Real Estate Syndications and Self-Directed IRAs: A Powerful Wealth-Building Combination

Real estate syndications and self-directed individual retirement accounts (SDIRAs) are two powerful tools for building wealth. When combined, they offer investors the opportunity to diversify their retirement portfolios, enjoy tax advantages, and participate in lucrative real estate deals that might otherwise be inaccessible.

In this article, we’ll explore what self-directed IRAs are, how they work with real estate syndications, and the steps to use an SDIRA to invest in multifamily properties.

What Is a Self-Directed IRA?

A self-directed IRA is a type of individual retirement account that allows investors to hold a broader range of assets than traditional IRAs, which are typically limited to stocks, bonds, and mutual funds. With an SDIRA, investors can diversify into alternative assets such as real estate, private equity, precious metals, and more.

• Tax Advantages: SDIRAs maintain the same tax benefits as traditional or Roth IRAs. Investments grow tax-deferred (or tax-free in the case of a Roth), allowing compounding returns over time.

• Control and Flexibility: SDIRAs give investors the freedom to direct their retirement funds into investments they understand and believe in.

SDIRAs are administered by specialized custodians who ensure compliance with IRS regulations. However, the investor takes on more responsibility for researching, managing, and directing investments.

How Real Estate Syndications Work with Self-Directed IRAs

Real estate syndications allow investors to pool their resources to acquire large, income-producing properties like multifamily apartment complexes. By using an SDIRA, investors can channel their retirement funds into these deals, combining the benefits of real estate investing with the tax advantages of an IRA.

Key Features of Investing in Syndications with SDIRAs

• Passive Income: Syndications generate passive income, such as rental distributions, which grow tax-deferred (or tax-free) within the SDIRA.

• Long-Term Growth: Multifamily properties often appreciate over time, offering capital gains that can compound within the IRA.

• Diversification: Adding real estate syndications to your IRA portfolio reduces reliance on traditional asset classes like stocks and bonds.

Steps to Invest in Syndications with a Self-Directed IRA

Using an SDIRA to invest in real estate syndications involves several steps:

1. Open a Self-Directed IRA

The first step is to set up an SDIRA with a qualified custodian. These custodians specialize in alternative investments and ensure compliance with IRS rules.

2. Fund the SDIRA

You can fund your SDIRA by rolling over an existing IRA, transferring funds from a 401(k), or making a direct contribution (subject to IRS annual limits).

3. Research Investment Opportunities

Work with syndicators who have a proven track record and present opportunities aligned with your investment goals. Carefully review the syndication’s business plan, projected returns, and risk factors.

4. Direct the Custodian

Once you’ve identified a syndication, instruct your SDIRA custodian to transfer funds to the syndication sponsor. This process typically involves completing paperwork that outlines the investment’s terms.

5. Monitor the Investment

As part of the syndication, your SDIRA will receive distributions from rental income, and at the time of the property’s sale, it will receive its share of the capital gains. These earnings are deposited directly back into the SDIRA, preserving the tax benefits.

Benefits of Using an SDIRA for Real Estate Syndications

Investing in real estate syndications with an SDIRA offers several advantages:

Tax-Deferred (or Tax-Free) Growth

The income and appreciation generated by real estate syndications grow tax-deferred in a traditional SDIRA or tax-free in a Roth SDIRA. This allows investments to compound more effectively compared to taxable accounts.

Asset Diversification

Real estate is often less volatile than stocks or bonds, providing a stable and reliable source of returns. Adding syndications to your SDIRA can balance your portfolio and reduce risk.

Access to Larger Deals

Syndications give individual investors access to high-value properties that would typically be out of reach. With an SDIRA, you can use retirement funds to participate in these lucrative opportunities.

Important Considerations and Limitations

While investing in syndications with an SDIRA has significant benefits, there are some rules and potential complications to keep in mind:

Prohibited Transactions

The IRS has strict rules about how SDIRA investments can be used and who they can involve. Two important restrictions are:

• Self-Dealing: You or your immediate family cannot use the property personally. For example, you cannot live in or vacation at a multifamily property owned by your SDIRA.

• Disqualified Persons: You cannot buy or sell the property to yourself, your spouse, children, or other close relatives. For instance, if your SDIRA owns a share in a syndication, you cannot sell your personal assets to that syndication or vice versa.

Think of it this way: The SDIRA is treated as a separate "entity" by the IRS. All decisions and actions must be for investment purposes, not personal benefit.

Unrelated Business Taxable Income (UBTI)

If the syndication uses leverage (debt) to finance the property, the income generated from that debt may be subject to a tax called Unrelated Business Taxable Income (UBTI).

For example:

• If 55% of a property is financed with a loan, then 55% of the syndication’s income might be subject to UBTI.

• The UBTI tax ensures that leveraged investments in an SDIRA don’t receive full tax-exempt benefits.

Since UBTI can complicate tax planning, it’s important to consult a CPA or tax advisor who specializes in SDIRAs and real estate investments.

Limited Liquidity

Syndications are long-term investments, meaning funds in an SDIRA may be tied up for several years. Ensure your SDIRA has enough liquidity to cover required minimum distributions (RMDs) or other needs if applicable.

Custodian Fees

SDIRAs often have higher fees than traditional IRAs due to the complexity of managing alternative investments. Factor these costs into your decision-making process.

Maximizing Returns with SDIRAs and Syndications

To make the most of your SDIRA and syndication investments:

• Partner with Reputable Syndicators: Work with experienced sponsors who have a proven track record of delivering returns.

• Diversify Investments: Allocate your SDIRA funds across multiple syndications or asset classes to reduce risk.

• Consult Professionals: Engage a CPA or financial advisor with expertise in SDIRAs and real estate to ensure compliance and optimize your strategy.

• Focus on Long-Term Growth: Since SDIRAs are tax-advantaged accounts, prioritize investments with strong growth potential and steady income streams.

Closing Thoughts

Combining real estate syndications with self-directed IRAs offers a unique opportunity to grow your retirement wealth through tax advantages, passive income, and diversification. By leveraging the power of multifamily properties, investors can achieve steady returns and long-term growth while minimizing exposure to market volatility.

However, SDIRA investments require careful planning, adherence to IRS rules, and collaboration with experienced professionals. With the right approach, this strategy can become a cornerstone of your financial future, enabling you to build wealth and secure a comfortable retirement.

About Brookeast Capital:

Brookeast Capital is a multifamily investment firm dedicated to helping investors grow and protect their wealth while achieving passive cash flow. With a focus on strategic acquisitions and value-add strategies, Brookeast Capital delivers exceptional returns by acquiring, repositioning, and managing multifamily apartment properties.

Our team combines in-depth market research with proven expertise to identify lucrative opportunities, maximize asset value, and return capital to our investors upon executing our business plans. We pride ourselves on creating long-term partnerships with our investors, ensuring transparency and trust throughout the investment process.

Join Brookeast Capital in building a stronger financial future. Explore how you can benefit from the dynamic multifamily market by scheduling your personalized consultation today. Let us help you take the next step toward achieving your investment goals.