1) Connect with a IRA Real Estate Broker: "Start a conversation to hone your thoughts"

Rolling-over a portion of 401-K or IRA savings to invest in real estate is a new concept to most real estate agents. Most don't know its possible, more don't know the rules, and likely less than .01% have ever done it themselves. Before trekking down this cumbersome road alone, talk with a broker that knows the rules, has done it successfully and has created a company to focus 100% on this service: Blue Chip Realty (BCR).

California broker, Randy Haldeman, has mastered this process. He has spent hundreds of hours modeling the financials, learning the IRS rules, finding the smartest custodians, building relationships with lenders, scouring the best towns, all while negotiating & closing real estate purchases with retirement savings (401K and/or IRA). Steps 2 thru 8 take four to six weeks to complete. In the meantime, save yourself dozens of hours of research and loads of stress by initiating an email conversation early and start the learning curve. You an get answers quickly from a pro as well as learn what opportunities are currently on the market.

2) Determine Your Investment Amount: "Lock-in a price range and ready a deposit"

Start planning now on a expected price range and deposit amount. Depending on your target area, BCR can provide ranges of expected sales prices and deposit amounts up front. If you'll need to liquidate some holdings in the IRA/401K, you should think through the timing of any sales, such as before or right after earnings announcements.

As for how much to diversify out of stocks and bonds, you could 1) start with an amount you want to diversify and move forward, or 2) start with a target type of property and backup to determine deposits and cash needed. The "sweet spot" in the California rental market in lucrative locations ranges in price between $680K to $820K. Since non-recourse lenders usually demand a 50% down-payment, you're "team" will need to liquidate around $350K to $450K of retirement assets to purchase one of these properties. Another option is to partner with a friend, relative, neighbor or co-worker and both put in half or three of you put in a third. If you want to invest even more, a duplex, triplex or apartment could be a bigger gold mine. See our Partnership page for some examples.

A “Self-Directed IRA Facilitator” needs to be selected for the creation of the paperwork necessary to establish the special IRA and LLC. They charge about $2K (plus $800 LLC fee) to manage all the legal agreements, set-ups and transfers. Well worth the price! They will perform the following:

  • File the paperwork with the CA Secretary of State to establish the LLC
  • Create the Self-Directed IRA LLC operating & partnership agreements
  • Acquire the LLC Tax ID# from the IRS
  • Assist with the completion of all 401K/IRA roll-over documents
  • Facilitate transfer of your funds to their custodian
  • Provide all tax advice you'll need

BCR has a created a list of the Top-5 facilitators along with consumers ratings. You can request that document with the request form below.

Once you have a self-directed account open, roll over the initial funds you decided in Step 2 from your 401(k) or traditional IRA to the selected custodian. Don't be afraid of the paperwork, because the reward is great in the long run.

4) Select a Non-Recourse Lender: Pick a bank with experience and know-how

Unfortunately, you can't get a "regular" home loan when you are using an IRA to buy a home. The IRS wants to protect you so instead, you need to get a non-recourse loan. Non-recourse means that the lender can't come after your other assets if you fail to pay them, they can only go after the property that the loan is secured by.

The good news is that using a loan for leverage to purchase real estate will likely double your ROI and allow you to capitalize on buying a bigger rental, which generates more income. The bad news is that non-recourse loans have higher interest rates (6.25% instead of around 4.75%) and usually require a 50 to 55% down payment. This is because the bank has no recourse and wants to make sure you can pay down the loan with your rental income, therefore their "ratios" are stringent. Thus the need for a bigger down payment. No worries though since the renters will pay it off and there's a big payoff at the end!

There are not many banks in the U.S. that provide non-recourse loans, and it is not advisable to seek a loan from outside a bank. BCR maintains a list of the three leading institutions that offer them, contact info and reviews. If you'd like a copy of that document, submit the form below.

