How to Use a Self-Directed IRA to Invest in Real Estate Syndications


When American engineer and prolific author Henry Petroski wrote, “Given enough money, [engineers] can accomplish virtually anything,” he was in the middle of making an argument that there ought to be more funding available for creating protective infrastructures against earthquakes, hurricanes, and other “natural and manmade disasters”. He could just as easily have been talking about real estate investments, however, which are also nearly boundless in scope – as long as the capital is present to fund the venture.

Of course, for many real estate projects, capital is the stumbling block that shuts them down before they ever get started. This can be a good thing! After all, there are a lot of projects out there that really should not ever be done. They will not benefit the community in which they would take place nor the investors who invested their hard-earned capital in them. However, when a project “has legs,” so to speak, there is often still a need for more capital than one investor or even one institution can supply. For example, multi-family residential developments are often such a project. They are extremely expensive to develop, but the returns can be exponential. When a project is viable but funding is needed, the sponsors and project managers may choose to use a real estate syndication to raise the rest of the funding needed.

Self-directed IRA investors find real estate syndications particularly attractive because they fit the bill perfectly when it comes to keeping the deal at “arm’s length” (or even a little farther off) and tend to require very little work on the part of the investor once the initial investment is made. However, not every syndication is a good one, and some poor syndications do succeed in raising capital.

Investing In Real Estate Syndications

Before you invest in a real estate syndication using your self-directed IRA, there are a few things you should know:

Are you qualified to invest in the syndication?

Some real estate syndications require investors to be either sophisticated or accredited. Find out what is required and determine if you are eligible to invest.

Will the syndication be using leverage?

Many real estate syndications raise capital to get the project started, then opt to use leverage to access the remainder of the funds they need. Remember, your self-directed IRA has certain IRS rules about how you can use leverage in your investments. You must find out if the syndication will be using leverage, then consult your trusted IRA tax advisor to determine if this will have tax ramifications for your account. Otherwise, your returns could come with tax obligations you were not expecting.

How is the syndication structured to protect investors?

Many self-directed investors have been investing in real estate actively for years. They are not alarmed by “one-man show” syndications because that is often how they have managed their own real estate investments – to great success! However, a syndication is much bigger than a personal investment, so you should always know how the project will move forward in the event of a disaster, such as a divorce, a corporate meltdown, or a death. Your capital should be protected at all times.

Who gets paid (and when)?

Syndications can be structured to pay in a variety of ways. You might be able to access “preferred investor” status, wherein you are paid a higher rate or paid before other investors; you might get paid before the sponsors, or you might be agreeing (in the fine print) to exorbitant management fees. Understanding how your self-directed IRA account will receive payouts, what the schedule will be for those payouts, and under what circumstances they might be delayed will be a crucial part of your decision-making. 

How many deals has the project manager done before?

Some self-directed IRA investors say that experience is a make-or-break requirement for them when it comes to investing in real estate syndications. This is largely a matter of personal preference, and will depend on how much experience you, personally, have in the asset class in which the syndication will operate. If you can identify a good opportunity with a new project manager, you may decide to take the risk. If you are relying mainly on the project manager and sponsors to identify good opportunities, experience will be more important.

Remember, You Can Always Have a Discussion

While the terms of a syndication are written out in advance, there is more flexibility for self-directed IRA investors than most realize. For example, you might be able to negotiate a better rate for your account or establish certain guidelines around how you will be notified of progress or permitted to withdraw your capital if you have a simple discussion with the project manager and syndicators. While they will not bend SEC rules and regulations for you, you may find that you have access to more opportunities than you initially thought. It never hurts to ask questions and seek out information before you make your final decision!


Please note: Not all alternative investments require Accredited Investor status. Please review the private placement memorandum, subscription agreement, or prospectus for purchase. 

Always take the time to consult with trusted, professional advisors to ensure you understand tax, legal, and investment issues related to the use of IRA funds in LLCs. 

Additional Resources: (crowdfunding regulations) (accredited investors)