What is Cash-Out Refinancing and How Can it Benefit Your Self-Directed IRA or Solo 401K?
Cash-out refinancing is simply taking advantage of or leveraging the equity built up over the years on your rental property owned within your self-directed IRA, solo 401K, or IRALLC. Through either paying off an existing non-recourse mortgage loan on the property or through extracting the equity in a free and clear property that is already owned by your self-directed retirement plan, that untapped equity represents potential funds for future opportunities within your plan.
Cash-out refinancing means taking a mortgage loan against the value of the property up to a loan value that the bank is comfortable making. For example, if you owned a single family rental home that had no debt against it in your SDIRA worth $150,000, you could potentially borrow up to 60% of the value of that home in the form of a long-term non-recourse mortgage loan. That 60%, or in this case, $90,000 could be borrowed and used for other investments within the retirement plan.
One reason to do a cash-out refinance would be to get better terms on the non-recourse loan than the current terms of the loan. Say the current interest rate on your non-recourse loan was 8% in today’s market, or say there is a balloon payment coming up on that non-recourse loan, a refinance could be used to pay off that loan and term it out over 25 years. By doing so, the potential cash flow benefit to the retirement plan could be substantial once the payments on the debt are spread out over a longer term that currently on the existing loan.
Liquidity for Other Investments
Most investments that are pulling liquidity out of their properties via a non-recourse, cash-out loan are using the funds to diversify their portfolio. They may be buying another piece of rental real estate and need the funds to pay for that next home. Or, perhaps they are using some equity to buy stocks and mutual funds and take advantage of the lower prices the stock market currently has in today’s’ market.
Liquidity for RMD’s
Some investors may be at the age where they are beginning to take distributions out of their retirement plans either to support their lifestyle or because they need to take out the Required Minimum Distributions (RMDs).
Improvement to other IRA-Owned Properties
Many investors are also using liquid funds from one property to fix up another property held within their self-directed retirement plan. Often investors need liquid funds to either make repairs that are needed for other properties, or to invest in a fix and flip.
Refinancing One Property Along With a Purchase of a New Home in Lieu of a Cash Down Payment
Another frequently-used strategy is to use the equity in one free and clear property in lieu of a cash down payment on the next purchase. If there is enough equity in the home to support the typical 40% down payment on the next home, often the lender can take a lien on the existing home plus a non-recourse mortgage loan against the new purchase and the investor doesn’t have to tape liquid cash to close the deal. By putting both homes on the same loan, the investor saves money on closing costs since they are only closing the one loan, not two.
There are many good reasons investors may want to do a cash-out refinance of their properties owned within their self-directed IRA, Solo 401K, or IRALLC. The most beneficial reason is to grow the retirement plan by adding leverage to existing assets to purchase more assets. First Western Federal Savings Bank is here to help with your non-recourse loans for your real estate investments. For more information about cash-out refinancing, contact our non-recourse loan lenders today.