Self Directed, IRA Loans, Property Types, Investment Groups
In 2009 we have had a lot more requests and questions from clients about using IRA funds to purchase investment real estate for fix and flip projects and rental properties. So I thought I would post an FAQ with answers. Here are the Top 5 Questions from 1st time investors using their IRA funds to buy income property:
#1 How do I get access to my IRA funds to buy a house?
In order to begin the process, you will need to establish a self-directed IRA account. It is unlikely that you will be able to obtain this type of IRA account with your current brokerage or bank. A quick Google search will retrieve many custodians who help investors open IRAs for real estate purchases. After comprehensive due diligence of many of these companies, we have selected Equity Trust Company for our own accounts and recommend that our clients include this company as part of their selection process for a custodian. Consider account and transaction fees, allowed structures, types of entities, consulting and customer service when selecting a custodian.
#2 Can I get a Loan in my IRA to purchase investment property?
Yes, you can get a loan for up to 65% of the purchase price of a property in your IRA using what is called a “non-recourse” loan. This type of loan is not personally guaranteed by you, it is only secured by the property within your IRA account. One of the leading lenders in Colorado serving IRA customers is First Bank. They have a specific and streamlined program that we highly recommend. You can read about all the plan and property qualifications at this link called Loans to Purchase Real Estate in your Retirement Account.
#3 What kinds of property can I buy using my IRA funds?
Within your IRA, you will have many options for real estate investments. The most common is purchasing property directly and getting fee simple title. The title will be held in the name of your IRA, not your personal or business name (with or without leverage or loans). Another option is buying into ownership of LLC’s or Limited Partnerships that own and operate income property. Your IRA may also be a lender that holds a mortgage on a property that pays interest to your IRA that is secured by real property. This is called investing in notes (promissory notes). In the first two examples, your IRA is the owner of a property, and the last example your IRA is a lender to an owner of the property. Any of these can be good investments for your retirements funds, all of them have risks and should be only be undertaken after careful consideration. After all, these are your life savings!
#4 How can I get the Money out of my IRA?
Well, here’s the bad news and the good news: You cannot pay yourself or take profits or cash-flow from real estate investments in your IRA and put them in your pocket today. Sorry. But, the good news is that you are doing yourself a favor by growing your net worth and savings and that will increase your borrowing capacity and ability to do deals outside your IRA accounts for current income or short-term capital gains.
What do I do First? Or How Do I Get Started?
Sometimes this is the first question, and sometimes it’s the last! I always recommend that investors (especially novice investors) begin the process by interviewing and hiring two experienced and competent advisors. First, an accountant and second an agent or real estate investment advisor. It is critical to choose real estate professionals that understand the benefits and risks of investing in real estate (whether in your IRA or otherwise). Be aware that there are many accountants and real estate agents that are very knowledgeable about normal transactions, but there are only a limited number that specialize in investment property, and even fewer who understand IRA rules and regulations. In other words, don’t just hire your brother-in-law! Seek out people who have been where you want to go. Find people who have an existing team that you can use; leverage other professionals who have paved the way for you!
NOW is the time to get started, Happy Investing!
If you or someone you know is interested in these types of IRA real estate investments, please us the Contact Form for additional information.
{ 5 comments… read them below or add one }
Very comprehensive coverage of a very tough question – on that comes with a lot of different variables! You’ve gained a new reader:)
Investing is my way of earning money both online and offiline, right now i am into venture capital.:*’
investing will always be a part of get rich programs, sometimes you need to be a risk taker to succeed.”,.
Another self-directed IRA custodian to consider is Lincoln Trust Company. I am the Product Manager at this company.
This is good stuff, Paul. I will say that in my experience with IRA real estate there is another aspect to consider. The few lenders who offer IRA friendly, non-recourse mortgages will sometimes disqualify an investment property because of its location within the U.S. Make sure that if you are trying to leverage the deal, ask about this point.