Looking for ways to fund a syndication investment?

There are two primary ways that you can invest in a syndicated asset: cash or retirement funds (via a self-directed IRA).

In this article, we’ll review both methods.

We’ll also warn you about the common pitfalls associated with using a self-directed IRA to fund your syndicated investment. After all, you don’t want to make a mistake and run into any trouble with the IRS — or subject your Roth to another round of taxation.  It goes without saying that when it comes to taxes and the IRS, you should always talk to your CPA (I’m not one).

Make no mistake, though, both methods are great ways to fund a syndication investment. Some financial institutions make it difficult to use your self-directed IRA to buy real estate, since they have limited options for accruing any extra income from the investment. In the end, it isn’t any different than using your IRA to buy stocks or bonds.

We’ll review the pros and cons of each method to find out which one is the right option for you.

Ways to Fund a Syndication Investment, Method #1: Cash

Using cash to fund your syndicated investment is fairly straightforward. If you have the cash, you can invest it in a syndication in much the same way that you would buy any other investment.

What are the benefits of using cash? For one, you don’t have to worry about whether or not your custodian (the institution managing your bank account) will allow you to invest in real estate. It’s just cash.

Additionally, when you’re using cash to fund a syndication, you can use depreciation to offset your tax bill. That’s something that you won’t be able to do with an IRA, since the money in an IRA is already tax-deferred. You can also use leverage when you’re using cash: funding some of the purchase with your own money and funding the rest of the purchase with borrowed money.

So what are the drawbacks? You might need a lot of cash. Typically real estate syndications have a pretty high minimum buy-in. According to one user on the BiggerPockets forum, for example, the minimum is usually about $50k.

According to ValuePenguin, only people who are in the top 80th percentile in income or above typically have savings accounts with a value of $50k or more. Additionally, those workers might have expenses that require them to be carrying more in their savings anyway — so that money might not even be available for investment. (And that’s only the mean, not the median).

If you’re anything like most investors, you’ve probably heard the phrase, “cash is trash.” Even high-yield online savings accounts aren’t offering great returns.

So, you’re probably not carrying much cash at all.

That’s where using a self-directed IRA to invest in real estate comes in.

Ways to Fund a Syndication Investment, Method #2: Using a Self-Directed IRA

In order to sidestep the cash requirement, you can use a self-directed IRA to fund a syndication. This is exactly what it sounds like: you’re using retirement funds to invest in real estate.

What are the benefits of using an IRA to invest in a syndication? Since all of the money in an IRA is tax-deferred, your gains from the investment could also be tax-free, as long as you withdraw the money at the appropriate retirement age.

What are the drawbacks to using a retirement account to invest in real estate? If you have an employer-sponsored plan, you probably won’t be able to do it. Most employer-sponsored plans use a major lending institution as the custodian for their IRAs (think Charles Schwab, E-Trade, TD Ameritrade, etc), and those custodians ban using retirement savings to invest in “alternative” assets like real estate.

However, if the 401(k) is leftover from a previous employer, you can rollover that 401(k) into a self-directed IRA. It often isn’t possible to use an active 401(k), but if the money’s been sitting around for a while and you’re not quite sure what to do with it, using it to fund a syndication might be a great option.

What You Need to Know Before Using Your IRA For a Syndication

There are some rules that you need to follow to avoid opening up your retirement savings to additional taxation — or on incurring penalties.

First off, you can’t use the real estate investment for personal reasons or have any personal expenses tied to the asset at all. If you moved your old furniture into a rental property that you bought using your retirement account, for instance, you could possibly subject your personal assets to litigation in the event of any liability issues. When lawyers look through financial records, they call this “piercing the corporate veil.” Luckily, when you invest in a syndication, this is much less of an issue.

Additionally, any expenses associated with the investment must be paid using your IRA (including taxes, for instance). If you’re still withdrawing from the IRA and the balance is dwindling, this could be an issue requiring you to withdraw from the investment at a bad time.

Finally, the gains you make from the investment must be paid to the IRA. This means you likely won’t be able to access them penalty-free until retirement age.

Conclusion

If you’re looking for ways to fund a syndication investment, there are two primary methods: cash and a self-directed IRA.

Using cash is pretty straightforward, and when you use cash you get the tax-saving benefits of depreciation, possibly allowing you to save a bundle come tax season. You can also use leverage when you’re using cash to buy real estate. The only problem is not a lot of people have enough cash sitting around for the minimum buy-in for most syndications: around $50k or more.

On the other hand, you can use a self-directed IRA to fund a syndication. You can get massive tax-savings benefits, but there are some rules that the IRS requires you to follow: don’t use the investment for personal reasons, pay all expenses using the retirement account, and collect all gains using the retirement account.