Self Directed Retirement Funds

[Gabriel Rocha]

Has anyone purchased a rental property using a self directed retirement account and had to finance the purchase? I am looking into this option and curious if banks are willing to offer financing?

[Brian Eastman]

@Gabriel Rocha

It is possible to use debt-financing such as mortgages with a self-directed IRA. Many, many people do so.

There are two considerations:

1) The mortgage must be non-recourse, meaning no personal guarantee from you. Most big banks will not do such loans for IRA real estate purchases, but there are a handful of specialty banks including First Western Federal Savings and North American Savings Bank. They want higher down payments than a personal residence loan. You can also borrow from private investors so long as they are not a disqualified party to your plan.

2) The use of debt-financing in an IRA introduces a small tax known as UDFI on the portion of the income the IRA receives from the non-IRA money. You will want to work with a professional in the field to get an understanding of this tax.

The bottom line is that you should still receive a higher cash-on-cash return for your IRA dollars than you would with an all-cash purchase through the use of leverage. It is a powerful strategy for wealth building.