So you’ve taken the steps and transferred some of your retirement accounts to an Independent IRA and you want to buy real estate. Now what? First, you need to assess the overall goals and objectives you have for your retirement account. What level of risk are you willing to take and what return do you expect to get on your money? There are two main options when looking to buy real estate in your IRA; cash only or a combination of cash and non recourse loans.
Let’s look at the first option, cash. If you have enough money set aside in your self-help IRA, you can simply purchase the property with those funds plus any fees associated with the transaction. When buying property with cash, you should pay attention to future expenses that may arise such as: maintenance, repairs, management fees, property taxes and insurance premiums. Your independent IRA should have sufficient additional funds to cover incidental expenses. It’s also a good idea to take a look at your retirement goals. Are you planning to buy more than one property? What returns do you generate for each property? What is your investment timeline? If you have a large amount of money in your self-contained IRA and are planning for a longer term of growth, then an all-cash purchase may be right for you. If not, you should consider an unsecured loan.
An unsecured loan is only a loan that is bound by collateral and not with the person giving the loan. According to IRS law, the only way to get financing in your self-help IRA is with an unsecured loan. This ensures that if, for whatever reason, the loan defaults, the lender can only go after the leveraged collateral and not the person. Because lenders are limited to collateral as payment in the event of default, non-recourse loans usually have a lower loan-to-value ratio and carry a higher interest rate. If so, why do I want an unsecured loan? Again, it’s important to look at your overall retirement goals. If you want to grow your account quickly with multiple properties or if you only have a small amount of money in your self-help IRA but want to buy real estate, this might be a good option for you. For example if you have $250,000 in your self-help IRA, you can buy a house for $180,000 and have $70,000 in reserves. Or with a loan, you can buy two houses for $180,000 each on a 50% loan amount and still have $70,000 in reserves. Let’s say the houses rent for $1,800 per month each. In the first scenario it would be a return of 12% per year. In the unsecured loan scenario, we will assume a 7% interest rate on a $90,000 loan that will yield 17% returns annually, per property.
One of the biggest benefits of having a self-contained IRA is that you are in control of your retirement fund. While this is just a brief description of what a non recourse loan is and how it can help you reach your retirement goals, we strongly recommend discussing your retirement plans with your CPA and attorney.
