Posted about 5 years ago

Leveraging self-directed IRA & Solo 401K with Non Recourse Financing

Many investors are familiar with self-directed IRA, which allows them to invest their retirement savings in real estate properties, mortgage notes, trust deeds, tax liens, private lending and more. But what if there isn't enough money to buy the property outright?

The reason why investors using their retirement accounts will not be able to use conventional loan when buying investment real estate, is the IRC Section 4975 prohibits the account holder (you) or any other disqualified person from personally guaranteeing a loan made to the IRA. Pursuant to Internal Revenue Code Section 4975(c)(1)(B), disqualified person cannot lend money or use any other extension of credit with respect to an IRA since this will trigger a prohibited transaction pursuant to Code Section 4975.

This type of financing is called a recourse loan because the bank can seek recourse from the individual guaranteeing the loan. These types of loans are the most common types of loans offered by credit unions, banks and other financial institutions. As a result a recourse loan cannot be used with an IRA. This leaves the Self-Directed IRA client with only one choice for financing investment property when using IRA: non-recourse loan.

In this Quick Tip video, learn how to use non-recourse financing with your self-directed Solo 401k or IRA:

Leverage with Non-Recourse Financing

Non-recourse financing can be used to acquire real estate investments for your IRA or 401k plan. Non-recourse lenders usually require 30 to 50% down-payment. You will also need to show that you have sufficient reserves in your retirement account. Each lender may have a minimum loan amount. There is only handful of lenders offering such loans. You will need to contact the lender directly for more details about this minimum amount and other requirements. Here is a list: