How to Use a Self-Directed IRA to Buy Rental Properties | Joe Thomas Explains
Show summary
In this informative interview, Joe Thomas shares expert insights on using self-directed IRAs to invest in real estate. He explains how investors can leverage retirement funds through non-recourse lending, while following IRS regulations to avoid penalties. Joe discusses the benefits of tax-advantaged investing, key restrictions such as self-dealing rules, and the practical steps needed to set up a self-directed IRA. The conversation highlights strategies for building long-term wealth through real estate while protecting retirement assets.
Key takeaways
- Non-recourse loans are required for IRA-owned real estate; the lender can only seize the property itself, not your personal assets, but expect a higher down payment and interest rate than a conventional mortgage.
- Only a few lenders in the US offer non-recourse loans for self-directed IRAs; Joe names North American Savings Bank (NASB) out of Kansas City as one of two or three major players, with approvals typically in 48 hours and closings taking 30-45 days.
- Self-dealing is strictly prohibited: you, your spouse, your children/grandchildren, or your parents/grandparents cannot use or occupy IRA-owned property (even one week a year on a vacation rental), or the entire IRA can be invalidated and become fully taxable. Siblings are an exception.
- Prohibited IRA investments include vacant land, antiques/collectibles, and S corporations; allowed investments include long-term rentals, short-term rentals, and fix-and-flip projects as long as they can generate income.
- You cannot manage the property yourself or provide sweat equity; you must hire a property manager, though you can direct that manager's decisions.
- The setup process: form an LLC with a qualified custodian (loan it money for legal fees and about $100 for a checking account), identify and offer on a property, apply for a non-recourse loan, close (30-45 days), then route all rental income and expenses through the IRA's LLC checking account.
- Joe's own strategy: he bought his first rental house with cash, then took a mortgage sized so rent covered the full payment; he repeated this for a second and third house, then used rent from the third to make double principal payments on the first two, paying off 10-year notes last summer and retiring on January 9th.
In this episode
- 00:00Joe's path from IT career to retiring on rental income
- 00:25How a realtor introduced Joe to self-directed IRA investing
- 07:55What asset classes self-directed IRAs can and can't hold
- 08:58The self-dealing rule explained
- 10:01Can you do rentals, short-term rentals, or flips in an IRA?
- 11:38Tax deferral and why you can't touch the money until 59 1/2
- 12:02Five steps to set up and use a self-directed IRA for real estate
- 16:10Joe's own four rental properties and paying off 10-year notes
About Joe Thomas
Joe Thomas is a recently retired IT professional based in Garland, Texas (DFW Metro) who became a self-directed IRA real estate investor after relocating from Southern California. He bought four rental houses starting in 2018 using his IRA and his wife's separate IRA LLC, paying cash and then taking mortgages sized to be covered by rent, eventually paying off 10-year notes last summer and retiring on January 9th. He was also elected to the Garland City Council last May.
Listen to the audio
“The only recourse they have is to come take that house. Your personal assets are not at risk.”
Joe Thomas
“If it's your siblings going this way, no problem. And so that's a form of what they call self-dealing. You're benefiting from your IRA without the IRS getting their tax money from that. So no self-dealing.”
Joe Thomas
“My financial advisor told me that last fall, it took me 90 days to get over the shock that I could actually retire.”
Joe Thomas
Questions answered in this episode
What is a non-recourse loan and why is it required for IRA real estate investing?
A non-recourse loan means that if you stop making payments, the lender can only repossess and sell the property itself to recover the debt; they cannot come after your other personal assets. This type of lending is required for self-directed IRA real estate purchases because the IRS doesn't allow personal guarantees on IRA-owned property. Because it's higher risk for the lender, these loans typically require a higher down payment and a somewhat higher interest rate than a conventional mortgage.
What is self-dealing and how can it disqualify my IRA?
Self-dealing is when you or certain family members (your spouse, children, grandchildren, parents, or grandparents) personally benefit from a property owned by your IRA, such as living in it or using a vacation rental even for one week a year. Joe explains that if the IRS catches this, they can invalidate your entire IRA, making the full amount immediately taxable. Siblings are not included in this restriction, so transactions involving them are allowed.
Can I manage the rental property myself if I buy it inside a self-directed IRA?
No. Joe says you cannot put sweat equity into the property or manage it yourself; you must hire a property manager. You can direct the property manager on tenant selection and other decisions, but doing the work yourself counts as self-dealing and benefiting the IRA improperly.
