A Mortgage Lender's Best Kept Secret: Self-directed IRA

Shhhhhh! Best kept secret in the financial industry! Real estate investors, rehab investors, TAKE NOTE! Only 2-3% of the population knows about this financial secret: the Self Directed IRA (SDIRA).

        Why is it only a small number of people know about this type of IRA? Good question! Self-directed IRA’s are not highly profitable for the custodian, who acts as a bank and maintains your account. The fees are annual and there are small transactional fees and some custodians of these IRA’s only charge annual fees and do not charge any transactional fees vs. brokerage accounts which are much more profitable for the custodian. Self-directed IRA’s are not held in a brokerage account.
        So who is the best investor for a self-directed IRA? Anyone interested in purchasing real estate, either as a long term hold or a short term buy and sell, anyone interested in lending money to others for the purchase of real estate, or someone interested in purchasing tax liens, should all highly consider the self-directed IRA. Other traditional investments can also be part of this type of IRA, such as the purchase of stocks, mutual funds, bonds. The IRA custodian needs to be selected carefully since not every custodian allows the entire investment list as established by the IRS.
        The old adage “buy low, sell high” is applying with the real estate market right now. We are in a “buy low” mode, which is creating a rush of money out of the stock market into the real estate market. Utilizing a self-directed IRA to purchase real estate will result in a tax-deferred transaction or, possibly, a tax-free transaction! In a Traditional IRA, funds will not be taxed until withdrawn. All the Traditional IRA rules for minimum withdrawals apply. If you elect to have a Roth SDIRA, there are no minimum withdrawal rules, you can continue to contribute to this type of IRA regardless of age and taxes are non-existent (as long as you are 59.5 and the account has been owned for five years)! There are maximum adjusted gross income limits for Roth IRA’s.
        The down payment for the real estate or the entire purchase price can come from your SDIRA. As the property is managed, all rental income must be deposited into the SDIRA and all expenses must come out of it. Mortgages can be placed on the properties as long as they are in the name of the SDIRA. Any withdrawals from the account aside from those associated for the designated investment will be treated as an IRA distribution subject to possible IRS penalties and taxes.
        The SDIRA owns the real estate for the benefit of you, the individual. For example, the owner of record for the property would be “(Custodian Company Name) Custodian FBO (your name) 123456 (account number)”. Your tenants would write out checks to this owner of record and all expenses would come out of this account.
        There are transactions which are not allowed in the SDIRA. Purchasing a home for your own personal use, or for a relative, or any affiliated party, i.e. your financial adviser or attorney or stockbroker, are all disqualified transactions.
All types of retirement accounts can be transferred to self-directed IRA’s. Simple plans, SEP, 401k, Roth IRA, Traditional IRA are all acceptable retirement fund sources which can be transferred.
        It is easy to get started. First find the best custodian to meet your investment wishes. You can do this by asking your accountant or another trusted adviser and you can do your own research over the internet. Next, select a financial planner to assist you with setting up goals; find a real estate agent to find properties to meet your financial goals; find an attorney to assist with the paperwork for leases and title work; a mortgage lender to obtain a loan for the investment if you are not paying all cash; and an accountant to review the financials. You are now armed for success.
        You just found out the best kept secret in the financial industry! Shhhhhh!
Ann Sabbagh, President, Seacoast Mortgage
Ann has owned a mortgage company for the past 10 years; is a registered representative for CCF Investments; is a teacher for the Rhode Island Association of Realtors and also serves on non-profit boards.