"You do have the money!"
summit homes and properties
It’s a great time to buy real estate, but I don’t have the money right now!” If you have retirement funds in an IRA or other tax-deferred instrument, you DO have the money right now! Buying real estate in your IRA (or for that matter SEP, Roth, or HSA accounts) was a little known secret that has now come to the forefront with the recent uncertainty in the stock market. These IRAs are referred to “self directed” IRAs. Real estate has always been allowed in these accounts, but most of the IRA custodians make money by selling securities to their clients’ IRA accounts, and would not allow real estate as an investment.
It is no wonder that, ultimately, with securities dominating IRA investment portfolios, most people thought it was not allowed or too difficult to deal with. Not true! There are now custodians who will open the door to these investments for your IRA. It is up to you to find the investment and direct the purchase by your IRA. Real estate of nearly any type can be purchased with a “self directed” IRA.
What’s the catch? Well, there are rules but they are the same rules that apply to all retirement plans. One of the main rules is no personal use of the asset by you or your close family members. It must be a real investment for your IRA. All money to purchase the real estate plus income and expenses must flow through the IRA.
How do I do this? Well, because the self-directed custodian does not sell investments nor give investment advice, you have to take the driver’s seat in making this happen. You or your real estate broker find the property, perform the due diligence and decide what to buy. The self-directed custodian will provide the forms and information you need to go through this process. With help of a real estate broker who “knows the ropes” you are already half way to owning a property in your IRA.
Maybe you like this idea, but you still don’t have enough in your IRA to swing the entire real estate purchase. This is a common problem for many who want to make their first real estate purchase with their plan. What can you do? Well here are a couple of options:
You can partner your IRA with others’ IRAs or non-IRA cash and purchase the property with 100% equity or,
Your IRA can obtain a mortgage and purchase a leveraged property.
#2 is exciting for everyone. The main thing about an IRA borrowing is that it is the IRA, not you, that is the borrower. This means that your IRA must guarantee the loan without your assistance. One of the IRA rules is that an IRA holder (nor any close family member) may guarantee the loan for the IRA.
What do you do when the IRA borrows? You will need to find something bankers refer to as a “non-recourse” loan. This type of loan is secured by the value of the property only and is not dependant on your credit score or other assets. There are local lenders who now have IRA lending programs. The bank requirements, because of the lack of a personal guarantee, usually require a larger down payment than a conventional loan. In addition to commercial lenders, your IRA may also borrow from other IRAs who act as lenders, use seller financing or utilize private lenders, all on a non-recourse basis.
One catch with borrowing is that there is the potential to generate taxes within the IRA. This is referred to as Unrelated Business Income Tax, a subject for another day. One good thing to remember though is that real estate is the ONLY investment that can be leveraged within an IRA. With the help of a knowledgeable real estate broker and a willing lender, you can increase the yield on your IRA real estate investment by taking advantage of the magic of leverage!
Contact us to find out more about this exciting investment strategy!
“Welcome Home” is compiled using various industry sources by TheTeam@Elich.com. Butch Elich has been helping people with their real estate needs in Summit County for over 20 years. His team includes Associate Broker, Paula Parker, a Summit resident for 23 years. Find them on the web at http://www.elich.com, or at RE/MAX Properties of the Summit, 305 Main St., Frisco.
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