Buying $130k Investment Property with only $40k of 401k Money
Posted by: Administrator in solok with roth, self directed ira, roth, retirement, real estate, nonrecourse loan, myblog, investment, Brooklyn Troy, 401k rollover, 401k on
Jan 11, 2010
Many people are still unaware that just because their 401k balance isn't enough to purchase a property it doesn't mean that they can't take advantage of the current real estate market. The fact is that there are several options for investors to utilize the funds that are available and successfully roll them over into a real estate investment. What is the primary vehicle needed to complete this transaction? Non-Recourse Loans.
There was a previous entry several months back that goes into a lot more details, but in a nut shell you are able to obtain a loan, up to 70% loan-to-value, to purchase an investment property using your 401k or IRA funds. Because the IRS mandates that all loans involving retirement funds must be non-recourse the only collateral that is needed is the property itself. The advantage of this being that derogatory personal credit, previous foreclosures, bankruptcies, etc, are completely irrelevant when trying to obtain a non-recourse loan. The lenders solely base their loan decisions on the property, it's cash flow potential, and minor reserve requirements within your IRA account. What does this mean exactly? Basically with a standard loan your bank will require you to personally guarantee the property. In the event of foreclosure you the borrower would then be personally liable. With a non-recourse loan involving your IRA funds the government wanted to make sure that in case a real estate investment soured the lender couldn't just come an wipe out your remaining IRA funds if the loan went into default.
At Brooklyn Troy we have seen purchases of properties involving IRA funds increase by 80% in 2009 and 20% of those purchases involved our clients obtaining non-recourse loans. Here is an example of one of the transactions we recently completed.
The purchase price of the property was $130,000 and this particular client had just over $40,000 available for a rollover into a Self-Directed IRA. Initially our client thought that their only option was to purchase a property for no more than the $40k in their retirement account, which significantly limited their investment options in their area. The solution to the problem was obtaining a non-recourse loan. In this particular area the lender was willing to lend up to 70% loan to value which gave roughly $130,000 of purchasing power. Already having several properties already picked out we simply analyzed each property and the potential ROI on each. After narrowing it down to two properties we were then able to make our move. Our client then made an offer on their first choice and actually were able to purchase the property for $125,000. After obtaining the loan for $87,500, and utilizing the $40,000 they had rolled over into a self directed IRA our client was able to purchase a property for $125,000.
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