A self-directed IRA or Solo 401(k) plan that offers checkbook control can have many advantages over a similar plan offered by a 3^rd party custodian serving as a processor.  When it comes to investing in real estate, the benefits that come with checkbook control are significant.

Checkbook Control vs Custodian

There are two different plan option when it comes to investing in alternative assets with a self-directed IRA or Solo 401(k).  You can use a custodian or build a plan that offers checkbook control.

An IRA custodian is a financial services institution, usually formed as a registered trust company, that can administer IRA accounts.  There are several non-traditional IRA custodians that have the people and paperwork to document unique investment assets like real estate, private equity, cryptocurrency, etc.   A custodian acts as processor.  They will hold plan funds, and at your direction will execute contracts, fund the expenses of acquisition or maintenance of investments, and receive the income produced by those investments.

To provide checkbook control for an IRA, a custodian is used, but they are limited to an administrative role only.  The IRA will make a single investment into a specially crafted LLC or Trust entity – something we do here at Safeguard Advisors.  While the IRA owns the entity, you can be the person with signing authority and can therefore directly manage plan investments.  Using the LLC or Trust, you can execute contracts and deal with the handling of expense and income transactions using a checking account you control.  The custodian is not involved.

Now that we understand the different models, lets take a look at how a checkbook control IRA is better suited for investing in real estate.

Act Immediately

One of the primary disadvantages of using a custodian is the processing queue.  Any time you need to make a move, whether to execute a contract, pay an expense like property taxes or repairs, or deposit rents, you have to go through the custodian.  The custodian will have forms that need to be submitted that provide them instructions on what needs to be accomplished.  They will receive hundreds or thousands of similar requests each day, and therefore a 2–5-day processing queue is not uncommon.  During busy times like year end and tax season, wait times can be even longer.

When you invest with an IRA owned LLC or Trust, you can act immediately without need for 3^rd party processing.

Writing offers and executing contracts is much, much easier when you do not have to have the paperwork reviewed by a 3^rd party.

Property Maintenance

Maintaining an IRA owned rental property is an interactive process.  Most properties have regular expenses related to property taxes, landlord insurance, and perhaps a mortgage.  There will also be occasions where you need to pay for repairs or hire in services like landscaping or snow removal.

Having to go through a 3^rd party processing agency for each and every such event can be a real headache.  The paperwork, delays, and per-transaction fees associated with custodial processing can really eat into your time and the income produced by the property.

The need to have all expenses paid via the IRA can also create real operational problems if you don’t hold the checkbook.  Imagine if the water heater or HVAC system stops working.  You have an obligation to your tenant to have the repair handled as quickly as possible, but need to tell your contractor that payment will be forthcoming from your IRA in 7-10 business days.  That is really going to tie your hands.

When you hold the checkbook, you can take care of all such matters immediately.  It is so much more efficient.

Property Management

Most custodians will require that you have a 3^rd party property manager.  While this can be a best practice whether you use a custodian or operate a plan with checkbook control, it is not a legal requirement.  The need for a property manager simply solves the operational difficulties of using a custodian as processor, by minimizing the need for the IRA to directly handle expenses.

As the IRA account holder and a disqualified person to your IRA, you are allowed to administer IRA investments.  You must limit your actions to things that are ministerial in nature such as executing contracts, selecting and paying vendors, and receiving the income produced by investments.

You can act as a property manager for your IRA if maintain such an administrative posture.  For investors who understand how to properly manage properties and tenants, not being forced to hire a 3^rd party property manager can be a big benefit.

Lower Cost of Operation

The fees for most custodians are based on the amount of processing they do.  You can imagine that if it takes $15-$50 every time you need to pay a utility bill or a landscaper, that can really add up.  Buying and selling properties often costs several hundred dollars.  While some custodians simply charge a flat fee based on the dollar value of the account the cost can still be significant over time.

Because there is no 3^rd party processing layer with a checkbook IRA, your annual operating costs will typically be significantly lower than using a custodian.  The legal structure of the plan will cost more to establish initially, but a few years out your overall plan costs will be less.

Access to Meaningful Guidance

Custodians are processing agencies.  They can guide you through how to fill out a form to process a transaction.  That, however, is where their guidance stops.  A passive custodian cannot provide tax, legal, or investment advice by rule.

When you work with a professional provider of checkbook IRA plans like Safeguard Advisors, you gain access to quality guidance.  As advisors and consultants, we can help you to understand and navigate IRS rules in a way that the processing staff at a custodian simply cannot.

For Real Estate Investors, Checkbook Control Is a Must

It really is difficult to effectively invest in a dynamic asset like real estate when you do not have full control and access to professional guidance.  For real estate investors, the benefits of checkbook control are clear.