The IRS doesn’t always make itself the easiest to understand. Do you need to hire a property manager for your self-directed IRA rental properties? We hear this from real estate investors all the time (particularly if using a direct purchase strategy to fund their deals). Though you’re not required to hire a property manager, the IRS does have rules about who you can and can’t conduct transactions with. The rules also state that you aren’t allowed do any “sweat equity”, or provide benefits due to your work on the property. Investors have worried that this implies a property manager is required, an added expense not all investors want to deal with. This is not to imply that having a property manager is bad— in fact, a property management company or manager can be a huge benefit to an investor, as long as it fits your investment strategy.
According to the IRS, prohibited transactions are transactions where a disqualified person (which includes yourself, your lineal ascendants and descendants) provides a service to your IRA. This means that, for example, you, your company, your mother, or your mother’s property management company cannot provide this service to your Real Estate IRA. Doing so would be considered a prohibited transaction and you can strip away the tax-free status of your account. Breaking these rules can have serious tax consequences.
Although you are a disqualified party to your IRA, you can still make all the management decisions for the investment, such as hiring the property management company, choosing tenants, hiring a handyman, plumbers, etc. You just can’t do the work yourself— even if it’s a small job, like painting a wall.
There are two ways you can go about managing your Real Estate IRA without breaking the rules:
- You can hire a property manager to collect rents, maintain property, hire contractors, and manage all aspects of the property.
- You can work with IRA Resources in getting bills paid and rent sent directly to your account. You would still need to hire and supervise the vendors providing services to your Real Estate IRA.
Hiring a Property Manager
When hiring a property manager, you will need to title the contract between your IRA and the property manager in the correct format, “IRA Resources FBO (your name) IRA (your account number)”. IRA Resources is responsible for signing the contract on behalf of your IRA. You would not sign personally.
All leases or agreements and vendor contracts must be in the name of the IRA. However, if the contract between you and the property manager states that bills, contracts, and lease agreements will be under the property manager’s name, this is allowed by IRA Resources. The property manager would be responsible for sending the rent(s) to IRA Resources, payable for the benefit of your account (as noted above). You are responsible for requesting payment from your IRA to the property manager.
Here are some of the positives of hiring a property manager:
- Saves you time – collecting rental payments, dealing with complaints, initiating evictions, coordinating maintenance and repairs.
- Tenant screening— sorting through the prospective tenant applications, running credit checks, and preparing lease agreements.
- Accounting and reporting— keeping thorough records regarding the property. This should include all income and expenses: list of all inspections, signed leases, maintenance requests, any complaints, records of repairs, costs of repairs, maintenance costs, record of rent collection and insurance costs. They send a monthly or quarterly statement depending, on the agreement.
The main negative of hiring a property manager are the associated fees. Most property management companies charge 10 - 15% of the total rent, or they may charge a flat monthly fee. Additionally, if the property manager is not paying the bills directly, you would be requesting payment to vendors through IRA Resources, with each check costing $7.
Not Hiring a Property Manager and Working with IRA Resources
Though there are benefits, many of our clients do not have a property manager. Here is what they do to ensure they do not make prohibited transactions and keep their retirement safe:
- You must make all rental contracts or lease agreements between the IRA and tenant.
- You can have the rent sent directly to IRA Resources. We also allow you to collect the rent and send it to us, if you prefer to do that. You cannot deposit the payment to your personal account or any other account. Income must go back to the IRA.
- All services that you are covering for renters, such as landscaping, garbage, and taxes, should be in the name of the IRA.
- When hiring contractors, plumbers, and other services to make a repairs or improvements to the property, the payments must come from your IRA. You would need to complete a Payment Authorization Letter and send it along with an invoice for us to pay the service provider.
- You can set recurring payments out of your IRA for certain vendors using the Payment Authorization letter.
IRA Resources will charge $7 per check sent to vendors. To give you an idea, the average IRA Resources client holding one property with no property manager requests an average of 5 checks monthly. This is approximately $35 per month, or $420 per year.
There are pros and cons to both scenarios. Whatever the choice, you must have income and expenses go to and paid from the IRA, not your personal funds.
Evaluate your personal investing strategy and see what makes sense for you— whether that be the convenience of a property manager or self-directing the income and expenses yourself while saving on fees, the choice is yours.
If you have any questions or would like more information on real estate investments with your IRA, contact us at (888) 322-6534. We’d love to help make your self-directed retirement investing easy!