Pros & Cons of Investing Through a Self-Directed IRA in Multifamily Deals

Written By Jessica Webster

For many investors, retirement accounts are one of the most underutilized tools for building long-term wealth. And when it comes to private real estate—especially multifamily—self-directed IRAs (SDIRAs) have become increasingly popular as a way to access tax-advantaged passive income and diversification.

But using an SDIRA isn’t right for everyone. It comes with powerful benefits, along with strict rules and important limitations every investor should understand. Below is a clear breakdown of the pros, cons, and key considerations for using a self-directed IRA to invest in multifamily real estate.

What Is a Self-Directed IRA?

A self-directed IRA is a retirement account that allows investors to hold alternative assets such as real estate, private placements, notes, and more. Unlike traditional IRAs or employer plans that limit investors to stocks and mutual funds, SDIRAs open the door to private multifamily deals, syndications, and funds.

The crucial difference?
You control the investments—but must follow IRS rules to avoid penalties.

Pros of Investing in Multifamily Through an SDIRA

1. Tax-Advantaged Growth

One of the most compelling reasons to use an SDIRA is the tax treatment. Depending on the account type:

  • Traditional SDIRA: Earnings grow tax-deferred.

  • Roth SDIRA: Earnings grow tax-free if rules are followed.

For long-term investments like multifamily real estate, this can dramatically increase compounding returns.

2. Diversification Beyond the Stock Market

Multifamily investments help balance a portfolio heavily concentrated in equities.
Real estate offers:

  • Lower correlation to public markets

  • More stable cash flow

  • Asset-backed security

This diversification can reduce total portfolio volatility—especially in uncertain markets.

3. Access to Private Real Estate Deals

With a self-directed IRA, investors can participate in:

  • Multifamily syndications

  • Value-add opportunities

  • Private equity real estate funds

  • Ground-up developments

These assets are often unavailable through traditional retirement plans.

4. Passive Income Potential

Multifamily deals can generate:

  • Quarterly or monthly distributions

  • Appreciation upon sale or refinance

These earnings flow back to your IRA, compounding on a tax-advantaged basis.

5. Excellent for Long-Term Investing

Multifamily investments often have hold periods of 3–10 years.
Since IRA funds are already intended for long-term use, this aligns perfectly with retirement goals.

Cons of Investing in Multifamily Through an SDIRA

1. No Personal Benefit or Use

Any investment made through an SDIRA must be purely for the benefit of the retirement account—not the investor directly. That means:

  • You cannot live in, manage, or personally benefit from the property.

  • Disqualified persons (spouse, parents, children, etc.) cannot participate.

Violations can trigger severe penalties and disqualification of the IRA.

2. No Access to Depreciation Benefits

One of real estate’s biggest tax advantages—depreciation—does not apply in an SDIRA.
Because your IRA is already tax-shielded, you don’t get the additional tax write-offs.

For many high-income investors, losing depreciation benefits can be a meaningful downside.

3. Limited Liquidity

Multifamily investments are illiquid by nature.
When held inside an IRA:

  • You cannot withdraw the funds without potential taxes and penalties (unless at retirement age).

  • You cannot use the investment as collateral for a personal loan.

Once invested, the capital is tied up until the asset sells or refinances.

4. Potential for UBIT/UDFI Taxes

If the deal uses leverage (which most do), your IRA may owe Unrelated Business Income Tax (UBIT) or Unrelated Debt-Financed Income (UDFI).

These taxes apply to the portion of income attributed to leverage—though still often lower than traditional income taxes.
It's important to consult a CPA familiar with SDIRA real estate.

5. More Complex Administration

Compared to a basic IRA, SDIRAs require:

  • A specialized custodian

  • Proper titling of documents

  • Strict adherence to IRS rules

  • Additional paperwork and timelines

Mistakes can be costly and may result in penalties or disqualification of the account.

So—Is an SDIRA Right for Multifamily Investing?

For many investors, the answer is yes, especially if:

  • You have meaningful retirement funds to deploy

  • You want access to private real estate investments

  • You value tax-deferred or tax-free growth

  • You’re comfortable with a longer hold period

  • You don’t need to personally use or control the investment

However, an SDIRA may not be ideal if:

  • You rely heavily on depreciation to offset income

  • You need liquidity

  • You lack patience for administrative complexities

  • You want to invest in deals involving disqualified persons

  • You’re not prepared for potential UBIT/UDFI tax implications

Final Thoughts

Using a self-directed IRA to invest in multifamily real estate can be a powerful strategy for long-term, tax-advantaged wealth building. But it requires education, due diligence, and proper structuring.

For investors who understand the rules and appreciate the benefits of private real estate, SDIRAs open the door to opportunities far beyond traditional retirement accounts. For others, simpler structures—or even taxable investments—may make more sense.

Either way, the key is aligning your investment strategy with your financial goals, risk tolerance, and time horizon.

Jessica Webster
Next

Webinar: From Investor to Fund Manager: David Priest’s Real Life Journey