Multi-Family Property Investments: 5 Key Considerations for Investing with Your Self-Directed IRA

 |  General Self-Directed IRAs

By J.P. Dahdah, Vantage Founder & CEO

Looking to grow your retirement portfolio through the real estate market?

Multi-family properties can be a strong way to generate steady rental income. These properties also offer tax benefits, risk diversification, and appreciation over time.

However, it’s important to recognize the complexities and risks associated with multi-family investment. IRA rules, financing, and property management are all significant factors when wading into the waters of real estate.

In this guide, I’ll outline five key considerations you need to recognize when using your Self-Directed IRA (SDIRA) to invest in multi-family properties.

1. Understand the Self-Directed IRA Rules

Per the IRS, SDIRAs can hold a virtually unlimited variety of investments, including direct investments in real estate. However, these investments are governed by strict rules in order to qualify for the tax advantages of the IRA.

Notably, “disqualified persons” (aka related parties) cannot benefit directly from the property. This will always include you as the primary investor, and may also include your immediate family members. Together, you cannot live in, manage, or even repair the property yourself.

Further, income generated from the property must be returned to the SDIRA, and expenses related to the property must be paid directly from the SDIRA. Failure to meet these IRS rules can result in what’s called a “commingling of funds” or personal gain, which leads to penalties.

Remember: Any commingling of funds or personal gain is strictly prohibited.

2. Consider Financing Options

If your retirement account doesn’t have enough funds to buy the property outright, you might consider leveraging your SDIRA using a non-recourse loan. However, this strategy introduces a pair of complexities to your financing.

First, leveraging your SDIRA could trigger Unrelated Business Income Tax (UBIT) on income derived from the financed portion of the property.

Second, the lender can only use the property as collateral and can’t pursue the IRA itself or the IRA owner’s personal assets in case of default.  Not many banks and lenders offer non-recourse loans structured for IRAs.

At Vantage, we work regularly with investors looking to expand their buying power using non-recourse loans. We’ve compiled a list of non-recourse lenders who offer this product. Contact us for a full list of available lenders.

3. Conduct Thorough Investment Analysis

Investing in multi-family properties requires careful analysis of several factors. These include the location of the property, market conditions, potential rental income, property management costs, operating expenses, and prospective repair costs.

Thorough investment analysis is critical to provide a realistic projection of the property’s potential return and guide your decision-making process.

Many of our clients are experienced multi-family real estate investors and can conduct their own investment analysis. If you fall into the experienced category, you’ll love making multi-family investments on a tax-favored basis using your SDIRA.

However, if you’re new to multi-family real estate investing, it’s important you work with experienced real estate investment professionals who can conduct the adequate due diligence and analysis necessary to make informed investment decisions.

Having the right team in place can make or break your potential for big wins.

4. Property Management is Crucial

Don’t forget: Direct management by you, or any disqualified person, is prohibited by the IRS. So, you’ll need to hire a third-party property management company to handle the property’s operations, including maintenance, rent collection, and tenant relations.

The costs associated with property management should be factored into your investment analysis, along with the time and effort needed to identify and interact with your property manager. Make sure you include this line item in your investment review.

5. Plan for Required Minimum Distributions (RMDs)

Once you reach the age of 73, IRS rules mandate that you begin taking required minimum distributions from your IRA.

If a substantial portion of your SDIRA’s value is tied up in real estate holdings, you may face challenges meeting your RMDs. Real estate isn’t as quickly liquidated as other assets like stocks or bonds. Maintaining a diversified portfolio can help avoid liquidity issues in the future.

Seek Professional Guidance

A “Self-Directed” IRA doesn’t mean you have to tackle the SDIRA investing process alone.

Multi-family real estate investments are complex. Because of the intricacies, it’s often beneficial to seek professional guidance. Guidance can come from tax professionals, legal advisors, or experienced real estate professionals. These experts can help you navigate the complex IRS regulations and the real estate market.

Lastly, if you want to take advantage of multi-family investment without all the management responsibilities, there are options. Many private fund companies invest in multi-family real estate strategies. You can buy into these funds to include real estate in your portfolio using a more passive approach.

In summary, using an SDIRA to invest in multi-family properties can be a lucrative strategy when handled correctly. However, this strategy requires careful planning, a thorough understanding of the IRA rules and regulations, proper investment analysis, and possibly professional advice to ensure a successful and compliant SDIRA investment journey.

Happy investing!