You would have to be living in a cave if you haven't seen or heard about the implosion of the real estate market over the last two years. Ever day in the news it is foreclosure this and a new regulation that. Not to mention although some 401k and IRA account have seen some recover from those late 2008 lows. Don't get your hand caught in the cookie jar the next time the market takes a dip. Now many investors have been waiting on the sidelines not sure what to do with their retirement accounts. While it is easy to reproach the mortgage brokers, the government regulators, and the infamous people on Wall St., focusing on who to blame on the recent financial crisis may cause you to miss one of the countless opportunities out there right now. 

Many people are unaware that they can use their IRA and 401k funds to purchase and invest in real estate. You can roll a portion of your 401k into a Self-Directed IRA and purchase investment properties to rehab and flip or just sit on and rent out. Some markets have been hit by more than 50% and some or even undervalued today by 40%. The best part about using your IRA funds is that you can now obtain and IRA Loan to help you acquire  or rehab your property. Some of the IRA lenders are now lending up to 65% of the value of the property you are looking to purchase. Here are some facts about IRA Lending: 

What is IRA Real Estate Lending?

IRA real estate lending is the process by which you can self-direct IRA or other qualified retirement funds to purchase real estate. This is accomplished by funding the down payment of the purchase price with a qualified account and then obtaining a non-recourse loan to finance the remaining balance of the property's purchase price. Self-directed accounts can even be used to purchase property or buildings in other countries. For more information on opening a self-directed IRA account, please contact  This e-mail address is being protected from spambots. You need JavaScript enabled to view it

In today's market, mutual funds and other Wall Street investments that were deemed safe and fail proof have in recent years shown significant volatility and in most cases dramatic losses. Many people today are moving towards self-directed retirement accounts where they control more closely what their retirement account should invest in. Because IRA's are qualified accounts, they are classified in such a way in which they cannot be accessed without negative tax consequences until much later in life. This can be a problem if you want to purchase investment real estate but simply don't have any non-retirement funds available to do so.

In order for a self-direct IRA to fund a real estate investment, per IRS tax law, a qualified 3rd party administrator must facilitate the purchase of the property which ensures that the individual does not have personal possession or direct access to any qualified accounts. If this rule is not abided by, then the IRS classifies the money as an early withdraw which triggers not only a financial penalty, but also causes the proceeds to be subject to ordinary income tax rates. The 3rd party administrator facilitates the purchase of the asset and title is vested in the name of your IRA or designated account. A property can NOT be purchased in an individual name and afterwards transferred to your self-directed IRA. This is referred to as self-dealing and is strictly prohibited by law. If you purchase real estate within your self-directed IRA, you will not be able to live in the property or own it in your personal name. This also includes your family and anyone else who may be connected with the transaction that could stand to personally benefit from the transaction. Your IRA is only allowed to purchase assets solely for investment purposes and void of any personal gain or benefit prior to taking a distribution from the account.

Are there penalties for misusing IRA loans?

There are fines and penalties for violation of the terms of IRA lending. The 3rd party administrator can also assist you in confirming that a transaction is eligible. Another way to properly plan for correct use of this type of investment is to work with a knowledgeable CPA and financial planner. Prohibited transactions from IRA loans can also lead to complete disqualification of the IRA itself, so it is imperative to be very careful in this matter.

What is the process for setting up an IRA loan?

Once you have found a trusted 3rd party custodian, they will assist you with paperwork and compliance documentation necessary to transfer your qualified accounts to their trust account. Brooklyn Troy works closely with and recommends Pensco Trust Company or The Entrust Group for a 3rd party custodian.  First, a plan is decided upon and approved. Then the funds from your IRA are rolled over into the new self-directed IRA held by the administrator. If you are pooling a number of IRAs, as in perhaps you are joining your IRA with that of your spouse, all these funds will be rolled into a new self-directed IRA. Upon a property being selected to purchase, the custodian will then take appropriate steps in order to help you facilitate purchase that will be title in your IRA.

This subject is still a bit of a mystery to many people. Because it is an alternative investment as oppose to a mutual fund or more widely quantifiable investment, most stock brokers and investment advisors simply don't have experience offering advisement in this area. Self-direct IRA's are an ideal way to take advantage of the present real estate market. Many financial institutions deem this type of non-recourse loan a safe and lucrative because of the large down payment required (typically 35% or more) and the excess account reserves that ensures repayment of their loan.

Remember this is one investment tool to help you diversify your retirement investments. While no one can predict what all the markets will do over the next ten years one thing is for sure there will be ups and downs, and this time you dont want to have all of your eggs in one basket. The only free lunch in investing is with diversification.  

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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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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

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