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When to Use Self-Directed IRAs for Real Estate Investing

For the past year, I’ve been working with a leading online real estate investing platform, iFunding. It’s exciting to see how technology and legal innovations are changing the way real estate is financed through online marketplaces and crowdfunding. Here, I’m extending my thoughts delivered in iFunding’s blog to cover the individual real estate investor’s perspective, which is the focus of my own LLC, Heartland Real Estate.

Retirementsavings tree

Growing Your Retirement Account with Real Estate

Today, we look at self-directed IRAs, which allow investors to place tax-sheltered retirement funds into specific property investments, as well as other alternative assets like gold, private loans and LLCs. The promise of significantly higher after-tax returns makes SDIRAs well worth considering for someone with an IRA next egg already built up.

Based on several months of research, my takeaways are:

  1. With real estate investing, SDIRAs offer the strongest tax-offset benefits if you are making loans to property owners/builders, or acquiring ownership (equity) in an income-generating property purchased mainly with cash. If these are your types of properties, you can increase your after-tax profits by 1/3 or more versus investing with non-IRA money.   Read an overview interview I conducted for iFunding with the author of “The SDIRA Handbook.”
  2. If you invest in other types of situations – house fix-and-flips, or acquisitions/rentals financed by mainly debt with some equity – then you’ll be subject to special taxes in your (often significantly) higher, marginal income bracket. An SDIRA doesn’t seem worthwhile if these represent the majority of your investments.
  3. Spend time to pick a reliable custodian – this vendor is responsible for executing the financial transactions that you request for use of your money. Some are highly responsive speed-wise and provide advice, while others can be flighty right at the time you need to close a deal quickly. Read the interview for iFunding I held with one custodian, IRA Trust Services, about finding the right company to work with. Also, on Bigger Pockets, you can search for a
  4. Understand the fees related to different account providers before choosing to work with one. Some custodians are more favorable to investors with a couple of assets and few transactions, while others are more favorable to active property owners that are receiving rent payments and paying lots of expenses. Many custodians publish fee schedules on their website.
  5. There is some setup and ongoing administrative effort involved with an SDIRA account. Most investors who apply for such accounts already have experience with real estate investing and are comfortable that their focus aligns with the best uses of SDIRAs. It’s fine to make several investments before creating your SDIRA, and crowdfunding sites make it easy to invest small amounts over periods of 6 months to a year or more.

I welcome dialogue with those who have questions or experience with self-directed IRAs. For further reading, I recommend the SDIRA Handbook or these discussions on Bigger Pockets.

Bitcoin as a currency for real estate investing?

Real estate crowdfund investing site, RealtyShares, has announced that it is accepting Bitcoin as a currency for investments.  Is this a big advance or more bleeding edge news-bite?

** Addition as of 2/25/14: The NY Times reports that an important administrator of bitcoin currency, Mt. Gox, has announced the digital theft of a significant amount of users’ currency. This illustrates the risks with bitcoin and some say poses a threat to its long-term viability. …My original review from 2/5/14 follows below:

Bitcoin is a purely digital/virtual currency. Rather than issued by a government or backed by a real asset like gold, bitcoin money is created (or “mined”) when someone uses extensive computing power to produce an encrypted data point. Once bitcoin is issued, it can be purchased in an online exchange that swaps traditional currency for bitcoin, or bartered for goods and services using computer-based bitcoin “wallet” software.

RealtyShares is one of the crowdfund sites that has opened real estate investing to a larger audience by facilitating investing online and offering low minimum investments in the range of $10K or less.

RealtyShares says online that they had investors interested in bitcoin, particularly to reduce the transaction fees of 5%+ that can occur when transmitting money, especially when currency conversion is involved.

So, is this a game changer? On the positive side, a number of web sites now take bitcoin, such as  And, can you argue with the Winklevoss twins (of Facebook/”The Social Network” fame) who have invested VC money into this area?

However, the bleeding aspects of bitcoin make it risky to say the least.  The currency value is very volatile and subject to speculation. During December 2013, the value dropped from over $1,000 USD to under $600, then climbed back to over $900.  It’s hard to see who in the real estate ‘chain’ would take ownership of the bitcoin for any period if it adds significant currency risk to the unknowns already in crowdfunding returns and swings in real estate. Instead you’d need a market to hedge the currency exchange. And,  government authorities have warned that your ‘wallet’ may be subject to hacking and theft.

My takeaway is that bitcoin makes for an interesting new-bite and praiseworthy creative project for the technical team that produced it.  However, the majority of crowdfund RE investors are looking other types of enhancements: greater clarity on the deal risks, terms and financial regulations that apply; a wider spectrum of deals on each site; more interaction with the RE operators on the other end of the deals; and of course strong returns.  Bitcoin may work best for the few sites that take $100s as the minimum investment, rather than those that are average $10K-100K per investor per deal.