Monday, May 10, 2010

First Investment With Self-Directed IRA

It’s been a very long time in the making – five months – but I am now making my first investment with my self-directed IRA! I opened the bank account two weeks ago, the hold on my initial deposit check ended last week, and now I’ve found a new hard money investment. This one will be all the more sweet since it will be made using funds from my self-directed Roth IRA, and thus the profits will be tax-free!

My partner has another hard money lending opportunity. This one is for a mortgage of $224,000 on a property the borrower purchased at auction for $321,000, giving us a 70% LTV ratio.  (Well, loan to purchase price ratio, anyway. The actual value of the property is somewhat variable, as I mention below.) The property is a single story, single family home in central California. It was built in 1951 and is a 3 bedroom / 2 bath property with 1020 square feet. It has an attached single car garage. The previous owners were out of town owners renting it out.

Comps range from $380,000 to $420,000 from another investor who has never seen the property, but knows the area, to $370,000 from automated sources (Zillow and ForeclosureRadar) to $350,000 from a Realtor who looked at pictures of the property but did not check the MLS. Given the wide variety in comp values, I would expect this property to take a little longer than typical to sell. Back in 2007, the last time it was listed in the MLS, the average days on market for the area was about 4 months. And the listing price for this property back then was $600,000. This property is located in the same city the property for hard money #10 was in.

Investment is standard terms – 10% interest only payments, loan term of 1 year with balloon payment due at loan end. This loan will be labeled hard money #13.


Another Investor said...

You have to be extremely careful with Castro Valley, which is really part of unincorporated Alameda County. The schools are key. Some of the older parts of Castro Valley have bad schools and other issues. Those areas have more in common with neighboring Hayward. The values there are much lower than the newer subdivisions up in the hills, which are high income and have good schools. Hope your partner knows the area.

Another Investor said...

What self-directed IRA custodian did you select and why? There seem to be several, but not many with a long track record. What criteria did you use?

Shaun said...

I went with the iTrust from They actually just set up the LLC. Their sister company, American Estate & Trust, is the actual IRA custodian. I selected them based on cost (since I didn't have a large amount of funds to work with) and how well they could explain the process and setup to me. Some other players and people's experiences with them are mentioned in the comments here: The way I looked at it was that once the LLC is funded with the IRA funds, there is really little need to deal with the custodian again, so I couldn't see paying some company a lot to do nothing.

Another Investor said...

Did your CPA tell you that the checkbook IRA's are ok with the IRS? It would be helpful if the IRS would issue some guidelines...

Thanks for the info.

Shaun said...

My CPA told me just about the same thing that the self directed IRA companies tell you - she quoted the court case that everyone sites as the precedence establishing the concept and the IRS letters and memos. She pointed out there hasn't been another court case to test this, so it sholdnt really be considered settled law. It basically comes down to how you feel about the rulings companies use to justify self-directed iras. And your tolerance for risk, like all investing :-) I wouldn't try this with a one million dollar IRA, but with the amount I am dealing with (< $75,000), I am willing to give it a try.

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