Non-recourse loans are a unique type of financing popular for real estate investments in IRAs. Unlike traditional loans where the borrower's personal assets are on the line (e.g., house, car, savings), a non-recourse loan offers limited liability.
A non-recourse loan is secured by the investment itself, the real estate purchased in an IRA. In the event of foreclosure or default, the lender can only pursue the IRA asset, protecting the IRA holder's personal savings and other assets.
Because of the increased risk, these loans come with stricter criteria (property with strong income potential) and higher interest rates compared to traditional loans. These loans are not offered by most banks. You need an IRA non-recourse real estate lender.
If you've ever considered real estate for your retirement, but felt limited by your IRA size, then a Self-Directed IRAs and a non-recourse loan can be a powerful solution.
Research and identify a real estate property that aligns with your investment goals. Remember, most lenders prefer properties with strong rental income potential, like multi-unit buildings.
Not all IRAs allow alternative investments like real estate. You'll need to open a Self-Directed IRA with a custodian who specializes in Real Estate IRAs. You will need to bring funds from another IRA or old 401(k) to your self-directed IRA. You can also make an annual contribution to get started.
Find a lender specializing in non-recourse IRA loans. They will assess the property and your IRA's eligibility for the loan and loan options. They will also determine the amount of money your IRA will need as a down payment.
Be prepared to provide detailed information about the property, your investment plan, and your IRA's holdings. Your credit history isn't a factor. The loan is made directly to your IRA, not to you.
Once approved, your IRA custodian will handle the transaction and work with your loan provider.
Some of your IRA money will be used to make a down payment on the property. The non-recourse loan will cover the remaining purchase price.
The property's rental income is deposited into your Self-Directed IRA. This income helps with the mortgage payments of the non-recourse loan over time, building equity within your IRA.
All rental income and expenses (example property taxes) for the property flow through the IRA.
In the event of default or foreclosure on the non recourse loan, the lender cannot take legal action or go after the IRA owner’s other assets. The IRA account holder is not personally liable.
When considering an IRA loan, it's important to understand how you're liable for repayment. Traditional loans are considered recourse debt. This means if you default on the loan (fail to make payments), the lender can go after your personal assets to recoup their losses. This could include your car, savings, or even your home.
In contrast, non recourse debt, also known as non-recourse financing or qualified nonrecourse financing, offers limited liability. With non-recourse loans, the lender's ability to collect is restricted to the specific collateral used to secure the loan.
In the context of real estate investments in an IRA, this typically refers to the property itself. If you default on a nonrecourse loan, the lender can only seize the property, leaving your personal assets protected. This distinction makes these loans attractive for certain investments, but it's important to remember that they often come with higher interest rates due to the increased risk for the lender.
Here are some basic questions to ask when researching non-recourse lenders:
As with any other real estate purchase, there are closing costs. These costs must come from the IRA and not your personal funds. You can request an estimate of potential costs from your lender in advance.
Also, there will be transaction fees from your custodian for the purchase of the investment and loan.
Besides fees, the other thing to consider when obtaining a non-recourse loan are IRA taxes UBIT and UDFI.
Understanding UDFI is crucial when considering non-recourse loans for your Self-Directed IRA. Consulting with a tax advisor can help you determine how UDFI might impact your specific situation and how to optimize your investment strategy.
We always recommend that you open and fund your account before you borrow the money. Moving funds from a custodian or financial institution to another can take time and may delay your purchase.
1. Open and fund a self-directed IRA. You will need to provide the lender a statement for your IRA. That's why it's important that you do this first.
2. Determine your SDIRA investment strategy. Will you need to bring in partners? Are you using and IRA LLC? Are you investing in residential properties or commercial properties?
3. Find a non-recourse lender and negotiate loan agreement. Remember, this is a loan to your IRA— therefore, once you have approved the loan terms, IRAR Trust signs all documents on behalf of your IRA. You do not sign the loan documents.
4. Once your deal has funded, set up payments to the non-recourse lender from your IRA not your personal bank account.
A non-recourse loan is a loan where the IRA account holder is not personally liable. The loan is to the IRA not the individual IRA owner and it is secured by collateral, usually real estate. In the event of foreclosure or default, the lender can only pursue the IRA assets. Because it is a higher risk loan for the lender, the interest rates are typically higher.
Most banks do not offer non-recourse loans. You must shop around for a non-recourse IRA lender, as every lender has different requirements, restrictions, and terms. Here is a list of non-recourse lenders.
Phone: 888-322-6534 (toll-free)
Phone: 858-459-1212
Fax: 858-459-6565
© 2024 IRAR Trust Company|Terms of Use|Privacy Policy