Owner finance from self-directed IRA

10 Replies

We found a rental house that we are interested in where the owner will provide financing. This house happens to be currently ownded in a self-directed IRA. Can the owner provide financing in this scenario, and are there any potential issues we should be concerned about?

Hello, 

Dmitriy is right as usual, but a couple things to be aware of.

This person cannot be a 'disqualified party' (close relation) to you or anyone else (if any) involved in your venture. Also, if the owner is only offering financing for short time and expecting you to refinance say once you have a couple of year rent history, and YOU are also buying it with a SDIRA, it will likely be VERY hard to get traditional financing for your SDIRA. 

Otherwise, that is exactly the kind of deals I am looking for too.....few and far between, but if we dont look, we wont find them!

Dan Dietz

I knew you could hold a note in an IRA, but for some reason I didn't connect holding a note with an owner finance loan -- I don't know why. Thank you for your excellent responses.

In this case, the other person is definetly not a disqualified party, and we won't be using a SDIRA.

@Daniel Dietz  

Financing is available for your SDIRA. I was able to do this for the purchase of a triplex. It needs to be a non-recourse loan, and the lender has to be able to accept the loan being made to the SDIRA, but their out there. Typically a higher LTV due to the non-recourse aspect and may only be a fixed rate for a certain period (say 5yrs with mine), then the rate becomes variable. In my case it is amortized over 25yrs. Just more to analyze when you model the income/expenses.

@Barrett Dunigan

Good point...... I meant to write in more depth before but was in a rush. 

You are completely correct that the Non-recourse lending is out there - just a bit hard to find and lots of 'conditions' from what I found.

In our case, many of the rentals that have great pricing and return ratios are; converted house into duplexes or triplexes, are pre 1950 or so in age, and under 80K-100K in price - ALL of which seem to be issues for most Non-recourse lenders, so it rules that route out in most of the properties in our area, which is a city of 12K or so.

With that said, I have been looking into a few larger (4-8 unit) and newer units with the leveraging in mind that a Non-recourse could bring, along with working on finding Private Lending for the other, older homes.

Dan Dietz

Another thing to keep in mind when using IRA with leverage (non-recourse financing) to purchase real estate is that the income from the financed portion of the property will be subject to Unrelated Business Income Tax (UBIT).

Using self-directed Solo 401k with non-recourse financing however is exempt from this rule. 

Mr. Dmitriy Fomichenko, I would like to know if a homeowner can owner finance TO my company's retirement plan. I have consulted at least three people in the industry and have gotten three different answers. One said that it was legal for a homeowner to sell to a self-directed retirement plan, another said that a retirement plan could only buy a property IF it was paid in full, and a third told me that I could open myself up to some sort of taxes. Please explain these taxes and the whole situation to me, if this information is accurate.

Cornelius,

I think you are getting mixed information due to they are not understanding your question clearly.  If I understand it, you have a SDIRA and are asking a non-disqualified party to allow you to purchase the home, but for them to also hold a note on the property (so you can leverage the property).  The only trick to this is that the person holding the note would have to write the note as a non-recourse loan (which is a 1 paragraph statement within a normal loan) as your SDIRA cannot have a normal recourse loan (since your SDIRA is its' own entity and you cannot guarantee the funds with your other financial instruments).  

So my answer is that the homeowner (a qualified person) can hold a non-recourse mortgage against the property and owner finance the deal.  

Jim

I don't think so, how would you sell a home to your SDIRA and carry back a note, which is what I got from the question, without benefiting from that SDIRA, if you hold the mortgage from a sale your SDIRA is making payments to you! The fact that the note is non-recourse is irrelevant, payments are still required.   Doing a note and setting the note over as well as the property over is redundant silliness, just set the property over. Coffee is on!