USING A PORTION OF A SELF-DIRECTED IRA TO PURCHASE AN INVESTMENT PROPERTY

USING A PORTION OF A SELF-DIRECTED IRA TO PURCHASE AN INVESTMENT PROPERTY

What happens when your self-directed IRA is not purchasing an investment property all by itself?  Maybe you are funding some of your investment with personal money and the IRA will pay for the rest. Or maybe your IRA does not have enough money to make the purchase alone so you need to secure outside funding from a lender.  It’s possible to invest this way, you just have to know some basic math.

Blurry man with 2 bags of money

Let’s assume your IRA funds 20% of the total purchase of your investment property, then you secure a loan or have personal money for the remaining 80%.  This is the pro rata formula you will use for everything pertaining to your investment.

Repairs and maintenance – your personal money will pay for 80% and your IRA will pay for 20%.

Property taxes – your personal money will pay for 80% of the tax bill and your IRA will pay for 20%.

Rent – Your tenant will have to cut two checks.  You receive 80% and your IRA needs to receive 20%. Or, if you have a property manager, the tenant can send one check to the property management company and the property management company can send a check made payable to you and one made payable to your IRA.  You should never split these check amounts on your own!

This 80/20 formula should be used for anything pertaining to your real estate investment.

MATH WAS NEVER MY THING!

IS THERE A WAY AROUND ALL THIS MATH?  Yes.  An ICO account would be a better fit for you!  This account has more paperwork, takes a little more time to set up and is more expensive; however, this is the best option when using only a portion of your Self-Directed IRA money to invest in real estate, or for those that want to invest in multi-unit or multi-family properties.

ICO

Here’s how it works:  “ICO”, is a special purpose limited liability company (LLC), which is either fully or partially owned by a self-directed individual retirement account (IRA).  This type of account will allow your IRA to fund a portion of the property’s purchase without worrying about keeping track of calculations due to the LLC that is attached.  The LLC has a checking account so taxes, repairs and rent can come in and out of the checking account in full.

A lot of clients feel its worth paying for the convenience of an ICO.

An ICO is also a better fit for those who are looking to invest in a multi-family, multi-unit or more than one single family home.  A self-directed IRA only has a certain amount of free transactions per year.  If the activity level is high enough you will start incurring additional fees.  Since the ICO account has an LLC attached with a checking account, the payments will go in and out of that account instead of coming to our office.  We are not involved so we do not charge a fee.  The ICO can be a more cost effective solution in the long run, not to mention more administratively friendly.  To see a list of our fees click on FORMS on our website, then click on FEES.

We can always change your Self-Directed IRA account into an ICO account, but if you know your IRA is going to fund only a portion or your investment or you want to invest in more than one home or multi-unit property, no need to add expense, just ask for an ICO.

To learn more contact me (info below) to schedule a free consultation or visit our website (www.Accuplan.net) and chat online with one of our knowledgeable IRA Specialist.

Author:

Jaclyn M. Grella

800-454-2649 x1119

[email protected]

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