying the future of your retirement onto the volatility of the stock market. 

Many hardworking individuals throughout history have had their retirement portfolios halved overnight due to the extreme volatility of the stock market.  

This scary reality became true for many individuals in the COVID-19 induced global stock market crash that occurred on February, 20th, 2020.  

This financial and global tragedy has brought many of our friends, and family to start asking the right questions…. What other ways can I grow my retirement to take ahold of my financial future and set myself up for the best financial position possible? 

In this article we hope to open your eyes and increase your education on how you can utilize a self-directed IRA to invest in real estate in more specific terms- multifamily real estate syndications, to grow your retirement nest egg.   

Your future self will thank you for reading this article and investing in your knowledge, to ultimately make the best investment decisions for you, your family, and the comfortability of your future. 

self-directed ira real estate investing explainer

What is a Self-Directed IRA? 

A self-directed IRA is similar to your traditional IRA in that it allows you to save for retirement and offers tax-free growth and tax-free distributions regardless of your level of returns 

Self-directed IRAs have the same IRA contribution limits as traditional IRA account.  

The main difference between a self-directed IRA and other IRA accounts are the type of assets you can own in the account. 

Regular IRAs usually contain stocks, bonds, mutual funds, CDs, and other financial investments. However, Self-directed IRA’s allow you the opportunity to invest in alternative asset classes such as: 

The ability to invest in alternative asset classes is undoubtedly the primary reason why investors choose a Self-directed IRA over traditional IRA accounts. 

If you are an investor looking to utilize a self-directed IRA, The Internal Revenue Service (IRS) requires that your self-directed IRA account be administered and managed by a custodian or trustee on your behalf.  

Keep in mind that your self directed IRA account must uphold certain rules and regulations for you to take ahold of its full potential. 

Continue reading for more information on self-directed IRA guidelines, specifically what rules you need to follow to utilize real estate as an asset class in your retirement portfolio.  


 Self-Directed IRA vs. Self-Directed Roth IRA (SDIRA) 

Now that we have clarified the primary difference between a self-directed IRA versus a traditional ira, let’s establish the difference between a standard  IRA and a Roth IRA.

Self-directed IRAs can be established as a standard IRA or a Roth IRA. However, each account has different tax treatment, eligibility requirements, contribution guidelines, and distribution rules. 

A major difference between a traditional and a Roth IRA is the timing of your tax liability.

With traditional IRAs, you get a tax break in advance, and you pay taxes on your contributions and profits as you withdraw them throughout retirement. With you Roth IRA you would pay taxes upfront, and your qualified withdrawals are tax-free.


Traditional VS Roth- Minimum Distribution  

With a traditional IRA, you must take Required Minimum Distributions (RMDs) at age 72. Roth IRAs have no RMDs during your lifetime. 

If you have a Roth IRA, you are allowed to withdraw your contributions at any time for any reason with no tax or penalty (as long as you have reached age 59 1/2).  

Withdrawals are not taxed, and there is no penalty after age 59 1/2, as long as your account is at least 5 years old.  

These same rules apply whether you have a traditional or Roth self-directed IRA. 

Now that we have clarified the difference between traditional IRA’s and Roth IRA’s, let’s get into how to utilize a self-directed IRA to invest in alternative assets, specifically self-directed IRA real estate investing!  


Benefits of Self-Directed IRA Real Estate Investing 


Tax Advantages: Self-Directed IRA Real Estate Investing  

As with any type of investment in your self-directed IRA, your investment income builds up tax-free, and you can withdraw it tax-free after age 59 ½. 

Arguably, one of the most significant benefits of using a Self-Directed IRA to buy real estate is the various tax advantages an investor can take ahold of.  

No matter what type of real estate asset class you pursue, coupling the tax advantages of an SDIRA account, with the tax advantages real estate has to offer, can completely change the future of your retirement.   

Here are a few taxes you can eliminate by utilizing a self-directed IRA to invest in real estate:

  •  Income taxes.  
  • capital gains taxes. 
  • dividend taxes. 

+ utilizing depreciation on your real estate investments, which will in turn offset your taxes.  

This tax-free advantage allows educated and active investors the freedom to move funds from one real estate investment to another while keeping the tax-deferral status of the self-directed IRA.  

This fact alone has allowed numerous real estate investors the opportunity to magnify their capital gains from strong asset classes while limiting taxes. 

When following the correct rules and regulations with your Self-Directed IRA there will never be any taxes to pay on your profits. 

This aspect alone makes self-directed IRA real estate investing one of the most attractive retirement paths an investor can make, but keep in mind that without following the associated rules and regulations you could incur tax consequences (More info on tax pitfalls below).  


Opportunity for Higher Returns: Self Directed IRA Real Estate Investing 

A Self-directed IRA allows you the flexibility to invest in strong real estate assets that are targeted for your level of risk and accustomed to your personal investment criteria.  

The freedom SDIRA’s offer to investors provides you the potential to generate a much higher ROI on your investments.  

