Self Direct, Leverage Your IRA Through Real Estate & Other Investments

Self Direct, Leverage Your IRA Through Real Estate & Other Investments

I have always heard about self directed IRAs and purchasing real estate with ones IRA but I never had the chance to experience this in a first hand way.  That is, until a friend of mine changed employers and wanted to roll his IRA into a self directed IRA and buy investment properties.  We have been in escrow on a property since 2012 and we will be closing escrow at the end of this month.  I have had my real estate license for over 9 years now and this transaction has made me more excited about real estate than any other transaction that I can remember being involved with.  I have always thought of real estate as being a great investment and that is what got me started on my real estate journey many years ago.  However, over the last several years many people have lost their investment properties to foreclosure and they are personally/financially suffering as a result.  That is why using ones IRA to buy real estate excites me so much.  Allow me to explain some of the benefits.

Through the course of this long escrow, where I am the buyer's agent for my friend who is buying a house with his IRA, I was introduced to North American Savings Bank.  They are providing the financing for his IRA loan.  You can find information about them at www.iralending.com and when you are on their website you will see the book that I have read which has given me most of the information for this post, Leverage Your IRA, maximizing your profits with real estate by Matthew M. Allen. 

Although I have learned from this above mentioned book that one can invest their IRA in ANYTHING with the exception of life insurance, collectibles and S corporations, the IRS has many codes and guidelines as to how your IRA investment may become disqualified.  You could lose the pre-tax benefits of your IRA investment as well as suffer a 10% early withdrawal penalty, etc.  I am not going to cover all of the things that are considered prohibited transactions in this post but basically you can't personally benefit from your IRA investment.  If you buy raw land you cannot hunt on it.  If you buy a boat slip with your IRA, don't dock your boat there.  If you by an investment property you cannot live in that property or allow any direct family members to live in it and you cannot personally perform repairs/maintenance on the house.  You cannot even park your car on the property that your IRA owns.  Everything needs to sort of be "arms length."

Another thing I learned from my escrow and this book is that if you don't have enough money in your IRA to purchase an investment property outright, you can still buy the property with an IRA loan.  These loans are not offered by most banks or lenders and they are not based upon your income, assets or credit score (sigh of relief).  IRS regulations do not allow you to personally guarantee these loans.  These loans are more like commercial property loans where the loan is based on the property being purchased and if it makes financial sense for the bank to lend on the property without too much risk exposure.  These are non-recourse loans meaning that they are not tied to you personally in any way and they do not show up on your credit report.  You can hold an unlimited number of properties in IRAs or with IRA loans as you are not restricted to only four real estate loans like Fannie Mae and Freddie Mac restricts individuals.  In order for banks to protect themselves from excessive risks with these loans, they require a substantial down payment.  In California, NASB requires a minimum of a 40% down payment.  With NASB, every state has a different guideline regarding down payment percentage required.  So, the rental market needs to show that the rents will be able to pay for the mortgage payments, plus cover other miscellaneous fees associated with rental real estate.  You also must have at least 20% in reserves in your IRA account based upon the amount of money borrowed and not the purchase price.

Leverage is one of the most awesome advantages of buying real estate with a self directed IRA.  Most IRAs are funded with pre-tax dollars with the exception of the Roth IRA.  So you can grow your nest egg before Uncle Sam gets a penny of it!  Talk about a snow ball approach to investing.  Pages 63 & 64 explain that non-recourse loans can be used to leverage real estate through these self directed entities:

1) IRA 2) LLC (IRA owns shares of the LLC) 3) Self-directed 401 (K) 4) Solo 401(k) 5)  C corporations 6) Partnerships 7) Profit-sharing plans.  It should also be noted that you must find an IRA administrator or custodian that allows for your IRA to invest in real estate or other investments.

I am just in the beginning stage of learning about and understanding the ins and outs of owning investments in IRAs and this post is just a snapshot of the book as well as what I have learned through my escrow.  There are legal and tax guidelines that one needs to be aware of while investing with your IRA.  My client spent around $1,800 to form an LLC to get his self directed IRA investing started and this also provided him with legal and tax counsel.  This books has lists of resources in the back regarding IRA administrators and custodians who can help get you started with investing with your self directed IRA.  It truly is a must read for anyone interested in growing towards a better retirement.  Take investments into your own hands and determine what will put you in the best position in the future.  You don't have to just settle for the typical mutual fund options that most financial advisors will recommend.  You can diversify your retirement and see what type of investment provides optimum performance.  Over the course of my client's career, his IRA grew at a rate of 2% annually.  Now it will be growing at a rate of 6-8% annually and that is the conservative anticipated growth.


Self Direct, Leverage Your IRA Through Real Estate & Other Investments