IRA's and Mortgages
“Most successful real estate investors make their money by leveraging their properties with mortgages, not by paying all cash up-front and tying up all their available money. That kind of leverage is rarely available in an IRA because of the loan restrictions under the prohibited transaction rules,” explains Ed Slott, author of The Retirement Savings Time Bomb… and how to defuse it. So why then are so many people switching their IRA funds into self-directed accounts to invest in real estate if they cannot take advantage of leverage with these retirement funds? Slott provides us with the answer. “You can… get a mortgage on property purchased with your IRA funds… without a personal guarantee by you.” This is called a non-recourse loan. However, finding mortgage lenders willing to participate in this type of transaction may prove difficult.
Most lenders don’t understand how to underwrite residential loans for properties held by an LLC. For that reason, you probably won’t be able to walk into your local bank branch and obtain a mortgage on a property purchased with IRA funds. We met with several lenders and showed them the unique structure Guidant Financial has devised. The result is we now have lenders willing to lend from 50-95% of the value of the property, depending on the structure,” comments Curt Bateman, Managing Director of the Commercial and Investment division of Absolute Mortgage. He continues, “I am currently working on a project to develop four-plex homes. We will use 150k of his IRA funds to satisfy the equity requirements for the construction loan of $850k. After the sale of the four completed units, roughly six months later, his IRA will receive a profit in the neighborhood of 20k. That’s 26.6% annualized return!” Although this particular client does not want to hold the four-plexes as rental properties, this same program could easily apply to an investor or investors that want to build a portfolio of rental properties.
Earning potential using leverage and real estate inside an IRA have caused many to rethink their current retirement investing strategies. David Nilssen, co-founder of Guidant Financial Group LLC, conveyed, “I can’t tell you how many people I talk to everyday who say they wish they had heard about this strategy three or four years ago. People can see the power of real estate. It is more real than stocks or mutual funds. You can touch it and see it.” Nilssen’s company, Guidant Financial Group LLC, specializes in IRA facilitation. Their purpose is to help average people get started investing in non-traditional IRA investments like real estate. “It is rewarding to help people whose retirement savings have been devastated by the bear market recover their savings through non-traditional investments I have personally lost a great deal of money in the stock market, so I can empathize with the powerlessness one has over Wall Street.”
Using leverage inside your IRA can be very complicated. Using an IRA Facilitator, who can help you through the process of switching into a self-directed IRA and provide a network of professionals familiar with IRA investing, is very important. Nilssen specified, “If you decide to invest with a self-directed IRA, don’t try to do it yourself. Use a professional to handle the process and avoid the severe penalties of doing something incorrectly.”
Very informing. One of our clients having spent the major portion of his investment career shooting himself in the foot in the market, finaly came to us looking to explore the area of real estate investment. We went with him to the office of the fund manager at his bank. Nice man Warton Graduate, great handshake, perfect tailoring. You could not help but like him. Squash player.
Near as I could tell he had experienced some really terrifice losses for his clients in the market. But the expertice was there, the buzz words impressive. Still the losses were multiple.
With an assist from the clients attorney we finaly unbuttoned him from securities and moved him into the field of real estate investing. His IRA was utilized in his primary investment. Erection and sale of a series of small storage sites. Interesting point. The bank involved in his prior securities did the construction financing and takeout. The client was most satisfied so satisfied indeed that he decided to forego the use of a Real Estate Broker Consultant on his next building venture. This venture almost a carbon copy of the first was also profitable.
However, drunk with sucess and confident in his newly learned skills. He started to cut costs. Changed Contractors, and picked a property in an area not responsive to the need for storage facilities. It laid a bomb. Took almost twice the prior period of construction and the marketing of the finished structure was not effective. In other words he ate it.
Moral: You can change the hat on the cat and teach it new skills. It remains still a cat. Damn.
Lucius Squash will never replace handball.
Great IRA reminder recap by Guidant. Nice lala land adagio by Lucius, reminding us that 1) IRA can be used as your alter ego in charge of your re investment business and 2) real estate can be equally risky compared to Wall Street or Dow, which requires no costly tenants and toilets maintenance. Conservatism or bear-ism is often the only safe response no meter in which market you invest.
Fair writeup on the uses of IRA to buy RE, notes, etc.
A little bit heavy on advertising side to suit me, but it is informative.
The reader should just keep in mind that there's lots of choice on how & where to set up SDIRA, number of SDIRA custodian/trustees in the business (just check internet for IRAs and you'll find them), so as not to think this co. is the only one he might use to help him buy RE with his IRA.
I would have to say many people can pull this off. I see it every day. I work with the Largest company that allows IRA's to by Real Property. It is hard but if you can talk to the correct person it is possible. I don't recommend setting up an LLC and investing it with IRA monies. There has been many legal people that have looked over the IRS guidelines and disapprove of this method. However, doing Real Estate in IRA or QP plans is a great way to put another side on Investing.