5) Select Name for LLC: "Create the entity that renters will be sending checks to"

The IRS says that a taxpayer can't own property within an IRA; however, a taxpayer's Limited Liability Corporation (LLC) can. An LLC protects its owners from liability beyond the assets in the corporation; therefore, if one investment went “bad” it wouldn’t affect other investments or your primary home. Thus, you should start thinking of a name for your LLC as well as how to divvy-up the ownership between partners.

  • Consider an interesting name for your LLC. It's almost like naming a child, in that it will be associated with you for a long time. Renters will be writing the LLC name on checks for years to come, and you'll be listed as the owner on the Secretary of State's website as a public record. You can check if your favorite name is available in California here. You'll need to provide this name to your IRA facilitator and they will arrange its purchase.
  • Determine ownership percentages. The neat thing about an LLC is that ownership can be between family members, neighbors and/or investment partners. Ownership is usually defined by the percentage of funds deposited into the account, and can change over time. A document must be created and kept up-to-date to define the ownership splits.

6) Open an LLC Checking Account: "Choose your favorite bank to manage your Checkbook IRA"

The cool thing about investing with IRA money is that you really get to use your own checkbook to make deposits and purchases. Even better, you get to select whatever bank or credit union you'd prefer. Most people choose their current household bank, but if you ever wanted to try a different entity, now is the time. Remember though that business banking is usually a little more expensive than personal banking if you don't keep minimum levels of cash in your accounts.

You will need to fill out and sign a handful of bank documents to set up a business account. Your IRA facilitator will mail official documents to your bank for you to sign in front of the bank's notary, so bring your ID's.

After you have the account established, order a round of checks through your bank (or online provider) and you'l soon be able to buy an investment property in your retirement account!

All funds used to purchase the property and fix it up must come from this self-directed IRA checking account, and any rental income must be returned to this account. If you follow these restrictions, your real estate investment will have little tax ramifications, called UBIT, but don't panic, they will just be a small percentage of the LLC's profit each year. We can give you estimates in advance, if interested.

7) Find the best Property to Purchase: "If you followed Step 1, you'll have a list of ready targets"

Hooray! You've made it this far and now the fun begins. You have an IRA facilitator, a trust account, your own LLC, a business bank account, funds transferred, and most importantly, a checkbook. It is time to identify the best investment property for Check #001 to put your money to work in extending your retirement runway.

If you've worked with a good real estate broker upfront, you'll be able to act immediately and keep your money working. You might have even toured some properties already and have a few targets in mind. If not, your broker can quickly get you a list of potential properties that fit your target profile. If so, you can quickly investigate, either by visiting in person or by reviewing online listings, property reports and photos. Note that in the "most lucrative" rental areas, there will usually be other savvy investors on the prowl, so you'll want to move decisively if the right property becomes apparent. The best investment properties usually get offers within a couple days. Unlike buying your first home years ago when every penny mattered and every home feature was obsessed over, buying investment property often requires quick action. As long as the "numbers and ratios" show the purchase is lucrative, it is better to act post-haste, purchase the property, earn income, and start paying down the mortgage instead of worrying about the color of a property's bathroom tile or if the dishwasher needs to be replaced.

8) Find the Best Renters for your Property: "Follow IRS rules & employ a pro to manage property"

The IRS says that a principal in a self-directed IRA cannot directly improve upon or fix items in their IRA rental. You are allowed to hire painters, roofers, plumbers, electricians and other home pros to work on the rental, but you can't paint, repair, or improve the property on your own.

Some investors would be fine with that, and would enjoy the process of managing the schedule between their renters and dozens of home pros. Some wouldn't. If you'd prefer not, hire a property manager to handle all of this for you, as well as the process of finding top-notch renters, keeping them happy and collecting rent each month.

Property management firms usually charge 7 to 10% of rental income for their services. Blue Chip Realty is certified by the California Assocciation of Realtors (CAR) to provides full property management services, and has a clever method to get outstanding tenants. BCR also provides monthly updates on the rental market plus all the key spreadsheets at tax time (a huge help) and charges 8% for this service. BCR collects the rent monthly and deposits the net amount to your LLC business account by the 10th of each month.