Buying Rental Props with Self Directed IRA

20 Replies

Greetings BPers!


I would like to learn how to purchase a rental property through my self directed IRA. I have an account through Equity Trust. I have enough in my SD IRA to make the down payment of 25%, but how do you get a loan through the IRA? No bank would make a loan in the name of the IRA entity I would think. I can qualify personally, for the loan, but I am not sure if a bank would make a loan to me, on a property that is owned by my IRA? If anyone has any experience in this please reply here


Thanks!

I'm looking forward to these answers because I'm going to bank on Monday to find these exact answers.  

@Chris Licavoli you have to look for non-recourse IRA lenders.

North American Savings Bank is a nationwide lender I am aware of that lends to IRA.

https://www.nasb.com/

Do a search on BP I am sure you will find other IRA lenders.

Good luck!

If you do a search here on BP there are tons of threads on SD IRAs that will help with more info.

Any financing for a retirement account must be non recourse. That means that in the event of default the only thing the lender can pursue is the property the loan is against. There are a few suggestions for lenders that do these loans in past threads as well. You need to understand that non recourse loans usually carry a higher interest rate (7-9%) and require higher down payments of 40-50% usually as well.

As far as your mention of you qualifying, that would be a prohibited transaction since you (your credit) is providing a benefit to the IRA. Also make sure you understand all the issues with Unrelated Debt Financed Income (UDFI), this is basically a tax on your IRA for using financing.

Hope this helps.

I'm exciting for you guys. I'm out of the office until Monday but if either of you would like to have a discussion then I'll be happy to answer questions.

Your IRA can obtain a "non-recourse" mortgage to leverage your plan assets. The mortgage must non-recourse because you're restricted from personally guaranteeing the note. The only collateral is the property itself.

You'll find that non-recourse lenders will ask for 30-40% down with some additional reserve requirements.

I have a list of non-recourse lenders that our clients have used across the country. Send me a PM if you'd like me to forward it on.

Feel free to ask follow up questions.

@Chris Licavoli  

do you have any other retirement accounts besides this one? Most lenders will require at least 30% down plus additional 10% in reserves (other retirement funds could be counted for that). Just confirming what others had said that the loan must be non-recourse. You can probably find local private lenders who will be willing to make a loan to your IRA, but expect rate of about 10%. There are several nation-wide banks who offer non-recourse lending and NASB is one of them. Many of our clients and myself used them. I got a loan from them last year 5/1 ARM at 4.875% with 40% down (depending on the state you can get a loan at 30% down, mine was AZ). So with banks the terms are much more reasonable. If you want to see full list of lenders we work with you can find it on our website.

Dmitriy Fomichenko, Broker
(949) 228-9393

Thank you so much for all the helpful advice. It makes sense that you have to get a commercial loan to do a deal like this in the IRA but I also heard that you can JV with yourself and your SD IRA. Don't know the details, just that it was possible.

Owning rental real estate in you IRA is not a particularly good use of the money. If you pay all cash you do not get the advantage of leverage. Real estate has some tax advantages that will do your IRA no good. If you have to borrow in order to buy in your IRA, the borrowed money will be subject to taxes that negate the value of the IRA - This puts you right back at point one. There is no advantage of leverage in an IRA.

ON the other hand owning real estate related assets can be very beneficial, tax liens, mortgages/ hard money lending, private placements on large commercial properties. commercial ground leases, etc.

Totally agree with you Ned. I do own Liens but I find them very difficult to locate and purchase. In Georgia you have to physically go to the courthouse to bid and there are 130 counties in GA! The ones I purchased were after the fact, non-sold liens in Florida which mostly do on-line bidding but finding decent properties with liens that have not been bid down to 5% interest is difficult to put a lot of money into play. You can buy 16% interest liens on vacant land in FL all day long however!

I was doing some reading on this subject this afternoon. If I am understanding it correctly, you have to be completely hands off when it comes to the rental property. Also, expenses need to be paid from the account and income needs to be deposited into it.

Please correct me if I am off base on this one.

Thanks

Ned is correct and is smart to warn you. There are MANY limitations to doing this. If you use leverage in an IRA investment the gains are reported differently and you may own income tax. (rent in excess of 1000 for the year is considered UBIT and taxed)

Deducting depreciation does no good.

You need to jump through a lot of hoops to make sure the money stays IRA eligible. Not collecting rents, etc.