Utilizing a Stable Asset Class- Self Directed IRA Real Estate Investing 

If you are currently investing in an IRA you may feel confident in your mix of stocks, bonds, and CDs, believing that it protects you through almost any economic downturn.  

Unfortunately, stock volatility can be detrimental to your retirement if a substantial portion of your retirement portfolio is devoted to them.  

Bonds are substantial for adding stability to your portfolio, but they can decline in value when interest rates are rising.  

Self-directed IRAs allow investors the opportunity to diversify their portfolio with a variety of asset classes such as real estate.  

This enables many investors the ability to reach a healthy portfolio mix to offset any dramatic changes in the market.   

Keep in mind, individuals will always need a place to live. 


Controlling the Future of Your Retirement: Self Directed IRA Real Estate Investing! 


Another benefit of owning a Self-Directed IRA is the flexibility they provide to investors. SDIRA’s enable investors to invest in assets that they are familiar with and can understand.  

Whether you are looking to be an active or passive investor, self-directed IRA’s allow you to take the reins on your financial future and put yourself and your families in the best possible position when it comes time to retire.   


Benefits of Utilizing your Self-Directed IRA in Multifamily Real Estate Syndications  

Now that we have discussed the wide array of benefits of self-directed IRA real estate investing offers to many investors, let’s discuss why multifamily real estate is considered one of the most lucrative and safest asset classes to invest in and has allowed countless individuals to build their retirement portfolio. 


Single-Family Real Estate VS Multifamily Real Estate  SDIRA investing

By utilizing a self-directed IRA, investors like you have the ability to take advantage of the power, cash flow, stability, and tax advantages that real estate has to offer.  

Many individuals think of SDIRA real estate investing as purchasing and managing a single-family rental portfolio 

Single-family rentals can be right for some investors, but for most investors working 9-5-day jobs, raising children, and all of the additional items on the to-do list, would not find it feasible to find, operate, close, and manage rental properties in regards to retirement investing.  

Multifamily syndications allow for individuals to invest passively into large apartment buildings that they could not afford or manage solely on their own.  

In general, multifamily real estate syndications include many investors who pool their funds to acquire a commercial real estate property. 

Each investor in the syndication holds a piece or share of the total investment based upon their financial contribution.  

Syndicated investments are normally structured as LLCs and the investment timeline can range anywhere from 3-7 years, depending upon the project and the deal sponsor’s goals. 

Multifamily syndications have many benefits over single-family rental properties not only in terms of a hands-off investing route but, also in terms of risk and returns.  

Here is an article that will give you more insight into the comparison of multifamily real estate syndications VS single-family rentals.  

The beauty of multifamily real estate syndications is once you find a deal sponsor that you trust, and perform the necessary due diligence on the investment offering, there is little to no ongoing involvement from you as an investor. 

Your role as a passive investor is to collect distributions whether that be monthly or annually or to receive a payout once the property is sold. These earnings will be grown tax-free by utilizing your self-directed IRA.  

The General Partner or in other words the syndicator for the multifamily syndication does he legwork and provides all the details for the investment project and once the project is underway, he or she will manage the day-to-day operations of the multifamily property.  

For more information on utilizing your SDIRA in multifamily syndications, take a look at the high- level view of the investment process below.    

Multifamily Syndication Self-Directed IRA Investment Process 

Put simply, the investment process for SDIRA real estate investors would look a lot like the steps below: 

Step 1: The syndicator locates and performs due diligence on an investment property. 

Step 2: The syndicator creates a prospectus for potential investors to review. 

Step 3: Interested investors will complete the necessary documentation provided by the syndicator, and would wire funds to take part in the investment opportunity. 

Step 4: Investors’ earnings would generally be gained through monthly or annual distributions with favored returns and/or revenue splits. Earnings would be funded directly back to their SDIRA to grow tax-deferred.

Step 5: At the time that the property is sold or re-positioned, the limited partners/investors normally get their preliminary investment back, as well as a portion of the revenues to go back into their SDIRA.  


Example: Investing in Multifamily real estate with your Self-Directed IRA  

To show you the power of utilizing your self-directed IRA in multifamily real estate, take a look at the returns achieved by our investors from one of our more recent closings. 

Longfellow Apartments, one of our class C+,  139-unit multifamily assets was closed in October 2019.

This asset generated our investors a 55% annualized return with a 90% return to investors in just 21 months. 

This means that if you utilized a self-directed IRA to invest 50K into this multifamily syndication you would have received 27K just in the first year of your investment…

This 27K along with your 9 months of cash flow from year 2 would go directly back into your self-directed IRA to grow completely tax-deferred!  

Not to mention, the 90% return on investment that you would also go back into your self-directed IRA upon the sale of the asset.  

This is a direct example of why utilizing your self-directed IRA account to invest in multifamily syndications is extremely powerful for many investors’ retirement. 


Potential Downsides and Risks of a Self-Directed Roth IRA  

Now that we have touched on the benefits of utilizing a Self-Directed IRA, let’s walk through some of the risks you might face with an SDIRA.  

With a self-directed IRA, you have to do all the due diligence yourself. 

