Using Your Self-Directed IRA to Obtain Non-Recourse Loans

Posted by: Administrator in self directed ira, nonrecourse loan, myblog, fico, Faisal Sublaban, Brooklyn Troy, 401k rollover, 401k on Apr 27, 2009 Print PDF

There are a countless number of ways to utilize your 401k and diversify your portfolio. An option that most people don't often utilize are non-recourse loans for self-directed IRA's. The IRS requires a non-recourse loan for all real estate purchases that use leverage with a self-directed IRA, which means that if the loan were to default the lender can only take the property and can not come after the borrower or their IRA account. Non-recourse loans are more often used for investors who want to acquire property using their self-directed IRA but don't have enough capital to purchase the property, and don't want to use their hard earned IRA as collateral. Non-recourse loans allow clients to purchase and use the property and only the property as collateral for a loan. That means that credit/fico scores are often not used in the underwriting decision on these loans because the borrower is not the guarantor for the loan. This does however require the properties being lent on being cash flow positive.  Most of the time non recourse lenders will even lend up to 70% loan to value.

For example lets say investor Bob has $90k in his 401k IRA that he is looking to invest but really doesn't want to use it all on one property. While searching for the right investment he finds an amazing property that is going for $100k, that he knows is way under valued and can cash flow positively even in the current market.  Bob knows he can do a 401k rollover into a self-directed IRA for $30k and then obtain a non-recourse loan for $70k in order to complete the purchase. Assuming that the property is cash flow positive, which is extremely common in this market, Bob can now use the remaining funds within his IRA account and purchase several properties instead of just one. This not only diversifies his portfolio but reduces his exposure to any potential down turn in the market, or unexpected vacancy. Now with the $90k Bob had ready to purchase an investment property he now has 3 properties that are all cash flow positive and each month the rental checks go right back into his self-directed IRA account.

Here are some basic guidelines for IRA financing:

Requirements for IRA Debt Financing:

 

  1.  Purchase transactions for investment properties only
  2. IRA assets to be managed by a custodian in a self-directed IRA or SEP.
  3. IRA assets must be verified for purchase and reserves. IRA reserve requirement may be up to 20% of the loan amount, to be available in the event of insufficient cash flow to pay operating expenses and mortgage payments.
  4. No employment or income verification
 
 
Documentation Require for Loan Approval:
  1. Completed loan application
  2. Current detailed Rent Roll or copies of signed leases.
  3. Most recent asset statement verifying IRA assets for purchase and reserves.
  4. Purchase/Sale contract, signed by the IRA account holder and the custodian. The contract must show the buyer to be in the name of IRA.
  5. Appraisal fee required at the time of loan application for 1-4 family. 

 

 

Obviously each deal is different and some restrictions may apply, but this is another tool that can be used to help your IRA account grow and to diversify the assets held within it.
 
 
For more information or questions please call Brooklyn Troy. 
 

 

 

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