How to Buy Your First Rental Property in an IRA | Mark J Kohler | CPA | Attorney

Hi, Mark Kohler here with another tax and legal tip. Let's talk about how to buy your first rental property inside your ira. Now I know this is exciting to many of you that may be just searching here on YouTube and have, you know, fallen on my channel. Others of you that have been following me for years, you may know where I'm going with this. It's, and this is just a review, but bottom line is buying real estate in your IRA is possible. People have been doing it for years and it's an extremely powerful tool. And don't let anybody tell you, well, because you don't get the tax benefits of it, you should just buy real estate in your own name and definitely not put real estate in your ira. I completely disagree. When you're deciding what you should put in your ira, the question should be what is it? What can I put in there to get the best rate of return? The best rate of return and you should have a balance. I want you to put money in real estate investments in your own name as well as inside your IRA, your 401k, your SEP or simple. But when someone says, oh, real estate should never be in an ira, let's talk, let's argue about it. Because I think that real estate provides a wonderful rate of return and it should be inside at some level or degree inside your IRAs and 401ks and tax preferred vehicles. There's nothing wrong with that. Look at the net rate of return. So with that stated, let's go through some quick steps of how to get your first rental property in your ira. Number one, you've got to get IRA money to a self directed custodian. Now in the Wall street world you would call this a stockbroker or a brokerage account. But in the IRA world we call it a custodian. Now the 401k conversation, that's one for another video or another day. Let's just talk about IRAs for a minute. Now you may have an old 401k that got rolled out to an IRA. Well let's take that IRA and put it into a custodians account. Now you may put new money in an ira, but it may not be enough to go out and buy a piece of real estate. But if you have old IRA money and old 401k money, step one is let's get that money to a self directed custodian. Now we work with custodians all over the country. We can give you a list of some great ones to interview or look at their websites and find the custodian that fits your style. But these custodians are just going to hold the money until you call them on day two and say I'm ready to invest. So get that money to a custodian. Step one, Step two, we need to decide what we're going to buy because it's going to dictate what type of vehicle we're going to use. So let me repeat that. Make a decision on what the investment within the real estate industry is going to be mean. It could be a single family home, it could be a mobile home, it could be a commercial building, it could even be the process of doing some rehabbing or fix and flips. It could be wholesaling, I don't know. And that's going to really dictate what type of structure you're going to invest in. Don't think that it's all I'm just going to use a trust or use an LLC and I'm done. Be careful. Number two, decide what type of real estate you're going to be embarking on and be clear about that. Don't be Harry carry. Be quite clear on that investment strategy because it's going to dictate the next structure. Number three, of course this video is about rental property and assuming you're going to buy a rental property. So what we need to do is in step three is set up an llc. Now this is going to be an LLC limited liability company set up in the state where you're going to buy real estate. Not in Nevada, not in Wyoming or New Mexico or Alaska or some sexy sales pitch that you're going to get from some non law firm or heaven forbid you go to LegalZoom and try to make this happen. And custodians aren't going to go for that. This has to be a well crafted limited liability company operating agreement that has ERISA and IRS provisions. And you should pay more than 1500 bucks to get an LLC to hold real estate owned by your ira. So see, an IRA is going to hold the LLC and the LLC is going to hold the real estate. And so you want to be working with a company that can help guide you through the process, a law firm, because this is real legal work. Now we've been doing this for over 15 years helping clients set up LLCs to own real estate. And we can do it as affordably as 800 bucks plus filing fee or maybe a registered agent fee. But $800 is the core fee to get a single member LLC set up. Now Shop around. This isn't an infomercial, but it's to let you know that a real law firm helping clients nationwide can be affordable. Now, this LLC again, is going to be in the state where you're going to own that real estate. That's point number one. Now, you might register at foreign back in your own state if you're in California. That's a typical problem, because California is going to want you to register in their state, even if it's in a Georgia LLC with Georgia property you have to register for in California and pay their darn $800 minimum tax, which sucks, I know. But