What are the steps to buy real estate with a self-directed IRA?
First, set up a self-directed IRA with a qualified custodian and form an LLC (you loan the LLC money to pay the lawyer and about $100 to open a checking account). Next, identify a property and make an offer, then apply with a non-recourse lender like North American Savings Bank (NASB), one of only two or three lenders in the US that does this. Approval typically comes within 48 hours, but closing takes 30-45 days due to coordination with the IRA custodian; once closed, the LLC/IRA owns the property and all rental income and expenses flow through the IRA's checking account.
What property types are prohibited in a self-directed IRA?
Joe lists vacant land (because it's speculative), antiques and collectibles, and S corporations as prohibited investments. Allowed investments generally include anything that produces income, such as residential real estate, and the IRA can be used for long-term rentals, short-term rentals, or fix-and-flip projects.
When can I withdraw money from a self-directed IRA and what are the tax consequences?
Withdrawals before age 59 and a half trigger a 10% penalty. After 59 and a half, there's no penalty, but you'll receive a 1099 at year-end and owe taxes on the withdrawal as a taxable event. To withdraw, you instruct your custodian to send funds to your personal checking account.
Resources and links
- Joe Thomas on Facebook
- Joe Thomas on Instagram
- Joe Thomas’ Email: jrtj777holdings@gmail.com
Full transcript
Joe Thomas (00:00)
And so I had 10 year notes, paid those off in just last summer. And so kind of finally got my ⁓ finances in order and decided, you know what? The rent, the money for those houses, the rent that I’m gonna collect.
will replace my income. My financial advisor told me that last fall, it took me 90 days to get over the shock that I could actually retire. And so, yeah, so I did retire on January 9th and I’m devoting myself to other duties.
Dylan Silver (00:00)
Hey folks, welcome back to the show. Today’s guest Joe Thomas is a recently retired IT professional turned IRA investor. He’s based out of the DFW Metro in Texas. Welcome to the show, Joe.
Joe Thomas
Thank you so much. Pleasure to be here.
Dylan Silver
Now, when we talk about IRA investing, this is something that I’ve heard of quite a bit recently, and I believe it’s picking up steam. How did you get into IRA investing?
Joe Thomas
So when a job transfer brought me here from Southern California to the DFW area, I actually live in Garland, a little plug for my city. Garland’s the 13th largest city in Texas and the 93rd largest in the US. A ⁓ job transfer brought me here. She specialized in investors, ⁓ buying rental real estate for investors, single family homes. And so when I said, I’d
And she helped me buy my primary residence. But when I said I don’t have money to invest, she says, what about your ⁓ 401k at the time? And I said, well, I’ve got some money in the ⁓ 401k and I know that money is not going to be enough to retire on. I’d like to do something to accelerate that. And she says, let’s talk about how to invest using that money or invest in real estate using that money. And that got me started.
Dylan Silver
That was your realtor.
Joe Thomas
It was.
Dylan Silver
That’s a good realtor. mean, I think one of the interesting things that I’ve noticed being a realtor in Texas is I think this is true across the board, whichever state you’re in. There seems to be this division from realtors who have an investing mentality and are comfortable working with investors versus folks who are just strictly looking for, you know, single family. ⁓
you know, buying a home for their homestead type of deal. It’s good to see that there’s other people in the space who are, you know, doing both.
Joe Thomas
Yeah, absolutely. And she was primarily focused on investors. She just happened to be a friend of a friend that said, okay, I’ll do you a favor and help you buy a personal home. But then when, you know, once you, once you get settled, I want us to talk about, ⁓ you know, seeing about how we can do some real estate investing. And so kind of that’s where we got started.
Dylan Silver
Now with the IRA investing, if we could get a little granular here, Joe, and talk about how this process actually works. I mean, for me, looking at it from the outside, looking in, it seems like, okay, well, how exactly would I move this money from an IRA into real estate?
Joe Thomas
So I ⁓ watched, one thing she did turn me on to was a little book because this, ⁓ the lending for real estate is specialized. It’s called non-recourse, which means they have no recourse. If you don’t make the payments, then to take that property, they cannot come after your other assets. And so it’s specialized lending. And ⁓ there’s actually a book by one of the banks that does this.
on North American savings bank. Let me just show you the cover of the book.
And so that is readily available on Amazon. It’s less than $20. And if you get the paperback edition, and these guys talk about how to set it up, how to roll it over to a self-directed IRA. ⁓ then all of the, their focus is on real estate, but they also talk about other things like things you cannot invest in.