This may not be a risk for investors that have a strong understanding of real estate investing and can make educated investment decisions…. or at least partner up with experts who can make those decisions! 

However, if you are not a knowledgeable investor and aren’t in the network of someone who is, you can make a bad investment decision that could affect your retirement portfolio. 

Another downside to SDIRA real estate investing is liquidity when purchasing real estate within a Self-Directed IRA.  

Investors must consider the possibility that access to the cash or the value of their investment will not be readily available until they reach retirement age unless they are willing to incur a tax penalty.  


Self-Directed IRA Tax Mistakes to Avoid 

When making your financial investments in a self-directed IRA, there are a few tax mistakes that you should avoid.  


1. Remember that certain IRA Transactions are restricted.  

Through a selfdirected IRA, you can purchase almost anything, aside from non-allowable possessions, such as life insurance coverage and antiques. 

According to the IRA rules and standards, the only catch is that you might NOT make any investments with disqualified parties.  

Primarily, a disqualified party includes you, your spouse, and any lineal descendants, more particularly relative (Mom, Dad, Grandma, Grandpa, your kids, & their partners, and so forth).

This is not a comprehensive list of the prohibited transaction. Your CPA or tax lawyer can provide you with a complete list of disqualified parties. 

A forbidden transaction occurs when you use your IRA to benefit you personally or the other way around.  

For example, if you use your IRA to purchase an investment property, you cannot reside in it at all, for any amount of time.  

This is true even if you pay a reasonable rental rate to your IRA, it would still be considered a prohibited deal. 

Selling land, you currently own to your IRA would also be considered a restricted IRA transaction.  

Since you are considered a disqualified party to your own IRA, this eliminates selling it to your IRA since you cannot acquire anything from an omitted party.  

IRA contributions must be made in cash and remember that land is not cash.  



2. Conduct Due Diligence Before Making an Investment. 

Next, you want to conduct thorough due diligence so that your retirement account does not become victim to a scam.  

While self-directed IRAs can be a safe and profitable method to invest your retirement funds, investors should bear in mind prospective fraudulent schemes before investing through their SDIRA. 

Investors need to understand that the custodians and trustees of self-directed IRAs may have limited duties to investors, which the custodians and trustees for these accounts will usually not evaluate the quality or authenticity of an investment.  

As a SDIRA investor you need to make sure you conduct effective due diligence and partner with those you trust.  



3. You Must Understand How Unrelated Business Income Tax(UBIT) Works 

What is UBIT? 

UBIT refers to Unrelated Business Income Tax.  

UBIT applies to specific types of  financial investments made through your IRA. Basically, it is put in place to keep IRA financial investments from having unfair tax benefits over regular, tax-paying companies.  

Your IRA may undergo Unrelated Business Income Tax if it is associated with any of the following: 

  • Runs a trade or business. 
  • Receive any type of rental earnings. 
  • Receives certain types of passive earnings from a business entity it manages. 
  • Ownership Invests in a pass-through entity 
  • Uses financial obligation to fund investments. 

Self-directed IRA real estate permits your investment to grow on a tax-deferred basis or if it’s a Self-directed Roth IRAs the potential for tax-free growth.

However, if you are not careful and you don’t follow the guidelines, you might purchase a property or invest in an opportunity the incorrect way.  

This would disqualify the IRA, and, unfortunately, produce a taxable event.  

Individual Retirement Account ownership of investment property also loses some of the tax breaks available to an investor if the property runs at a loss.  

You likewise cannot declare devaluation on IRA-owned real estate. 

There are no self-dealing or personal transactions that are allowable with Self-Directed IRAs primarily, Self-Directed IRA real estate, must all be arm’s length transactions so that means you can’t purchase a vacation home or your primary residence using it. 

 Likewise, this rule applies to your immediate family member. As such, if you buy a property from or sell a property to a relative (or yourself), you will also develop a taxable event. 

As you can see there a variety of rules and guidelines you must be follow as a self-directed IRA investor.  

We highly recommend to work with a qualified CPA who understands your financial goals and is familiar with SDIRA real estate investing. 

A qualified CPA can help you to avoid taxable events while also putting you in the best position to offset your taxes to meet your retirement goals.  


Self-Directed IRA Real Estate Investing Summary  

We hope this article gave you better insight into self-directed IRA’s, and the freedom, tax benefits, and diversification they provide to many individuals looking to maximize their retirement nest egg.  

We hope you see the power self-directed IRA real estate investing can offer to your financial future. 

Although these benefits are evident, the rules and regulations of a self-directed IRA can be complex to understand, primarily when it comes to maximizing your tax advantages.  

We find that it is incredibly valuable for many of our investors to consult an experienced tax professional before beginning to use your self-directed IRA to invest in real estate. 

The rules of a self-directed IRA must be carefully followed by all real estate investors so that a taxable event doesn’t occur.  

Your risks can be avoided by consulting with a trusted CPA who can guide you along the process of utilizing your self-directed IRA to invest in real estate.  

After reading this article we hope you take your next steps in self-directed real estate investing and you begin the journey of maximizing your financial future.  




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