Self Directed IRA Rental Strategy Questions - Any Workarounds For This Issue?
In a Self Directed IRA, most younger people don’t have a lot of cash built up given its $6k per year contribution cap. So if you were to buy a rental property for 300k and need $100k down then most people would be left with no extra money for rehab or maintenance.   What strategies are there to get around this to make sure you have sufficient funds to support the property?
[{"id": "hwm04qe", "text": "Rehab funds could be built into a loan, but if you don\u2019t have extra liquidity to carry the property during renovations, you shouldn\u2019t be buying a property that requires renovation to be viable as a rental. Buy a property that is ready to rent from day one, maybe one that already has tenants (assuming you\u2019ve done some DD to ensure they are unlikely to default). You can build a replacement reserve from operating cash flow. Smaller repairs can probably be budgeted into the operating expenses. $300K isn\u2019t going to buy more than a few units, maybe a duplex at best. At that scale, assuming you get a residential home loan (which you can for 4 or fewer units) and are paying the prevailing market rate of around 4%, your mortgage payment will be around $1,000 per month including escrows for taxes and insurance. Assuming monthly rent of $2,500 per unit in a duplex and a 40% expense ratio, net cash flow after debt service would be around $2,000 per month or $24,000 per year. Of course this assumes 100% occupancy at all times throughout that year, which may not always be the case. Now from that $24,000 per year, build a replacement reserve based on expected major repairs over a number of years which should vary depending on your expected holding period. That should cover the big costs like the roof, HVAC, appliances, etc.", "replies": [{"id": "hwn6au0", "text": "Thanks for the reply but in a SDIRA you can only use funds from the IRA to operate your rental. So you\u2019re very limited given IRA accounts for young people typically don\u2019t have a lot of capital due to a $6k per year contribution cap. So looking for workarounds here or else a rental in a SDIRA isn\u2019t a great option at this point in time.", "replies": [{"id": "hwni7fe", "text": "If your capital structure doesn\u2019t allow you to build a replacement reserve, you shouldn\u2019t be investing in commercial real estate at all.", "replies": [{"id": "hwnmfjk", "text": "You\u2019re missing the point lol - I have plenty of money. The issue is in a SDIRA you can only contribute to the property what\u2019s in the account and from what I\u2019m seeing there is no work around to fund the account more than the $6k per year cap. So asking if anyone has a workaround\u2026", "replies": [{"id": "hwnoxyj", "text": "Perhaps you could buy a duplex, turn it into a condominium in which you own both units. Then, the condo board (that you\u2019d control) could assess each unit for maintenance costs. Many lenders will actually require condo assessments to be escrowed along with taxes and insurance. This way, it becomes an operating expense paid as part of your mortgage payment each month and the condo association, which is distinct from your ownership of each condo unit, which you rent out, actually pays for repairs and builds a reserve to maintain the building.", "replies": [], "depth": 5}, {"id": "hwpofx3", "text": "Prior poster is right though, if you don't have the funds in the account, your capital structure does work.  I mean, if you have a non relative that will do non recourse lending to your sdira, that could provide funds.\n\nBut you are also wrong.  There are a number of ways to super fund an ira.  But most require that you roll over a business retirement plan into it (such as your employer 401k balance, and that will depend on your employ!ent situation, plan balance and plan terms).  If you are self employment, you can set up plan and contribute.a.ton.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]