Using leverage in an IRA to purchase real estate assets is not a new idea. It has been perfectly legal since 1974 when the original rules were established for individual retirement arrangements (IRA’s). By that, I mean that if you wanted to purchase a piece of real estate to hold in your IRA you could do so. And if you wanted to have your IRA borrow some of the money necessary to close the transaction that was perfectly legal also if you didn’t have all the funds in your IRA. The only stipulation per IRS rules is that your IRA would need to obtain a non-recourse loan.
What is a non-recourse loan?
A loan that is secured entirely by the subject collateral and nothing else. The lender has “no recourse” (other than the sale of the subject piece of real estate) against any other assets in the IRA or the owner of the IRA should the IRA default on the loan. The only recourse for the lender is to foreclose on and sell the property. If there is a deficiency balance left after the sale of the collateral, that is a real loss to the lender. There is no such thing as getting a deficiency judgment.
The loan (and purchase agreement for the property) is actually written in the name of the custodian or administrator of the IRA for the benefit of (FBO) the IRA owner. The owner of the IRA does not sign the note or mortgage or deed of trust. The IRA owner merely initiates the transaction and reviews and initials the final documents prior to closing to be sure the owner of the IRA has read and understood them. The IRA must make all the payments to service the debt (not the individual personally) and cover all maintenance and holding costs of the property. Because the owner of the IRA cannot reach into his or her own pocket personally to subsidize a loan payment or pay an expense of owning the property, there needs to be a surplus of funds in the IRA after the close of the transaction to be there in case of a loss of rental income, unanticipated maintenance expenses, or other costs associated with owning the property. The last thing you as an IRA owner building your retirement wealth wants is to buy something you cannot afford, as the tax consequences and potential loss to your retirement future is not acceptable.
Two quick things about non-recourse loans from a lenders perspective: 1) Because the lender cannot go after other assets or the IRA owner personally, the loan-to-values (LTV) are more conservative than with a traditional loan. Sixty percent LTV is typical on most investment properties. 2) The interest rates are slightly higher than a personal real estate loan because there is more risk to the lender should there be a default and no secondary market to repurchase the loan.
Lastly, the process is simple. We don’t get personal. Because the plan or IRA is borrowing the money and not the individual, we don’t get personal financial statements, tax returns, or income verifications. We merely want to see IRA statements of value and specific details of the property to be purchased. I would encourage you to look at our website for the actual process by visiting our purchasing rental property page. You can also visit our IRA loan FAQ page, but as always, we are more than happy to answer any questions you have if you give us a call or submit a contact form. We are an FDIC-insured bank that can lend in all 50 states. And most importantly, we are a common-sense lender. If it makes sense, we do it!