How self-directed deals can build funds

Maybe you are not new to real estate investing. Maybe you have fixed and flipped hundreds of properties or are a housing provider to hundreds of families nationwide. But have you ever thought of using your self-directed IRA or solo 401K to fix and flip an investment property? If you are looking for a way to build funds in your self-directed account, flipping could be a good option for you to grow the account more quickly. Here are some tips:

  1. Find a distressed property where the numbers work for you. What kind of a return are you looking for? Some people look for a specific return on investment (ROI) in percentage, some look for a dollar amount. For a fix and flip to meet criteria, I need to be able to make $25,000 at a minimum. Anything less than that, and I won’t do it. Then that goes up on a sliding scale depending on my outlay of cash. I won’t spend $250,000 out of my account to only make $25k.
  2. Why is my number $25k? Because I want to budget in enough of a buffer. Something will inevitably go wrong: contractor issues, unforeseen repairs, project delays due to materials or material price increases, etc. Sometimes when you get into a fix and flip project and you open a wall or move plumbing, you will find more repairs than you originally expected. Also, what if the market shifts downward? You want to make sure you will turn a profit.
  3. Always run your deal analysis on a six-month holding time for a mostly cosmetic flip. Even if you are paying cash, you will have holding costs during the renovation. Utilities turned on during construction, property taxes to be prorated at closing, and insurance all come with numbers that need to be factored in when you are analyzing a deal. If you sell faster, it is icing on the cake, but if it takes longer at least it won’t hurt as bad.
  4. If you’re doing more of a gut job or complete renovation, I would suggest a 12-month holding time. If it is a major project, it will entail permits from the municipality, and we have no control over that process. Permitting times have more than doubled in some municipalities due to the pandemic, the number of permits being issued, and other reasons, plus, you also don’t control when the city inspector will get out there. Sometimes, if you miss them, it may take another two weeks before they come back, and you can’t move forward without passing that particular inspection. Understand that even with a smaller renovation (permits may be required) always check.
  5. If you don’t have enough capital to purchase and renovate a property, you can use private or hard money. The key is to make sure the loan is a non-recourse loan.
  6. Keep in mind that you cannot have a direct benefit when using your self-directed account. Make sure to speak to your self-directed advisor.
  7. The profits you make go directly into your self-directed account and depending on what type of self-directed vehicle you have, the gains/profit on that deal are tax deferred and you incur zero capital gains tax. Again, always speak with your tax professional or CPA.

If you are looking for a way to grow your self-directed account as a pathway to becoming a more passive investor, flipping could be a great way to do that. It is a strategy that I have personally used and experienced positive results. Just understand with any investment you make, there can be a profit or there can be a loss. Make sure you do your due diligence, ask for some help from a seasoned investor if you want a second pair of eyes on the deal, and understand being nervous is just a part of the process. Remember also that if you have a traditional IRA or 401K, you will need to find a company that deals specifically with setting up your self-directed account.

IDX Real Estate