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How to use your Retirement Funds to Invest in Real Estate Syndications

Sarah Bromley
Sarah Bromley
July 20th, 2022
couple injoying their retirements

While the stock market is a tried-and-tested method for growing your wealth, it can also be incredibly volatile — as the period between 2020-22 has shown. If you’re looking for an alternative way to invest, you may have wondered if you can use your retirement funds for real estate syndication deals instead. The short answer is “yes,” but it’s a little more complex than buying stocks.

We’ll run through how self-directed IRAs work, before moving on to how to invest in real estate syndications and some key considerations.

Using a self-directed IRA

The importance of using a tax-efficient vehicle like an IRA to prepare for retirement is nothing new. But if you really want to be in control of what your money does, a traditional IRA may not cut it. To invest in alternative investments like real estate, you’ll need to turn your attention to a self-directed retirement account (SDIRA), which allows you to hold assets that a standard IRA restricts.

It’s the perfect choice for many savvy investors. But is it right for you?

Pros and cons

If you’re still on the fence, it might help to look at the biggest benefits and drawbacks.

The biggest advantage of an SDIRA is the option to invest in alternative investments — including real estate, private businesses, and even cryptocurrencies — while still accessing the tax efficiency of an IRA. These asset types often yield higher returns than you’d achieve through assets like stocks and bonds, and give you the chance to create a more diversified portfolio.

You can also leverage property in a way that isn’t possible for other investment types.

Besides, this isn’t the only way in which an SDIRA offers greater flexibility. You’ll also have the chance to set prices and make changes to a property, giving you greater control over your investment, and you'll have the option to open an LLC to get more control back from a custodian (more on this later).

However, the SDIRA also comes with a few disadvantages, especially when it comes to taxation. You could face unrelated business income tax (UBIT) if you have investments that involve debt (e.g., a property with a loan), which means you’ll face taxes — and an additional charge if you didn’t set up your SDIRA properly with a tax ID.

You also need to consider that opting for an SDIRA is a riskier path, but don’t let that put you off if you can manage the risks.

Different types of self-directed IRAs

As with standard IRAs, you’ll have the choice between a Roth and a traditional SDIRA. A Roth SDIRA allows you to invest after-tax dollars and save yourself from tax later down the line, while a traditional SDIRA means you invest pre-tax dollars and pay tax when you make withdrawals down the line.

The one you choose purely comes down to personal preferences and when you expect to face the greatest tax bill (now or later on).

Investing in real estate syndications through an SDIRA

Now that we’ve cleared up the basics of how SDIRAs work, we can move on to the key point of the article: How to use them for real estate.

A real estate syndication involves pooling your resources with others, making it possible to access opportunities you couldn’t if you relied on your wealth alone. Most opportunities are restricted to accredited investors, and they tend to center on commercial real estate rather than properties for individuals.

The process of starting investing through an SDIRA differs slightly depending on whether you want to open an account with a brand-new investor or just transfer your funds over. Either way, the first step is finding a custodian to open your SDIRA with (more on this shortly). If it’s a new account, the next stage is simply making your initial investment.

Or, if you’re doing a rollover, you’ll need to fill out paperwork. It can take up to two weeks for a money transfer to take place since the custodians will need to arrange the switch.

Then, you can invest in your real estate syndication of choice.

The role of custodians

Every type of IRA comes with a custodian: A company that is responsible for your accounts and which oversees the regulatory side. A traditional IRA technically comes with a custodian too, but as it will just be a financial institution like Fidelity, you won’t notice their involvement to the same extent.

On the other hand, to open an SDIRA, you must work with a certified custodian who approves your investments and tracks your transactions. They can also help you decide on the right account to open for your circumstances and guide you through the necessary paperwork. Therefore, finding the right custodian is one of the trickiest and most crucial parts of investing in this way.

To choose the right custodian, it’s best to do plenty of research. First, check if they’re licensed by the IRA, and you may also want to check the Better Business Bureau (BBB) database.

Compare a few custodians on their price and past reviews. Also, ask whether the custodian allows syndications (some allow for real estate investments but not syndications), and the type of funding they accept (some only take paper checks). Another factor to look out for is speed since this is often crucial for your transactions if you want to grab an opportunity as soon as it arises.

Another option is to operate under an LLC. This will give more control — a custodian will still need to report things, but you can approve your own transactions.

Take control of your retirement

Preparing for retirement is a non-negotiable, but there’s more than one way to do it. If you’d like to go beyond the usual stock investments, an SDIRA is a perfect way to access alternative investments like real estate syndication while still accessing the tax benefits of an IRA.

If you want the right way to track your alternative investments along the way, consider using a portfolio tracker like Vyzer to stay on top of how your assets are performing and access insights to make any necessary adjustments.