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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*This is an article written by Pensco Trust CEO Tom Anderson that was featured in the August 2009 SJREI Journal.*

While today’s residential market is flooded with foreclosed properties, the resulting devaluations in many parts of the country are creating unique opportunities for long-term investment buyers. With many consumers increasingly concerned about liquidity as a result of the reeling economy, investors are turning to their retirement accounts to take advantage of an incredible buyer’s market. Since the credit market is effectively in neutral, investors are scooping up properties in some areas for less than 50% of appraised value, with all cash purchases with their self-directed IRAs.

For example, on July 6, I heard from a real estate broker in Florida that he was able to purchase a 2,800 square ft. home on a golf course in a gated community (and needing no repair) for $100,000. It was listed by the bank that foreclosed on it at its appraised value of $200,000, and it sold two years ago for $440,000!

Although we may not yet have reached the bottom of the market for residential real estate, and the window of opportunity will likely stay open until the third or fourth quarter of 2010, the opportunities today have the dual potential for significant appreciation in the five to 10 year time frame and the production of positive cash flow during the holding period at today’s prices.
Experienced real estate investors, brokers and realtors are taking action now, recognizing that more foreclosures will follow early next year as adjustable rate mortgages (ARM mortgages) sold in 2007 kick in with a vengeance in the first quarter of next year.

At PENSCO Trust, we have seen a 26% increase in IRA real estate purchases (to $26 million) between the first and second quarters of this year. Most of this increase was associated with foreclosures in the residential market, however, we have also seen quite a few real estate syndicators buying up unimproved land (undeveloped lots), with the idea of conditioning it through entitlement in time for the next upswing in the real estate development sector. In some cases, they are buying at 10 cents on the dollar. These deals are not for the faint of heart and may require a longer holding period, so they are not suitable for anyone with liquidity needs.

Another avenue self-directed IRA investors are pursuing is to provide credit to others for the purpose of buying real estate. With traditional credit markets almost nonexistent, borrowers are getting needed funds from IRA investors looking to increase their investment yield on their retirement accounts. Such investors may offer the down payment, first mortgage or second mortgage or even become a co-tenant on a purchase when the buyer does not have the necessary funds.

For example, one investor may locate a great investment property, but not have sufficient funds to buy the property. By combining forces and funds with an IRA investor, who may participate through an equity investment or an extension of credit, they can acquire the property.

It is important when investing in real estate with a self-directed IRA, that you choose a competent IRA custodian with a strong track record. Good custodians will help you to understand the rules and the process, easing your entry to self-direction.

In addition, it is very important that your custodian is geared to execute in a timely and accurate manner, as real estate transactions can close very quickly and earnest money deposits frequently have to be made from your IRA on the same day to secure the best opportunities. PENSCO Trust is proud of the fact that we generally get all real estate transactions funded on the same day they are authorized by our clients, and, in almost all cases, within 48 hours.

Certainly, investing today is more challenging than in a bull market, but some things are certain. Real estate values are down in most areas of the country, building has almost come to a screeching halt and demand will eventually catch up to supply, at which time prices will rise. How long that takes is anyone’s guess, but some like those odds better than investing in the stock market. Choose your own poison, but eventually you have to take action to keep your wealth growing.


*Pensco Trust is a passive custodian and in no way endorses nor gives any investment advice on particular investments* Original article can be found at www.selfdirectedira.com

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With the uncertainty within the financial industry these days it is no wonder investors don't know where to go with their money and investments. Over the past year we have seen such financial industry staples such as Lehman Brothers, and Bear Stearns go under, and even had a $50 billion Ponzi scheme by Bernard Madoff exposed. With all of the uncertainty in the market a great alternative can be Self Directed IRA's. With a self directed Ira investors have more control over their investments. Through the aid of a custodian such as Pensco Trust Company investors can roll over their 401k into anything from land, rental properties, tax liens, or even a pizza parlor. 

In fact many investors are now using their retirement accounts to diversify their investment strategy. With real estate prices at historic lows now may be best time to invest in real estate. Bob Wooderd, a 55 year old Florida business owner saw his retirement account lose about 30 % of its value last year and he is now actively searching for deeply discounted condos through out the Florida. ''There are condos now selling below the cost to build and provide a pretty handsome rental income. I have used the combination of my 401k and non-recourse loan to purchase 3 condos in the last 4 months and my IRA is receiving roughly $800 per month in positive income.'' says Mr Wooderd. Over at Brooklyn Troy we have been providing investment opportunities for our clients by rolling over their retirement accounts into self directed IRA's. The real estate market hasn't been this prime of a potential investment in years. Whether it is land, a rental condo in florida, or using your funds to start that dream business self directed IRA's provide a nice supplement to your existing retirement investments. 

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