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Is it possible to use a retirement account to invest in a real estate syndication? The short answer is yes, and there are huge advantages to freeing up money that is otherwise untouchable. But what qualifies?

You’re probably familiar with the traditional 401k account, which are retirement accounts established by an employer. You may be contributing to this account on a monthly basis and perhaps even getting a match from your employer. As it stands, employer plans are NOT eligible for investment into real estate.

On the other hand, there is the IRA, which is an individual account not tied to an employer. Only the self-directed IRA can be set up to invest in real estate syndications. The tax code allows for this, and the key is to place your self-directed IRA account with a custodian that will accommodate investments for a multifamily syndication. 

Today, we’ll take a look at how to choose the right custodian, the processes involved, and the pros and cons of this strategy.

Choosing a Custodian 

The thing people don't realize is that just by having a self-directed IRA doesn't mean you can use it for real estate investing.  A self-directed IRA requires an IRA custodian. Normally, it’s a financial institution (like Schwab or Fidelity) that sets up and manages the account so that it abides by the US tax codes. 

But if you call your custodian and start asking questions, you might find that you can’t actually use these funds to invest in real estate assets. They'll call it a self-directed IRA, but you can only direct it in things like Wall Street. Obviously, you’ll need to find a new provider that will allow for real estate investment. And even then, they're not all created equal. 

From our experience at Nighthawk, we’ve found some of these self-directed IRAs are easier to work with than others. Some will allow for real estate, but not for syndications. Others only take paper checks, which we’ve made a rule to avoid.  When we conduct distributions, we actually require a group to take electronic deposits (ACH/Wire).  So, if your IRA custodian insists on paper checks, know that you will not be able to invest with us and certainly with other groups.  

Another thing to consider is how quickly the custodian can execute documents. The tax code requires an arms-length transaction to happen, and one of the things that involves is the custodian must sign for every transaction on your IRA. While it might be the “Michael Blank IRA” it's really its own separate entity, if you will. 

Every time you have a document that needs to be signed, like an operating agreement for example, there's a process for submission. If your custodian insists on receiving a paper document with a wet signature instead of accepting a DocuSign, it will put a delay on the deal.

In all, there are certain things you want to do when looking for a custodian of your self-directed IRA. First, just start a conversation with them and learn how they operate. Second, whether it's Nighthawk or another investment group, ask their opinion about the custodian. 

Moving Your IRA to a New Custodian

Once you’ve found a custodian for your self-directed IRA, there’s a series of paperwork that you'll fill out.  The new custodian will then get in touch with your current custodian to process the money transfer, which may take a couple of weeks. It’s different for each group, but it’s a more involved process than you might expect.

That’s why the best time to make a change is before there's an active deal present. You want to put yourself in a ready position, especially in today’s environment where deals happen pretty fast. At Nighthawk, our deals typically fill up in just a few days after we start, and we like to move quickly.

The Pros and Cons

Like any investment strategy, there are pros and cons.

The main advantage of using a self-directed IRA to invest in syndicated real estate deals is the return. Many people have a lot of money wrapped up in an IRA account that’s earning only 1-2% a year.  So that makes investing with an IRA very, very powerful.

Related: The Potential Returns of Multifamily Real Estate
Related: The Truth About Stock Market Returns (And What You Can Do About It)

The con is that you may actually have to pay taxes on your IRA. There is something called the UBIT (Unrelated Business Income Tax) which usually affects investments that have some kind of debt associated with it. And of course, all multifamily syndications have debt. That's beautiful, but the tax law doesn't think so, right? This tax law makes you pay income tax on any portion of income that’s derived from debt. 

For example, let’s say you’re using a mortgage to fund 80% of a multifamily apartment deal.  This is a debt, which means that 80% of any profits you make are taxed at your current tax bracket. This is triggered when we sell, and will now be a taxable event in your IRA.  And if you didn’t create a tax ID for your IRA prior to getting it set up, you may have to pay a penalty and interest when you CPA files your returns.  

I've gone through this myself and it's a real nightmare. But I now know how to properly set these things up from the start, and I think it's a great way to get started. The good news is there's a solution for the headaches I experienced. It’s a different kind of 401k called a Solo 401k, and we’ll talk about it in our next video.

The Bottom Line


If you haven’t already, check out my free report that compares the return of the stock market to multifamily syndications. If you are at a place where you're ready to get involved in passive investing, you can join our Nighthawk Investment Club.  We’ll set up a call with our team to see if makes sense to work together and we'll get you on our list. 

Thanks so much for taking the time, and we’ll see you in our next video blog.

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