Self directed IRA and leverage

5 Replies

I understand the concept of leverage- using someone else's money. But do you flip the script by using a self directed IRA on if a deal works. My thought is a SD IRA basically gives you alternative to stocks. If I assume 8% in stocks then the goal is just to beat that annually, right? By using SD ira funds I have the ability to borrow less from a lender, therefore increasing 'cashflow' and return on my own funds. Also, capital gains when sold are deferred. What am I missing?

@Ben Grubb

leverage is in fact a very powerful tool to be able to use within a self-directed IRA.

What you describe is not possible however, as it seems you want to mix SDIRA funds along with personal funds to make a larger down payment. As a disqualified person to your IRA, you may not transact with or otherwise create any benefit between yourself and your IRA.

An IRA could purchase a property and obtain a non-recourse loan from a bank or private party. You may not pledge a personal guarantee on such a note. Again, as a disqualified person to this tax-sheltered money, you may not provide your personal assets as security for the IRA's debt.

When an IRA uses leverage, there is a tax on the resulting Unrelated Debt-Financed Income. It does not typically add up to much and your IRA will still see the boost in return that leverage creates, but the concept is something you want to be sure you and your CPA understand and plan for.

But bottom line... can your IRA by using a mortgage to purchase income property outperform the 8% number you suggest from the stock market. If you do things well, yes, it should be able to.

@Brian Eastman . Brian, thanks for the response. I guess my thought was to use 50% of ira funds for a $200k purchase and the other $100k would come from a traditional lender. You say non recourse loan and I'm not familiar with that so will research it. Sounds like a may not be able to use SDIRA and a traditional mortgage to do a deal?

@Ben Grubb

You can't use conventional loan with an IRA. Conventional lender will require you to personally guarantee the loan and that is prohibited by the IRS rules, that is why you have to use non-recourse loan.

We have mostly used NASB off of @Dmitriy Fomichenko 's list. Great service and fair rates.

We have also used a local Private Lender (who we have also used for non-retirement account properties) who was willing to do a non-recourse loan. These type of people ARE hard to find, but if you can, it works great.

Dan Dietz