Tips for investing in real estate using your self-directed IRA One of the most common ways people are investing their retirement money is in Real Estate. Are you invested in real estate or are you thinking about investing in real estate? Then this article is for you! I’m going to share a series of quick tips that can help you avoid the most common snafu’s you can run into when investing your SDIRA in real estate. Here’s the first one. Tip #1 – DON’T COMMINGLE YOUR PERSONAL MONEY WITH YOUR IRA MONEY Now you are either saying, “what’s commingling” or “I already know that. “ In either case, keep reading and I guarantee I’ll save you frustration and help prevent a prohibited transaction in the future. Here’s what my attorney says about commingling… “The term commingling is most often applied to funds or assets. When a fiduciary, a person entrusted with the management of funds other than his or her own in trust, mixes trust money with that of others, the fiduciary is commingling funds and thereby breaching his or her fiduciary duty.” Here’s how I simplify it… “Commingling occurs when you mix your personal money with your IRA money.” That’s a strict no-no. Now if you tell me you already knew that, let me tell you how it can accidentally happen to anyone and I’ll offer you a simple tip to avoid it. The Scenario Let’s say you own (or are purchasing) a property in your SDIRA. You may pay cash or you may have a non-recourse mortgage on it. In either case, when you invest in real estate you need working capital on hand to cover routine expenses like a mortgage payment, unexpected expenses like a tenant clogging up a toilet and occasional expenses like real estate taxes, HOA Fees and property insurance. From time to time you also have to deal with vacancy or situations where your real estate isn’t providing monthly cash flow back to your IRA. The Problem Here’s where the problem comes in. Lets say one, two (or if your name is Murphy) three expenses hit your SDIRA in the same month. This also happens to be the month your tenant decided to pay the rent late. Question, “How do you pay those expenses?” Maybe the better question is, “How do you not pay those expenses?” Well, you don’t pay them with your personal funds because that would be… drum roll … COMMINGLING! Now you would be surprised how this can sneak up on you. You are making multiple investments, cash coming in and cash going out of your account and you suddenly find yourself in a situation where more went out than came in. What do you do if this happens to you? The Simple Solution The simple solution is to keep working capital in your SDIRA. Now the best time to make sure you have adequate money in your account is BEFORE you make the investment. In other words, set a guideline, the amount of cash you plan on keeping in your account. If you find you fall below that amount, replenish it. How do you replenish or add cash to your account? Contribute Money. As long as you are eligible, you can contribute money to your account. To make this easy for you, I’ve attached our automatic contribution form. Its as simple as printing it and sending it back to us. Money will effortlessly move from your savings or checking account to your Horizon Trust SDIRA. Transfer Money. If you have money in an IRA at another custodian you can transfer all or some of that money into your SDIRA. Rollover Money. If you have access to an old 401(k) or 403(b) you can roll that money into your SDIRA. How much cash should you keep in your account? Here are some basic guidelines. $500 minimum cash balance. I want to stress that this should be considered an absolute minimum. The Bank’s Guideline: When you borrow money from the bank for investment property, they recommend a 10% cash reserve. For example, if you purchased a $50,000 property with debt on it, they would advocate you keep $5,000 on hand. Your Guideline: You get to decide what you are comfortable with. Start with the minimum of $500 and go from there. With a little planning and these simple tips you are on your way to a prosperous and successful journey. Its your money, now make the most of it!
Posted on: Thu, 12 Sep 2013 18:43:23 +0000
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