In June 2017, I jumped out of the stock market and converted my IRA’s to self-directed IRA’s (SDIRA). I began lending money for renovation loans to another former teacher, who is flipping houses in Baltimore, Maryland. Click here to learn more about what she is doing Blackhawk Homes, LLC. I have been earning 10% interest and a point on my loans. I donate the point to an awesome charity that provides financial assistance and counseling to a diverse student population. Many recipients are the first in their families to attend college. Click here to learn more about The Scholarship Fund of Alexandra. Lately I’ve been exploring other options to grow my IRA in preparation for retirement. The self-directed IRA provides the freedom to make investments in precious metals, stocks, bonds, mutual funds, LLC’s, tax liens and tax deeds, as well as, residential or commercial real estate. I have been investigating purchasing a rental property with my SDIRA. The tax advantages will help me grow my nest egg for financial freedom in retirement. Using my SDIRA and a non-recourse loan will help me leverage assets that I can’t touch for over a decade anyway.
A non-recourse loan is secured only by collateral, usually in the form of property. If the borrower defaults on a non-recourse loan, he is not held personally responsible for the loan. The lender can only seize the collateral. There is no recourse towards the IRA account holder if the property goes into foreclosure. If any debt remains after the lender has sold the collateral, the amount will have to be forgiven. In general, a non-recourse loan is more challenging to secure than traditional loans. Consequently, lenders are more strict when approving a borrower, down payments must be higher, and the rates are typically less attractive than traditional recourse loans.
Non-recourse loans enable SDIRA holders to finance the purchase of an investment property without risking their entire SDIRA or other personal assets, in case of default in payment. After making a down payment from the SDIRA, the borrower obtains the remainder of the purchase price using a non-recourse loan by following this process:
1. First, establish a SDIRA with a reputable IRA custodian. Here is a list to get your started.
2. Find an income generating property that meets your current investment goals. The cash flow must cover the loan payment. Lenders will scrutinize the financial information related to the property before approving the loan. Lenders usually require types of property which have good resale value or high income generating capacity. In the case of borrower default, the lender will want to recover the loan amount. Multi-unit properties such as apartments, condos, offices, or retail stores are preferred by some non-recourse lenders.
3. After identifying a suitable property, the next step is to make an offer. The offer will be made in the IRA’s name, not your own name. For example, IRA Custodian For the Benefit of Niccole Taylor. The purchase agreement and all legal documents related to the property will be executed in, and held by the SDIRA, in accordance with the custodian’s requirements.
4. Do your research and apply for a non-recourse loan. Not all lenders offer non-recourse loans to SDIRA’s. The loan will be made to the SDIRA and all money will flow in and out of the SDIRA. The non-recourse lender may require a certain level of money be available in the SDIRA. Funds will need to be available in the SDIRA to cover all expenses related to the property – repairs, property management, closing costs, etc. Here another list to help you get started on finding a lender.
5. Complete the direction of investment form required by your custodian to fund the purchase with your SDIRA. This is required before they can fund the earnest money deposit (EMD).
6. Maintain “arm’s length” distance from all transactions. You may not put any “sweat equity” into the rental property. At a minimum, you will need a property manager and a contractor on your team.
7. Sit back, collect rent, pay off the non-recourse loan, and wait until you are 59 1/2 to access your wealth!
Researched, written, and edited by DorrianGrey, iWriter.com, and Niccole Taylor