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Leveraging Real Estate in an IRA

A self-directed IRA real estate may acquire a loan to purchase property, but it must be a non-recourse loan (the lender is acknowledging, in the case of default, their only avenue for renumeration is the property itself.)
Not all lending institutions and banks offer these types of loans, but several do exist. Also, a non-recourse loan can come from a private lender. 

When an IRA purchases real estate using a non-recourse loan, the debt financed portion of the property's net profits may be subject to UBIT.
Similarly, if an IRA-owned property is sold while a percentage of ownership is still debt financed, the net profits derived from the debt financed percentage may be subject to UBIT.
UBIT is paid by the real estate IRA and does not affect the IRA holder's personal taxes. Learn more about UBIT here.


Property Management

After you have used your self-directed IRA to purchase real estate, the IRA holder makes the management decisions. That may include the hiring of a property manager (or other non-disqualified person or entity) to handle the day-to-day cash flow and operations, or you may choose to work directly with New Direction to have vendors and other bills paid. You are allowed to make decisions for your IRA-held asset, but there are limitations that the IRS imposes.
 
  • Income generated by the self-directed IRA real estate must go back into the IRA. Rent checks are made out to the IRA (or the management company if there is one), not the IRA holder.
  • You cannot pay for any property related expenses with your personal funds on behalf of the real estate IRA. All expenses are paid from the IRA.
  • As the IRA holder, you have the ability to choose tenants, plumbers, repairmen, etc. for your IRA-owned property.
  • Maintenance and improvements cannot be performed by the self-directed IRA real estate holder or any disqualified person.

Can my IRA acquire financing, and what types of loans are available?



Who offers non-recourse loans?


 

What types of terms and rates should I expect with a non-recourse loan?


 

Can my IRA participate in an owner financed purchase?


 

What are the advantages of using debt leverage inside my IRA for real estate investments?

  1. Increased purchasing power: The biggest advantage is leverage. For example, a $250,000 IRA could purchase one $250,000 home outright OR make a 50% down payment on two $250,000 homes and use non-recourse financing for the other 50%. In this scenario, your IRA can own two properties instead of one with the potential for added income or appreciation from both properties.
  2. Make money on money that you didn’t have to contribute to your IRA: The use of leverage with an IRA is typically not offered in accounts that trade public securities such as stocks, bonds, and mutual funds. However, lenders are more open to the idea when tangible assets, such as real estate, are involved.
  3. Not considered a loan on your personal credit: Keep in mind that the IRA is taking out the loan instead of you personally. The new debt created is not added to your personal credit report. However, most lenders will still want to examine the IRA holder’s credit so a credit inquiry may still apply.
  4. Your personal finances become less important to lenders: While lenders may examine your credit to make sure you’re financially responsible, final loan approval is most reliant upon having a great deal. Don’t get discouraged if you have already maxed out your personal financing options or have a high debt-income ratio. Non-recourse lenders are typically focused on the future success of your investment since they only have recourse to the property itself.


Additional Important Considerations



 
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