By Douglas Skipworth
Many rental property owners want to hold part of their real estate portfolios in a self-directed retirement account. However, they may decide not to simply because they fear the differences in property management between holding a property personally and holding it in a self-directed account will be too complicated or too great. Fortunately, a little bit of research will clearly indicate this fear is unfounded.
Here, we examine property management basics for self-directed IRA rental property owners.
Similarities with Other Owners
When it comes to professionally managing rental properties day-in and day-out, there really is no difference between individual owners and self-directed owners. The logistics of property management remain the same, although investors holding their properties in a self-directed account will not manage their properties personally, since that is prohibited by IRS regulations.
The process of managing the properties on the “front end” of the process, however, is pretty much the same whether someone owns a single property or multiple properties, or whether the property is held in their own name, the name of an LLC, a SDIRA, or another entity or vehicle-type. The vehicle itself does not affect the daily property management tasks.
Similarly, property managers and tenants normally do not care who owns the property. Managers and renters perform their normal functions without regard to the specific owner of the property.
As such, owning rental property in a self-directed IRA is just like owning property in any other fashion. There is really no difference from a day-to-day perspective except for one small distinction: the disbursement of funds.
Disbursement of Funds is Different for SDIRA Owners
The only difference between self-directed IRA owners and other clients is regarding disbursement of funds. Self-directed IRA’s typically have a “coupon” that accompanies the disbursement or require a specific account number to be noted on the payment. The coupon or account number is what the IRA custodian uses to match the funds distributed from the property manager to the specific IRA. This is particularly helpful if one owner has properties in multiple self-directed IRA’s. Other than that minor difference, there are no significant differences between self-directed IRA owners and other owners of rental property.
Active and Passive Self-Directed IRA Owners
While management of a specific property is essentially the same for professional managers no matter who the owner is, there are actually two different kinds of self-directed IRA owners. In our experience at CrestCore, the typical self-directed IRA owner is using their IRA to build wealth for the future. Funds have been set aside for long-term accumulation, and any investment in rental property through the self-directed IRA is usually treated similarly to a long-term investment in a stock market index fund. We have seen owners with properties in self-directed IRA’s buy a property with the plan to just look up and expect everything to be in a better position in 20+ years.
While there are tremendous benefits in taking a long-term perspective, too many investors who use their self-directed IRA’s for purchasing properties become too passive. They do not track the monthly performance of the property and delegate decision-making almost to the point of abdication, essentially to the point of giving complete control to the property manager. Although a self-directed investor must not interact directly with their rental property, of course, it is still their responsibility to remain informed about performance, maintenance, etc. Rental property is not as passive as an index fund and therefore requires involvement from a passive owner.
The other type of self-directed IRA investor is the client who is already actively thinking about how the income from the property will affect their financial future. Investors like these are very involved and do not make frivolous decisions regarding the management of their property. They monitor the monthly performance of the property manager and the property, itself. They ask thoughtful questions and make informed decisions when necessary. Instead of making an investment and hoping the future turns out well for them, they are making an investment and staying involved today to make sure the investing turns out well. It is a slight adjustment in attitude and action, but it makes all the difference.
Many self-directed investors acquire rental properties in their self-directed accounts with the idea that they cannot even think about those properties again without committing a prohibited transaction or “self-dealing”. This is not true. If you are unsure about how much interaction you can have with rentals in your self-directed portfolio, consult an expert in the field to get clarity on what types of monitoring are appropriate. You will probably find you are cleared to make more decisions than you might think!
Be an Active Self-Directed IRA Investor
In nearly 20 years of property management, we have seen that the best performing properties are the ones owned by active self-directed IRA owners. We highly recommend that all self-directed investors treat their property as if they were dependent upon the performance of the property today, because eventually tomorrow will be today!
CrestCore Realty manages rental properties for hundreds of clients with thousands of properties throughout West TN. A significant portion of those clients own property in a self-directed IRA. Learn more about CrestCore Realty by emailing Douglas Skipworth at Douglas@CrestCore.com.