You must hire a property manager which adds to costs and you cannot do any maintenance yourself so you end up overpaying for work to be done.

I disagree with the negative mentions so far. It's just a different way of going about things. Besides, you've already put this money aside in a tax advantaged account over the years.

Technology has changed over time to make the accounting nuances of SDIRA investing more simplistic. Like others have said, it's the IRA that must pay expenses and receive income for its portion. Things like online bill pay and even online rent payments (ACH) are available to streamline these tasks.

The mention of requiring a property manager is false. IRA holders CAN be a property manager but only from a decision making standpoint. You should not perform any sweat equity, nor should you handle cash flow. Imagine trying to landlord remotely. Check out the blog article I wrote on this about a month ago.

It's easy for someone to say, you lose all the personal tax advantages but everyone's tax situation is different. The lower your tax bracket, the less productive those benefits become. I'm working on a side-by-side comparison blog right now to show a real comparison with what I consider to be a middle of the road American (25% tax bracket). I don't think ALL of those who weight in on the (lose personal deductions) argument have ever understood how to accurately calculate the comparison. It's a long term comparison, not a short term one.

Once you have 5 loans lenders require you to have reserves to cover 6 months of P&I, tax and insurance for each loan. I figure the best use of my IRA money is to have it in investments that can easily be made liquid like stocks, that way my IRA can be used as reserves and be invested at the same time.

The main reason I opened the SD IRA is because, as a flipper I am getting KILLED on taxes! But its hard to get enough funds into the account to handle a big flip so its either JV or put the funds to work doing other things until is grows large enough to fund flipping activity. That's my long term plan.

I don't see the benefit using an SDIRA for rentals since the passive income is relatively low taxed.  And if you borrow it appears to be taxed anyway.  

Like you, I intend to use my SDIRA for flipping to avoid short term capital gains but I don't have quite enough money in my solo IRA to flip.

I will build up my IRA up this year through contributions. Solo IRA's are a flavor of SDIRA's but one step further down the road to independence and control than SDIRA's. Significantly, for you, they allow higher contributions ... up to 20% of your 1099 income ... tax free.

Mark Nolan of mysolo401K.com is my advisor on solo 401K's.  There may be away to more effectively pursue joint ventures to flip with a solo 401K.  I would get advice on that.

>KNC<

The tax benefits of owning property outside a retirement plan are huge. Here are a few long-term disadvantages of owning property inside a retirement plan, including some that were not mentioned:

1) You lose the long-term capital gains tax rate. Profits you make when you sell will ultimately be taxed at your then current ordinary income rate when you start taking distributions. Don't think for a second this will necessarily be lower when you retire, than now. I hope for your sake you still have lots of income coming in.

2) Already stated, but you don't get the benefit of depreciating your assets.

3) You can do nothing more than manage your properties administratively. That is, you can hire & fire property managers and contractors but cannot do any "real" work. Sweat equity has an implied price is an excessive contribution, as is using your after-tax money to pay bills if your plan runs dry. What would you do then?

Slightly more obtuse and much longer-term for some here:

4) Once you reach 70 ½ you will be required to take distributions whether you have cash in the account or not. This could mean selling property at an inopportune time. In fairness, this would apply to paper as well.

5) If you die, your heirs would enjoy no step-up in basis from income property in an IRA and pay tax at their ordinary income rate when they sell.

(Not retirement plan related, but you can often use a 1031 exchange to defer or eliminate taxes altogether. This is yet another option when holding property outside of a retirement plan.)

On the other hand, paper is very inefficient from a tax point of view. Anyone who loans, or buys tax liens, or invests in the other vehicles @Ned Carey mentioned above, will normally get killed in taxes and there are not many options. These are the best use of a retirement plan. Self-Directed 401k plans are particularly suited over an SD IRA if you really have to borrow money, since they are exempt from UDFI. Done properly, a husband and wife team can shelter over $100k in income using an SD401k. Depending upon your age, you're limited to roughly $6k each in an SDIRA.

In my opinion, I would start a corporation and build commercial credit.

Then I would use that to invest in real estate.

If you'd like more information, you can email me. I can introduce you to someone who is showing me how to build my corporate and commercial credit.

@Chris Licavoli  

First Western Federal Savings Bank provides non-recourse loans in all 50 states.  

myiralender.com

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