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June 18, 2024

Investing in Multi-Family Real Estate with a Self-Directed IRA

Key Points 

  • Investing in multi-family real estate with a Self-Directed IRA (SDIRA) can offer tax advantages and help to diversify your retirement portfolio.
  • You cannot live on a property owned by your SDIRA, but you can develop a diverse tenant pool for rental income.
  • Broad Financial offers Self-Directed Real Estate IRAs with checkbook control for more efficient management of multi-family properties.
There are a plethora of benefits when you begin investing in multi-family real estate with a Self-Directed IRA.

The U.S. is ripe with investment opportunities if you're interested in real estate. Many investors focus on the multi-family segment because of its potential to generate steady income and high returns. The possible profits can grow even more lucrative if you invest with a Self-Directed IRA (SDIRA), as you receive tax advantages. Let’s explore how you can invest in multi-family real estate with a Self-Directed IRA and the potential benefits that you can enjoy.

Benefits of Multi-Family Real Estate

Multi-family real estate refers to properties designed to house multiple tenants in separate units. This category includes apartment complexes, townhomes, and condo buildings. Each unit within these properties operates independently, allowing multiple streams of rental income. Multi-family properties cater to a variety of tenant needs, spreading out financial risks for the investor across several units rather than relying on a single tenant

The appeal of multi-family properties lies in their potential for consistent and substantial income generation. Unlike single-family rentals, where a vacant unit equals zero income from that property, multi-family units can still generate income even if some units are unoccupied. This can help buffer investors against possible financial dips caused by tenant turnover. Furthermore, the economies of scale in managing multi-family units often translate into lower per-unit maintenance and management costs compared to single-family properties.

Benefits of a Self-Directed IRA for Multi-Family Real Estate

This couple is thrilled that they began investing in multi-family real estate with their Self-Directed IRA with checkbook control.

Investors seeking broader options beyond traditional investment vehicles often turn to Self-Directed IRAs (SDIRAs). Unlike standard IRAs, which are typically limited to stocks, bonds, and mutual funds, SDIRAs empower investors to diversify their portfolios with alternative assets like real estate, private placements, and more. This capability is especially advantageous for those interested in the tangible asset class of real estate.

Investing in multi-family real estate through an SDIRA, sometimes referred to as a Real Estate IRA, brings several unique benefits. First, any profits generated from investments held in a Real Estate IRA will grow either tax-deferred in a Self-Directed Traditional IRA or tax-free in a Self-Directed Roth IRA. Tax advantages significantly enhance the growth potential of investments by allowing any potential gains to compound without immediate tax implications.

Using an SDIRA to invest in real estate also provides perhaps a protective barrier against market volatility often associated with stocks and bonds. Real estate tends to have a lower correlation with stock market fluctuations, offering a generally stable investment return that is particularly appealing during times of economic uncertainty. Additionally, the physical nature of real estate investment through an SDIRA allows for more direct control over the asset, potentially leading to better risk management and investment outcomes.

Who Can Live at the Property?

One of the most common questions surrounding multi-family property investment with an SDIRA is who can live at the property. According to IRS rules, neither you nor your direct family members can occupy multi-family units owned by your SDIRA. It would be considered a prohibited transaction. 
However, the goal with a multi-family property is usually to develop a tenant pool that contributes income to your retirement portfolio, ultimately helping you build a better future for yourself and your loved ones.

Can You Still Get a Loan?

Multi-family properties typically involve significant upfront cash. If you don't have the money in your Self-Directed IRA to cover these costs, you can apply for a non-recourse loan. You'll be able to leverage your SDIRA's purchasing power and keep the tax-free or tax-deferred status. 

Non-recourse loans are exclusively tied to the IRA-owned property. The lender can't use any other assets in your SDIRA as collateral or pursue a judgment against you personally for defaulting. If you ever sell the property for profit, you will pay taxes on any gains related to money borrowed through the non-recourse loan. The net profits attributed to the leveraged loan portion are considered UDFI, or Unrelated Debt Financed Income. The UDFI tax is a subset of UBIT, or Unrelated Business Income Tax.

Benefits of Checkbook Control

Renting to multiple tenants involves ongoing transactions, like collecting rent and paying for maintenance services. With a classic SDIRA, each transaction goes through the designated Self-Directed IRA custodian, which can limit efficiency when investing in multi-family properties.

Opening an IRA LLC or IRA Trust allows you to gain checkbook control of your SDIRA so you can manage everyday investment transactions without involving your custodian. That's why these accounts are also called Checkbook IRAs. Your SDIRA funds are invested in the IRA LLC or IRA Trust, and you act as the entity's manager with control of the bank account.

It's important that you remember to perform due diligence when utilizing your Self-Directed IRA for investing in multi-family real estate.

Interested in Learning More?

If you think multi-family real estate might be a good asset for your retirement portfolio, schedule a discovery call with Broad Financial to learn more about our Checkbook Control IRA. We’re here to help you realize the benefits of using a Self-Directed IRA to invest in real estate and many other alternative assets. Contact us today!

Disclaimer: Broad Financial LLC does not provide legal, tax, or investment advice. Please consult with your tax or legal advisor before making investment decisions. 


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