Investing in Multifamily Real Estate with a Self-Directed IRA
Self-directed Individual Retirement Accounts (self-directed IRAs) are powerful tools for real estate investment, and understanding the benefits, limitations, and processes involved is essential for successful real estate investment through a self-directed IRA. Beyond their specific tax structure, understanding the role of the custodian is crucial to successful investment in an IRA or self-directed IRA.
Tax Structure, IRA vs. Roth IRA
If you have an IRA, you are likely already familiar with its associated tax benefits, but we will briefly summarize here, along with the key differences between an IRA and a Roth IRA. A traditional IRA delays taxation by allowing pre-tax dollars to enter the account, with tax collected later at distribution. A Roth IRA is funded with after-tax dollars, so growth and withdrawals are not taxed. If you are early in your career and expect to fall into a higher tax bracket later in life, a Roth IRA might be better suited for you.
Self-directed IRA Taxation Under UBIT
You cannot use a self-directed IRA to invest in your own personal business, and you will need to watch out for Unrelated Business Income Tax (UBIT) when using a self-directed IRA. UBIT kicks in the moment your account moves beyond passive stocks into ‘active’ territory, like owning a Limited Liability Company (LLC) or using leverage, Unrelated Debt-Financed Income (UDFI), to buy property. If you have more than $1,000 of unrelated taxable business income, that income will be subject to UBIT.
Another Consideration: Required Minimum Distribution
A Roth IRA does not have minimum required distributions. In a traditional IRA/self-directed IRA, starting at either age 73 (if you were born from 1951-1959) or age 75 (if you were born in 1960 or later), you must make a required minimum distribution (RMD) from your IRA. If you do not do so, that required amount will be taxed at 25% (or 10% if you correct the distribution(s) within 2 years). The RMD will change based on your age, and in some circumstances, the age of your spouse. More detailed information on this topic can be found on the IRS website.
IRA vs. Self-Directed IRA
A self-directed IRA can be structured as a Roth or traditional IRA, but that “self-directed” feature is key. A traditional IRA allows investment in stocks, bonds, mutual funds, Exchange-Traded Funds (ETFs), public Closed-End Funds (CEFs), and Real Estate Investment Trusts (REITs), with the general rule that these investment assets must be publicly-traded (there are other rules associated with IRA administration that we will get to shortly).
The reason an IRA is limited to publicly-traded investments is due to the ways that IRA custodians offer investments. IRA custodians are unable to handle the administration and paperwork associated with individual private investments (and private investments in general) and therefore, the investments an IRA custodian can offer are limited to publicly-traded assets that do not have a large administrative burden.
Unlike a traditional IRA, a self-directed IRA allows investment into non-public assets, which can include real estate, private equity, private CEFs, promissory notes, LLCs, gold, silver, tax liens, and some digital assets, as well as publicly-traded assets in many cases. Because of the higher administrative burden associated with non-public investments, investing in a self-directed IRA will involve higher fees than investing in a traditional IRA. An IRA, whether self-directed or not, cannot be used to invest in life insurance, art, collectibles, a primary residence, or your own business.
Regardless of the general limits on assets available for investment through an IRA, the actual investments available will depend heavily on the custodian that is administering it.
Find the Right Custodian for Your Self-Directed IRA
Arguably, the most important consideration for investing through an IRA is selecting a custodian for the account, which is required for traditional/Roth IRAs and self-directed IRAs. The custodian actually holds the title of the investments that an individual makes in an IRA or self-directed IRA. The custodian does things like ensuring/assisting with investment compliance, reporting, and other administrative functions. Crucially, different custodians will have different levels of service and fees along with different types of assets available for investment in an IRA.
For some traditional IRAs, large companies like Schwab and Vanguard have a relatively straightforward, automated process for investors, but for a self-directed IRA, there are a variety of options, fee structures, and asset specializations. There is typically more paperwork associated with the wider variety of assets allowed in a self-directed IRA, so choosing the right custodian involves picking one that provides the level of service you need, has the best fee structure for your investment goals, and has experience with the kinds of assets that you are choosing to invest in.
Custodian Fees and Asset Types
Self-directed IRA custodian fees are a particularly important consideration that can have a very meaningful impact on total investment returns. Some custodians charge a flat fee, some have an initial setup fee, some fees are based on the total value of the investment(s), and some fees change based on how much you have invested with the custodian. This is an important aspect of selecting a custodian, especially because the level of service offered by a custodian may differ. If you need a higher level of service and support, you may consider a different fee structure than someone with a more straightforward setup.
Self-directed IRA custodians also differ in the kinds of asset types they offer for investment, and some of the different fee structures are more advantageous for certain asset types. One custodian may offer precious metals as an asset type, another may allow crypto, another may specialize in real estate, and yet another may offer a combination of different asset types but a fee structure that is more economical for precious metals, for example, than real estate assets. There are a wide range of custodians available for a self-directed IRA, and finding the right match with asset type and fee structure, especially in real estate investment, is an essential part of the process.
Self-Directed IRA Custodians
Investors with J+G Companies have used a wide variety of custodian options. Although J+G does not recommend specific custodians, below is a list of several custodians with experience in real estate, along with a sample of their fee structure. Please note the fees listed below do not include fees on transactions and other activities, and more information on each custodian’s fees can be found in the fee schedule link(s) in the table below.
| Custodian | Setup Fee | Recurring Fees | Fee Schedule |
| Equity Trust | $50 | $350 – $2,500, tiered based on account value | (Link to Full Fee Schedule) |
| Madison Trust | $50 | $556/yr (1st asset), plus $120/yr for each additional asset | (Link to Full Fee Schedule) |
| IRA Financial | $0 | $495/yr | (Link to Full Fee Schedule) |
| The Entrust Group | $50 | $219 (single asset) or $329 (2+ assets) plus 0.17% of asset value over $50K | (Link to Full Fee Schedule) |
| Directed IRA | $50 + $50 per asset | $495 + $50 fee per asset | (Link to Full Fee Schedule) |
No matter the custodian, investors should thoroughly review the terms, fees, and services offered by any potential custodian to ensure their self-directed IRA will remain compliant and their investments will have the highest possible returns.
For more information on multifamily investment, feel free to contact us at moc.seinapmoCGdnaJ@tsevnI.
DISCLAIMER: This is not financial advice, and this material is for educational/informational purposes only. This is not an offer to invest.