First Western Federal Savings Bank
When it comes to generating profits for your future, owning income-producing real estate property within your IRA (individual retirement account) is an excellent means of doing so. Real estate is a type of asset that can fluctuate in value based on the nation’s ever-changing stock market; but nevertheless, renting out a home, apartment, or commercial property can produce consistent cash flow and introduce the possibility of appreciation. What makes this an even more attractive opportunity, however, is when you get in on the real estate market through IRA investments, meaning more funds can be raised for your future retirement; this is because IRA’s can create higher returns.
First Western Federal Savings Bank is proud to help clients across the country by identifying how best to take advantage of real estate IRA investments, and how to go about planning them. Discover more information below on buying property with mortgage finance, and contact us to get started!
Create a Plan Beforehand
With regards to any real estate IRA investment, the first step is to create a long-term plan before you make a purchasing offer. It’s important that the IRA-owned LLC is specifically listed in all documents as the purchasing party, and that all down payments or the like come from this body (not the individual). What our First Western Federal Savings Bank staff want our clients, both new and old, to know is that the process of establishing and funding an IRA-owned LLC and putting a real estate property under contract typically takes about a month. After this is complete, your chosen lending organization will take about 40 to 45 days to process and fund the IRA investment loan.
You’re Required to Have Non-Recourse Loans
An important distinction when it comes to IRA investments in real estate is that according to the IRS, all debt instruments utilized by an IRA must be non-recourse; in short, this means there is no personal guarantee from you to the IRA. This is because if you as an individual were to pledge a guarantee, you would then be offering up your personal assets as security, and thus violating pre-established IRA plan rules. If you’re dealing with smaller one- to four-unit properties, several institutions such as First Western Federal Savings Bank can offer non-recourse loans; however, when it comes to IRA investments in larger commercial properties, there are many more loan supplier options. While private loans from investors are also an option in these situations, it’s important to always avoid disqualified parties.
With all of this in mind, our experts recommend discussing this entire project with your non-recourse lender well in advance so you know exactly if a certain real estate property will qualify, and what types of down payments or requirements may apply. Due to the high-risk nature of these loan types, you can expect 60% loan to value and 10-15% liquid reserves in the IRA.
Purchasing The Property Itself
Once the above steps have been completed, and you have a plan in place, then it’s time to actually put down an offer on a property for your IRA investment; as we touched on above, the LLC will be the purchaser and this is exactly how the contract should be written. You as an individual will function as the LLC manager who executes the contract on behalf of the LLC, as opposed to it being in your own name. During this time, any prior down payments or deposits must be paid with the acquired funds within the LLC, as well as any sort of normal house or property pre-closing costs. In order to ensure everything goes to plan, First Western Federal Savings Bank recommends giving yourself a longer close period (40 to 45 days) to allow for proper processing. From there, you can issue funds from your IRA investment bank account to fund the purchase of any real estate.
Considering Taxes
When it comes to IRA investments in terms of real estate, the IRA inputs a slight tax burden. A portion of the individual’s income is directly sourced from the IRA capital — that is, the down payment —and thus is fully tax sheltered. However, the portion of income the IRS received from borrowed lender monet is, in fact, taxable; this is what’s referred to as Unrelated Debt-Financed Income (UDFI). Although this may sound bad initially, while this income does come with a tax cost, your IRA investment will still receive high benefit from high cash-on-cash returns. What’s important is taking the time to understand how you can best benefit your IRA investments.
Understanding Your Returns On Investment
When it comes to figuring out how your real estate IRA investments can increase your financial situation, let’s illustrate a simple example: Let’s say you have $100,00 worth of IRA money to invest; this means you can purchase a property for the same amount or use that money to made a down payment on a $200,000 property. If your rental income on that property is only about $100,000, operating at a 30 percent ratio of expenses to income, it will appreciate at nearly 4 percent each year; this then results in the IRA investment producing nearly $80,000 worth of extra income over five years.
If you’re ready to get started with IRA investments, or need help securing a non-recourse loan for this type of financial project, First Western Federal Savings Bank is happy to help! Our organization is one America’s best providers for these types of loans, and our staff can also provide direction and answer any questions. Contact us anytime to get started!