My in-laws have an LLC in which all shares are owned by their self directed IRA. They would like to purchase rental properties with the LLC and then sell them to my wife (their daughter) and I under contract for deed for their purchase price plus 7% APR with a 10 year balloon. Being that their current investments are not performing at all it is a great investment for them. My wife and I already have one mortgage and can't get a conventional mortgage to start purchasing rental properties so it helps us as well. Is there anyway that this can be done without large penalties?
Wed Jul 24, 2013 2:34 am
oldguy Senior Member
Cash: $ 717.80
Joined: 21 May 2006
There probably aren't penalties, assuming that they are over 59 1/2, they can cash out the IRA, pay their income taxes, and buy whatever they want and then sell them to you.
But, as an investment, this has disaster written all over it - for both parties. Mortgages on rental houses are about 5.5% now, 30 years fixed rate. So your 7% is not a good deal. And that 10 year balloon is a bad idea. I had one on one of my rental houses, it wasn't fun. Never sign up for a calendar driven event. If rates go up to 15% you can't refi to pay the balloon. And you can't sell the house because no one else wants a 15% loan.
Worst of all, codependant investing with relatives/friends doesn't end well - someone always feels that the oter got the best end of it - but they will never say it.
What are their current investments? Most IRA investments (mutual funds)have had returns in the double digits for the past few years, maybe that is what they should be fixing?
Wed Jul 24, 2013 3:37 am
coaster Senior Advisor
Cash: $ 1626.30
Joined: 11 Oct 2005
This also seems pretty close to the edge in terms of what is allowed with property ownership in an IRA. All parties best get some legal advice from a professional tax advisor / enrolled agent to see if you're going to run into trouble.
Wed Jul 24, 2013 5:08 am
CraigEGI New Member
Cash: $ 0.80
Joined: 15 Oct 2013
Location: United States
Definitely think long and hard about investing with friends and relatives like this, it rarely ends well, think about the consequences for these relationships should something go wrong. You should definitely take some professional advice onboard.