Dylan Silver
There it is.
Joe Thomas
such as antiques and collectibles. That’s not permitted under the IRS rules because that may or may not be worth anything to somebody else. And so whereas real estate will always be worth something and ⁓ especially income producing real estate.
Dylan Silver
I’d like to break down the non-recourse term and we were talking in the green room, right? What does that mean in this sense, right? Non-recourse lending.
Joe Thomas
very simply it is if you do not make the payments and they go to repossess the property and repossessing that property and selling it will not pay off the loan that they have, then they have no other recourse. They cannot come after your other assets because that’s the only asset that’s available to them. so there’s other lending requirements that they do to kind of, cause that’s a higher risk.
model and so there’s other requirements that may not be available on a you know, there wouldn’t be there for a conventional loan on your home for your homestead. For instance, higher down payment, maybe a little higher interest rate, things like that. But that’s my, I don’t know, short and sweet definition of non-recourse. The only recourse they have is to come take that house. Your personal assets are not at risk.
Dylan Silver (00:25)
So pivoting a bit here, Joe, when we talk about self-directed IRAs, one of the common questions that I hear is, which asset classes can you invest in and are there any limitations?
Joe Thomas (07:55)
So there are some limitations. Typically, they want you to invest in ⁓ properties that will draw income, such as residential real estate primarily. Things that are absolutely prohibited, things like vacant land, which you’re speculating it might be worth something in the future to somebody. Antiques and collectibles, all prohibited.
and S corporations, you’re prohibited from investing in those. Other than that, if it’ll make money, you’re typically allowed to do it. And of course, stocks and bonds are mutual funds, which most IRAs have devolved into just that, because it’s easier for the employers to do that. Other than that, the law allows for…
Dylan Silver (08:47)
Is there an element of, you you have to be a certain ⁓ level detached from it. It has to be passive. You can’t be too active in the business.
Joe Thomas (08:58)
Absolutely. There’s a big prohibition against what they call self-dealing. And so if you buy a residential home to rent, cannot occupy it. You or your spouse could not occupy it. Neither your ascendants or descendants. So not your parents, not your grandparents, not your children, not your grandchildren. That line cannot benefit from this. Now,
If it’s your siblings going this way, no problem. And so that’s a form of what they call self-dealing. You’re benefiting from your IRA without the IRS getting their tax money from that. So no self-dealing.
Dylan Silver (09:39)
Now,
when we compare segments from year to year annualized leases to short term rentals to fix and flip even, right? Are you able to do real estate IRA investing in all of those segments or would some of them be potentially prohibited?
Joe Thomas (10:01)
No, I believe all of those would be allowed. The temptation though is to let’s say you buy a vacation home in Colorado and you’re renting that out all except for one week of the year where you go up there and use it yourself. Well, that is self-dealing. And if they find out they could invalidate your entire IRA and you would be owed taxes on the entire amount of the IRA. so self-dealing is…
Dylan Silver (10:28)
Now.
Joe Thomas (10:31)
It’s very tricky. And so even with residential real estate, you have tenants, you need a property manager to manage that for you. So you can’t manage it yourself. You can’t put sweat equity into the property. You have to hire someone to do that. Now you can direct who you hire. You can direct your property manager to do this or that and find you tenants, but you can’t.
do it yourself. kind of that self-dealing that’s benefiting the iron. It’s not allowed.
Dylan Silver (11:38)
Now, you know for folks who are looking at getting started, I think one of the things that is luring about the idea of a self-directed IRA is, you’re deferring the tax obligation. If you’re generating a short-term rental cashflow from an Airbnb, you can’t cash out on that until you’re 59 and a half or whatever the age is, right? You have to let that stack up in the IRA.
Joe Thomas (12:02)
Well, and 59 and a half, yeah. So here’s the kind of the, let’s just talk about the step-by-step process, kind of five steps here at a high level. And again, I would refer people to the IRAlending.com website that gets into more details, good FAQs there, but the five steps. So number one, you’re going to set up your self-directed IRA with a qualified custodian. And there’s custodians listed on that website.
And so to do that, you’ll need to loan the LLC the money to form it. You you’ve got to pay the lawyer to form the LLC. And then secondly, you’ll, that LLC will go to the bank and set up a checking account. Typically you will got to loan it a hundred bucks to start a checking account. And so now you’re ready to receive a money or rental money, for example, into that account or pay expenses from that account.
