By Judy Dutton
• less than 3 min read
He rolled his 401(k) into buying a house
The pros and cons of a little-known financing strategy: the self-directed IRA.
Three investments owned by Harley Green at InvestAway.
The pros and cons of a little-known financing strategy: the self-directed IRA.
Three investments owned by Harley Green at InvestAway.
What if your retirement account could help you buy a house? That’s the idea behind a self-directed IRA (SDIRA), which lets investors venture beyond the usual stocks and bonds into real estate, private lending, and other alternative investments. Check out how Harley Green at InvestAway got started.
Q: What is a self-directed IRA, and how can it help buy a home? “Self-directed just means you direct the investments, so you’re not limited to the stocks and funds a traditional advisor offers. You can invest in real estate, private loans, commercial buildings, and more. It’s very common for SDIRA investors to buy homes, usually to flip. It works well because the IRA is a tax-advantaged vehicle: The gain on a flip is tax-deferred in a traditional IRA or tax-free in a Roth.”
Q: How have you used SDIRAs to invest in real estate? “My wife and I were real estate investors in Chattanooga, TN. I’d just left my career as a computer engineer, so I rolled my 401(k) into a self-directed IRA that we’ve used both to flip houses and to lend to other flippers. Most IRAs can be converted to SDIRAs any time. Going from a workplace 401(k) to an SDIRA depends on the plan custodian and often requires you to separate from the company.”
Q: What are the challenges of an SDIRA? “You have to bring cash for the full purchase, closing costs, renovations, and holding costs. If you use debt, the SDIRA can owe unrelated business income tax (UBIT), which adds cost and complication.”
Q: Can SDIRAs be used for any property? “You can’t use them as primary-residence loans. Holding a rental inside an SDIRA also doesn’t make sense because you give up the tax benefits of owning real estate, like depreciation, by putting it inside a tax-advantaged vehicle.”
Q: What advice do you have for using SDIRAs? “To simplify, focus on lending, where the return is simply interest income growing in a tax-advantaged account. The results are far more consistent compared with flipping, where sometimes you hit a home run and sometimes you hit a dud and take a loss. Since 2022, we’ve funded 57 loans for 33 different investors, over $10m in total, averaging returns of 15.5%, all while traveling internationally full-time with three children. Lending is something we can do from anywhere in the world without much work.”
Learn more about SDIRAs at Green’s free webinar on November 19.
Lending allows Harley Green and his family to live abroad.
