Working Americans almost all look forward to retirement, but the fact is, retirement these days isn't as sure a thing as it used to be. In fact, almost half of retired Americans are considered to be economically vulnerable, and about one in four Americans think that they will have to work at least until the age of 80 to retire. One of the ways that many people do start preparing for retirement is to open an individual retirement account (IRA), but there are rules about what an IRA owner can and cannot invest in with it.
The Solo 401K is a self directed retirement trust that allows the Trustee of the Solo 401K Trust to direct his or her retirement funds into investments that they know how to make money at. Whether that may be a real estate investment or business, the Solo 401K has several advantages over the typical self directed IRA.
One of the things that almost every working American depends on is being able to retire comfortably. We have visions of traveling, sipping fruity drinks poolside, playing with grandchildren, or finally starting the novel we always wanted to write. The reality is, though, that many Americans are forced to work into retirement, and almost 30% of people working in America believe that they will have to in order to be able to maintain a comfortable lifestyle after retirement.
One way that people are preparing for their retirements is to invest in real estate, but doing it in a way that doesn't cut into their income. How? By using the funds in their individual retirement accounts (IRAs).
Equity Trust Webinar - Non Recourse Multi-Family Investing
Equity Trust's "Equity University" just released a webinar called "Next Level Real Estate Investing is Within Reach" With First Western Federal's Roger St. Pierre. If you didn't get the email, it is attached below.
Learn how to leverage commercial property and multifamily properties with a Non Recourse Loan! To view the webinar, click here: View Webinar
Equity Trust Company and Pensco Trust Company
Equity Trust Company and Pensco Trust Company are 2 of the largest and most well established custodians allowing their clients to invest in alternative assets and real estate with their with their retirement funds. They have been in business for decades and meet all of the federal regulations for custodians. There are many other very good companies but these are just a couple of larger ones you may want to interview when looking for a home for your self directed retirement plan.
Non Recourse Lenders
Non Recourse Lenders in the self directed retirement plan world are few and far between. If you have done any research in looking for leverage for your self directed retirement plan you will find that there really are only 2 nationwide non recourse lenders. They are First Western Federal Savings Bank (myiralender.com) and North American Savings Bank. These two companies are federally chartered savings banks with FDIC Insurance. We at First Western Federal Savings Bank pride ourselves in offering nationwide financing for investors buying any kind of income producing real estate, whether it be residential properties, apartment buildings, commercial buildings or ag land. North American Savings provides financing for 1-4 family residential properties only.
Three Common IRA Non Recourse Loan Questions Answered
The typical final part of the American dream is being able to enjoy a comfortable retirement, but these days that future is not as certain as it used to be. In fact, almost 30% of Americans believe that they will not have enough money to live comfortably after retirement, and 40% think that they will have to work past the age they planned to retire to maintain their lifestyles. One option for ensuring that you will be able to retire when you want and comfortably is to invest with your self directed IRA.
401K or Solo 401K Non Recourse Loans are a great way to leverage your 401K funds to get a better return on your money. Financing the purchase or refinancing a purchase of real estate inside of a Solo 401K has some distinct advantages over using a Self Directed IRA to buy and fund real estate purchases. The process is the same no matter the retirement entity purchasing the property and funding it with a Non Recourse Loan. However the big advantage to the Solo 401K is that there is No potential UBIT, or Unrelated Business Income Tax on any of the profits made inside of the Solo 401K either from rental income or the gains from the sale of the property. When the rules were written for the different kinds of retirement plans, the Solo 401K got a great break in that it is exempt from Unrelated Business Income Taxes.
IRA loans are a great way to leverage your own retirement funds and make them stretch farther in acquiring investment real estate inside of your self directed retirement plan. Whether your plan is a Self Directed IRA, Solo 401K, IRA LLC, or other qualified retirement plan, you can use as little as 40% of the purchase price in your own retirement funds and combine that with a non recourse IRA loan from First Western Federal Savings Bank. The rental income from the property pays back the loan and covers all operating costs of the property.
First Western Federal and Next Generation Trust Present Non Recourse Lending Webinar
Recourse vs Non Recourse Loans
Recourse vs Non Recourse Loans. What is the difference? You may hear about Non Recourse Loans and wonder what that is all about and how can you get one.
Let's start with Recourse Loans first which is the typical loan you may sign at a bank or credit union when you borrow money for a car or a home or commercial building. You usually sign the promissory note in your own name or your companies name and you are responsible for making the payments on that loan. And if there is a default on the loan, you as the borrower can be sued for the unpaid balance of the loan.
Non Recourse Loan underwriting criteria with First Western Federal Savings Bank is very straightforward. We look at 4 areas when determining whether or not to make a Non Recourse Loan. The main areas are:
Does the IRA or SoloK or IRA LLC have enough money? What I mean by that is, does the Plan have the requisite 40% down payment necessary for most properties we finance, plus closing costs, and liquid assets still left in the Plan of 15% of the loan amount as reserves.
Does the cash flow from the property pay all operating expenses such as taxes, insurance, maintenance, management fees, and loan payments and have excess cash flow each month? We want to see a minimum of 1.25 Debt Service Coverage.
Is the property a good property in terms of condition (doesn't need a lot of work to be rent-ready), neighborhood, priced in line with other homes in the immediate area, conforms to other surrounding properties, etc.?
Management of the property will be solid, whether you as the owner of the IRA are experienced in rental property management yourself and can handle the issues involved or will have professional property management if the property is located in another state or you just are most comfortable with professional management.
If a non recourse loan request will have these 4 components covered, then you are well on your way to acquiring that rental property in your SD IRA or Solo K or IRA LLC.
The Application Process for a non recourse IRA or Solo 401K (or LLC) loan with First Western Federal Savings is very straightforward.
First Western Federal Savings receives "EXCELLENT" Rating
First Western Federal Savings receives Excellent rating from Weiss Ratings
IRA Loan Debt Service Coverage
IRA Loan Debt Service Coverage is the ability of the rental property that the self directed IRA (the Plan) owns to generate enough income or rental stream to pay all the operating expenses of the property and the loan payments with a cushion. A Non Recourse loan can only be paid back by the income and liquid assets in the Plan. So when a lender is evaluating whether or not to make a non recourse loan, that lender and you should look at all the operating expenses the property has such as taxes, vacancy factor (we use 7% of gross rents), insurance, any HOA Fees, maintenance, and any other operating expense the IRA is obligated to pay.
Titling self directed IRA owned properties (naming the entity) is different than owning a property in your own name or privately funded LLC. If your self directed IRA is held by a custodian or administrator and you purchase a property with that account, the name on the Deed or ownership document filed with the county recorder in the area of the country you are purchasing the property in must show the name of the company where your account is held FBO (for the benefit of) your name. An example would be: XYZ Trust Company Custodian, FBO Roger St.Pierre, IRA. Or if an administrator, then the name of that company FBO your name IRA.