We have all heard how budgeting is important when saving for big purchases and retirement. However, occasionally breaking your budget and using leverage may be beneficial in certain situations. Let’s discuss an example where this may be true:
Bill, a Self-Directed Checkbook IRA account holder, is looking to invest in real estate with his retirement funds. He finds a multi-family rental property worth $400,000, but his current IRA balance is $300,000. Although Bill cannot afford to invest in the property solely with his IRA funds, he does not want to lose the opportunity to diversify his portfolio and grow his savings, so he looks to borrow funds through a non-recourse loan.
A non-recourse loan is a loan guaranteed by the Self-Directed Checkbook IRA (not the account holder) and is secured only by collateral (typically the property itself). In the event of a default, only the collateral itself can be foreclosed; the lender cannot go after the account holder’s additional IRA assets or the IRA owner personally. A non-recourse loan is typically used to finance a real estate investment.
The difference between a recourse and non-recourse loan is that recourse loans hold the borrower personally liable for the debt. For example, if a recourse loan was used to finance a car and the borrower breaks the loan agreement, the lender can repossess the collateral (the car) and go after the owner’s additional assets to make up the funds owed.
Within a self-directed account, a recourse loan cannot be used to obtain an investment. The IRS prohibits the extension of credit between a disqualified person and the retirement account. In other words, a disqualified person cannot loan money to or personally guarantee a loan to a retirement account.
The real estate expertise and dedicated client support team at Broad Financial matched with a five-star non-recourse lender, give Self-Directed Checkbook IRA account holders an unparalleled investing experience.
Continuing with the example above, before investing with a non-recourse loan, Bill asks his tax advisor, “are there any tax consequences when using a non-recourse loan?” Bill learns that the percentage of income attributed to the debt-financed portion of the asset is subject to Unrelated Debt Financed Income (UDFI).
For example, Bill decides that his IRA will invest $300,000 in the multi-family property and a non-recourse loan will help finance the additional $100,000. In this case, 25% of the income generated from the property will be subject to UDFI.
Next, Bill calls a Self-Directed IRA Specialist at Broad Financial. He learns that all investment expenses must be paid with IRA funds. He cannot make loan or maintenance payments with funds outside of his IRA, as this will qualify as a prohibited transaction.
Bill has a Self-Directed IRA LLC at Broad Financial, so he has already completed the following steps:
1. Opened and Funded a Self-Directed IRA
2. Established an LLC and Dedicated IRA LLC Checking Account
Now he needs to:
3. Identify an Income Producing Property
4. Apply for a Non-Recourse Loan with Broad Financial's Preferred Lending Program
Before he can close on the multi-family property and loan, Bill’s next steps are as follows:
5. Execute a Purchase Agreement with his Self-Directed IRA LLC Listed as the Buyer
6. Close on the Property and Loan by Simply Writing a Check or Sending a Wire from his IRA LLC Checking Account
Then, the lender will provide the remaining amount needed to close on the real estate investment. To upkeep his investment, Bill pays expenses and receives rental income through his IRA LLC checking account, ensuring that his personal funds are kept separate to comply with IRS rules. For more information about the investing process, please visit investing in real estate with a non-recourse loan.
Non-recourse loans are a powerful tool that can help Self-Directed Checkbook IRA account holders, like Bill, invest in real estate opportunities that would otherwise be unattainable with retirement funds. Broad Financial and our preferred lending partner ensure you have a positive investment experience.
Are you interested in learning more about investing in real estate with a non-recourse loan? Schedule a free discovery call with a Broad Financial Specialist to explore your options today.
Disclaimer – Broad Financial LLC does not provide legal, tax, or investment advice. Please consult with your tax or legal advisor before making investment decisions.
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