That’s not your personal account. It’s another entity that’s separate from you. All right? And then secondly, and then so then once you get that set up, you identify an investment property, just like you would any other property you’re going to buy. And so then you go and make a qualified offer and then you apply with, ⁓ I’m using North American Savings Bank because they actually do non-reports lending. Very few lenders in America do this.
And so there’s only two or three NASB happens to be one of the big ones and they’re out of Kansas City. And so you approve that they give you a, you know, our approval typically within 48 hours. And then the, then they process it just like anything. So they do the underwriting. Typically that closing takes 30 to 45 days because there’s coordination there with the, uh, with your custodian of your IRA.
And so that may take a little longer. You’re not going to close this in 15 days. It takes a little longer to get it closed. And then once the deal closes, your LLC, your IRA now owns the property. So any rental income you get goes into that IRA’s checking account and the expenses that you have to pay, just like if you had brokerage expenses. You got to pay your broker something to invest in stocks.
Dylan Silver (14:18)
Yeah.
Joe Thomas (14:23)
That’s an expense of the investment. Same thing, if I’ve got a broken dishwasher and I need to pay a guy to repair it, that comes out of the IRA checking account. So that’s kind of the basics there. And just like any other IRA, if you’re still working, you can still contribute to it up to the normal limits, you know, six, seven, $8,000, depending on how old you are and if you can catch up contributions and such. And so…
Dylan Silver (14:31)
to next step.
Okay.
We are.
Joe Thomas (14:51)
Yeah, and you can do this at any age. The 59 and a half, you take withdrawals from it, before 59 and a half, there’s a 10 % penalty. After 59 and a half, a withdrawal from it would not incur the penalty, but you would get a 1099 at the end of the year and be required to pay taxes.
Dylan Silver (15:55)
We are coming up on time here, Joe. ⁓ Any new projects that you’re working on in the Garland area, any new exciting deals that you’re looking at. And then as well, if folks are interested in reaching out to you, what’s the best way that they can contact you?
Joe Thomas (16:10)
Yeah, so I’d like to just share the book that I highly recommend you get this book, read through this little guy, a whole ton of good information. IraLending.com will redirect you to the North American Savings Bank website with all of their FAQs. And that’s a higher level. There’s a lot more detail in the book, and it’s less than $20 on Amazon. ⁓ So for me, we’ve got four.
I’ve got this with my IRA. My wife has her own LLC for her IRA. And so we have, ⁓ when I bought these houses in 2018, then I decided I decided that I was going to pay cash, which puts you at the head of the line when you’re going to buy it. And then figured out how much rent I could collect and then took a mortgage that would be just, you know, just less than the amount of the rent. So the rent went a hundred percent to paying that mortgage off.
Did that with my second one, paid cash, took a mortgage and then bought my third one, paid cash and then used the rent from that one to make double principal payments on the other two.
Dylan Silver (17:21)
Yeah.
Joe Thomas (17:22)
And so I had 10 year notes, paid those off in ⁓ just last summer. And so kind of finally got my ⁓ finances in order and decided, you know what? The rent, the money for those houses, the rent that I’m gonna collect.
will replace my income. My financial advisor told me that last fall, it took me 90 days to get over the shock that I could actually retire. And so, yeah, so I did retire on January 9th and I’m devoting myself to other duties.
Dylan Silver (17:48)
Look at that.
Joe Thomas (17:55)
went and actually I got elected to the Garland City Council last May. And so I thank you. I’m keeping pretty busy with city council duties. ⁓
Dylan Silver (18:00)
congratulations.
Joe Thomas (18:06)
you know, being as large a city as Garland, there’s quite a bit to do. ⁓ anyway, but yeah, so with those four, we’ve kind of settled in and we’re kind of just right now because of how much, you know, the, the, have we had in savings, we’re not even touching our IRA money yet, but eventually we’ll make withdrawals from the IRA. And basically you send the money to the custodian saying, here’s, here’s some money. And then you give them a directions on where to
what to do with the money and what to do with it is send that to my personal checking account and that will be a taxable event that the money comes to you directly and then you’ll be looking for that 1099 at the end of the year.
Dylan Silver (18:53)
Joe, thank you so much for joining us today. Thanks for your time.
Joe Thomas (18:57)
All right, very good. I’m glad to help. Personally, you can reach out to me. I’ve got um My LLC has a little email address if you want to reach out. It’s JRTJ777 Holdings, plural Holdings, at gmail.com.
