Good people of GRM, please bestow upon me knowledge of rental properties in your retirement accounts

I have a pension that's based on about a decade of employment. It will keep the lights on.

I am currently earning in a 401K mixed between Roth and not Roth.

I have a Roth IRA and a traditional IRA from previous employers that I can use. Let's say there's enough in the Roth contributions to make a down payment on a property we want.

I want to buy a rental house with a mortgage, through an LLC, using the IRA funds as down payment. As I understand it:

1. You cannot manage your own property (vague rules on what that means exactly) if held in a SDIRA
2. I can keep the SDIRA like a checking account, money flowing in and out
3. If the net in is greater than the max contributions for the year, I have to open another SDIRA in my wife's name or pay taxes on the gains
4. I can alternatively take the cash out of the Roth IRA contributions and just use them as my money, but have to pay taxes on all net gains.
5. I need a commercial loan due to LLC
6. I need an LLC to protect me from litigation

I don't know much else.

Has anyone done this? I know it can be done. The numbers say I should beat the S&P, plus I get a house in the end which continues to appreciate.

If this is a "I've heard" or a "my cousin says" or a "I did stay at a Motel 6 one time" then put that in as disclaimer.

I make my living off rentals and I looked into a SDIRA a number of years ago.  My thoughts were there were too many rules that hurt your ability to save money doing things yourself.  Paying people to do everything will eat your lunch.

Example: replace water heater is probably around $1000 to have a plumber come out and do. I grab one at Homey's and I'm only out about $400. How many months profit did I just save?

If you can't do things yourself you will probably lose money each year but make it up in appreciation. It all depends on the market in your area.

Just put it in an LLC.

I would ask this question on both Bogleheads (prepare to be lambasted) and mr. Money mustache. 
 

I briefly looked into it, then quickly shut the pages down from how much work it is - that and I couldn't make the numbers work out in my area. Here are a bunch of the negatives, I've had this site bookmarked for a few years: https://evergreensmallbusiness.com/self-directed-ira-real-estate-investment-problems/

I'm sure that there is enough upside that one should not be scared by this, but it was too much work and research for me at the time. I'm watching this thread with interest. 

I also looked into this a couple years back. I think you've got the basics down. But I also came to a similar conclusion as the other two posters that the restrictions dull the shine quite a bit compared to just owning outright through an LLC and at least having the option of earning some sweat equity. If you can buy cheap enough that management costs and ongoing maintenance/capex aren't eating all of your profit, then it might make sense, but that's exceedingly tough to do right now, especially if you'd like some property appreciation to go with your monthly cash flow.

Outside of something like Wholesaling, I've not been able to find a Real Estate investment path that made enough sense to me to deal with the SDIRA. And Wholesaling feels kind of slimy to me so I've never pursued it.

Oh, I forgot about UBIT. If you're going to have a mortgage, make sure you understand how UBIT impacts your gains.

I'm wondering if it would be possible to incorporate as another LLC, so you'd have two - the "owns the home LLC", and then "home repair LLC" and have one LLC hire the second to do things like replace a light bulb, which I think the owner is not allowed to do. Probably an obvious loophole that has been closed, but worth considering.

Just asked my friend who owns multiple rentals. He said "Not easy not worth it"

I really want to hear from someone who has done this. It wouldn't be a thing if there wasn't some benefit. 

There are benefits. From the taxation side, most of the payments can be made to look like losses overall with depreciation and cost to do business. (repairs, leasing costs, etc.) From a return on working capital, That is really going to depend on the tenants. That is the wild card here. 1 bad tenant can wipe out a lot of your gains and really hurt you overall. The cost to evict and repair after eviction can be really put a strain on the finances. 

As you are looking at the property costs, Factor in a renovation every 10-15 years to stay relevant. 

We have had rentals in the family almost my entire life. Honestly, I get better returns on my capital from high dividend stock portfolio but I also have cash to invest. With the rentals, you don't need the cash up front as much to reach returns. If I was going into the rental market again, It would be VRBO/AirBnB. Higher returns overall as long as you can keep the turnover cost between rentals to a minimum. 

mtn said:

I would ask this question on both Bogleheads (prepare to be lambasted) and mr. Money mustache. 

Off hand, I would expect to find more of the people who have been successful with this over at Bigger Pockets.

mtn said:

I'm wondering if it would be possible to incorporate as another LLC, so you'd have two - the "owns the home LLC", and then "home repair LLC" and have one LLC hire the second to do things like replace a light bulb, which I think the owner is not allowed to do. Probably an obvious loophole that has been closed, but worth considering.

If not outright banned, I'd guess that at the very least it probably requires the hired party to be bonded and insured.

bmw88rider said:

There are benefits. From the taxation side, most of the payments can be made to look like losses overall with depreciation and cost to do business. (repairs, leasing costs, etc.) From a return on working capital, That is really going to depend on the tenants. That is the wild card here. 1 bad tenant can wipe out a lot of your gains and really hurt you overall. The cost to evict and repair after eviction can be really put a strain on the finances. 

 

As you are looking at the property costs, Factor in a renovation every 10-15 years to stay relevant. 

 

We have had rentals in the family almost my entire life. Honestly, I get better returns on my capital from high dividend stock portfolio but I also have cash to invest. With the rentals, you don't need the cash up front as much to reach returns. If I was going into the rental market again, It would be VRBO/AirBnB. Higher returns overall as long as you can keep the turnover cost between rentals to a minimum. 

We are indeed talking about airbnb vrbo vacation rentals. Sorry I forgot to add that.

So I can just take money from my Roth IRA and then it's mine to spend without the SDIRA aspect, as I stated in the OP. It sounds like that's the way to go. I still need the LLC and still need all of the insurances, and enough stuff to make it not make much on paper. What's the easy way to ethically and legally do that?

You don't even need the LLC but it is nice to have the corporate veil to sit behind if E36 M3 goes sideways.  So, do the LLC and do one for each property if you get more than one.

The VRBO can make you some good money if your are in an area that people want to spend money to get to.  The turn over between customers would be a pain in a SDIRA. You will probably want to contract with a cleaning service but fixing minor wear and tear yourself will save you a ton of money.

I have 18 units in St Pete Beach and people have been telling me to go the Air BnB path with a few of them. No thanks.  I'd rather go into a unit every couple years to paint etc after someone moves. Every week? I have more fun stuff to do. Also think about the people around the property. Other Air BnB? My inlaws have a house on the water just south of Clearwater and the house next to them is on VRBO. Every weekend its a party.  Makes his blood boil.