So you've taken the steps and transferred some of your retirement accounts in a self-directed IRA and are looking to buy real estate. Now what? First, you need to assess the overall goals and objectives you have for your retirement account. How much risk are you willing to take and what amounts you can expect to earn your money? There are two main options when looking to purchase real estate in your IRA, cash only, or a combination of cash and a non-recourse loan.
Let the first option, in cash. If you have enough money set aside in your self-directed IRA, you can simply buy a property with these funds, plus any fees that are associated with this transaction. When buying a property for money, you should be aware of future expenses that may arise such as: maintenance, repairs, management fees, property taxes and insurance premiums. Your self-directed IRA should have enough additional funds to cover any unforeseen expenditure. It is also a good idea to look at your retirement goals. Are you planning on buying more than one property? What are you doing back on each property? What is your investment time frame? If you have a large sum of money in your self-directed IRA and are planning longer-term growth, a cash purchase of all may be right for you. If not, you should consider a non-recourse loan.
A non-recourse loan is simply a loan that is related to the warranty and not the person obtaining the loan. According to the I.R.S. laws, the only way to obtain financing in your self-directed IRA is a non-recourse loan. This ensures that if for any reason, the loan is in default, the lender can go after the safeguards it has been mobilized and not the person. Because the lender is limited to the guarantee as repayment in the event of default, non-recourse loans generally have a low LTV and interest rates higher. If so, why would I want a non-recourse loan? Again, it is important to review your retirement goals. If you want to grow your account quickly to multiple properties or if you have only a small amount of money in your self-directed IRA but want to buy a property, this could be a good option for you. For example, if you had $ 250 000 in your self-directed IRA you could buy a house for $ 180 000 and $ 70,000 have reservations. Or a loan, you could buy two houses for $ 180 000 each with a loan of 50% of the value and still have $ 70 000 on reserve. Say that the houses rented for $ 1800 per month each. In the first scenario would be a return of 12% per year. In the scenario of non-recourse debt, we assume an interest rate of 7% on the loan $ 90 000, which would result in a yield of 17% per year, per property.
One of the biggest advantages of having a self-directed IRA is that you are in control of your retirement funds. Although it was just a brief description of what a non-recourse loan is and how it can help you reach your retirement goals, we strongly suggest you to discuss your retirement plans with your accountant and lawyer.