the LLC is critical to hold the real estate, hold the checkbook to buy that rental property. Next, I want to talk about the acquisition of the real estate and the management of the LLC for a moment. Now, this is an important step in managing the LLC that we talk about what those limitations are. Now, this, of course, could be a much longer video. And my partner, Matt Sorenson has written an incredible book called the Self Directed IRA Handbook. This is a chapter in my newest book, the Tax and Legal Playbook. And we've got all sorts of videos on our website and support. And when you set up an LLC with our law firm, we go through all the details and it's included in the setup and you talk to a real lawyer. Now, with all that said, again, let's hit a couple highlights. And that is this llc, which is going to have a checkbook. You can be the manager of that llc, you can be the signer of that checkbook. That's okay. If your custodian says you can't, you've got the wrong custodian. That's their rule. That's not the IRS or ERISA's rule. And we've been studying this and doing LLCs for over 15 years, helping clients do this. We are experts in this and we stand behind our LLCs. And if you get audited and there's a penalty, we pay it. That's why we carry malpractice insurance. So we know this custodians have their own internal guidelines. The law firm is representing you to design your llc. So you can manage that llc, you can buy real estate, you can control the checkbook, but you cannot provide sweat equity. You can't go out there and work on the rental property. You need to have a third party manage the rental real estate. You also have to use a realtor. It can't be yourself. So you've got to be cautious on the acquisition. And we guide you through those rules, but you can manage that llc. So once you've got your LLC funded, you're out there, you've got the checkbook, you would write an offer to go buy a piece of real estate and you start to go through the closing process. Now you cannot co sign on the loan or use your credit to get that loan. You have to use a non recourse loan. But it can be exciting. And you don't have to buy real estate for cash. You can pool your money with other people and, and to leverage your money in a sense with other partners or you can get a non recourse loan. Banks will loan you money, usually about 60 cents on the dollar when you put 40% down and keep some sort of reserve. Very common. So it can be exciting. Now that's that step in the process of managing the llc. Now finally, let's talk about annual maintenance. And again, as I've said previously, this is a big topic and I'm just trying to hit the highlights, but once you have this LLC set up and you're buying real estate, you may need to file a tax return annually. There's taxes that could occur called unrelated debt financed income. And if you're flipping properties, not rentals, but I want to throw it out there, there's this UBTI tax or unrelated business income tax or taxable income. You're going to want to learn about these things. This is why you're going to get some additional study and consultation and books to help you through the process. And we'll be there as well as your attorney. But it can be very low maintenance. Maybe a annual tax return and an annual valuation to give to your custodian. But you shouldn't have to stress about the process. People have been doing this for over 30 years. It's very common and it's certainly legal. So before someone says you can't do it, it's not that you can't do it, it's maybe that they can't do it because they're there. You're stockbroker or their custodian. Rules don't allow for it. But get a law firm behind you. If it's not our law firm, that's fine. Get someone else's to write you a comfort letter and give you guidelines so they can stand behind and help you set this up and then maintain it for many years to come. Bottom line, get out there, invest with your ira. Invest in what you know best. And I think having rental property in your own name and your own LLC is owned by your trust and having rental property in your IRA and that owns LLCs and you're out there getting a better rate of return in your ira. I think it's fantastic. Have both buckets going. Don't be afraid of rental property inside your ira. You can do it. Give us a call. We'd love to help. Thanks for watching and if you found that helpful, powerful, interesting, exciting. I did. I've got so much more to share with you. I have a whole video series on how to start a small business. Eight steps, almost 40 videos, 99 bucks. Simple, easy. You can start watching it right now and get the steps going to get your business off the ground. And every time I shoot a new video, you get a copy of it. It's all included in your membership site for lifetime access, I guess. My lifetime. Anyway, you're going to love it. Check it out. Also, I want to challenge you to subscribe to my YouTube channel. I shoot videos every week. I've got a blog and social media tips and a newsletter every week. So much there. And you can check it all out at my YouTube channel. So please subscribe and I hope to see you on the backside.