The ability to purchase real estate with your IRA has been in existence
for many years. However, most people believed that they had to buy
their property entirely with cash. They did not know that they could
obtain a loan to help them with their purchase. For those few who
have heard they could get a loan, they have not known how to go
about getting one. Further, for those who have known they could
get a loan, they have not known who to call on for help to obtain
this special financing. I am here to provide that help.
Before I can inform you how to invest your IRA funds in real estate,
I have to tell you the reason it's so difficult to do. The IRS does
not permit the IRA owner to personally guarantee a mortgage for
the purchase of property with their IRA. The majority of banks that
issue mortgages require a personal guarantee for those loans.
Under normal circumstances, if the mortgagee (property owner) cannot
or does not meet the payment requirements of the mortgage, the bank
can use whatever legal means at its disposal to obtain payment from
the mortgagee. The bank can sue the property owner and obtain that
individual's personal assets to satisfy the mortgage debt.
As a result most banks will NOT lend money to purchase real estate
through an IRA, because they cannot obtain that personal guarantee
from the borrower. The only 'recourse' the bank has to satisfy the
mortgage debt incurred by the IRA is the property and the rental
revenue that the property generates. Therefore, the IRA owner must
obtain what is called a NON-RECOURSE loan in order to purchase real
estate if they cannot pay the entire purchase price in cash.
That brings us to the 'HOW TO' of making an investment in property
with your IRA. The first step in this process is to establish your
IRA account with a custodian/trust type company that specializes
in handling an individual's IRA investment in real estate. This
is necessary for several reasons. Again, the IRS does not permit
the IRA owner to handle any financial transactions in respect to
the ownership of the property. The custodial company must pay all
bills and receive all rents associated with the ownership of this
real estate.
Once you have established this account, the time is right to find
a property worthy of your investment. In order to identify the right
property to invest in, there are a few important things for you
to know. First, you will need to have enough money in your IRA to
make a minimum down payment of 30-35%. Depending upon the type of
property and the lender, you may need to make a greater down payment.
Second, you need to find a property that is either already rented
or will be easily rentable once you own it. The property being purchased
by your IRA must be an investment property. It cannot be a primary
or secondary home.
The third thing you need to keep in mind is that the rent the property
will generate should be 1.2 times greater than the mortgage payment
required by the loan. If you find that your property is not generating
enough rent to exceed your mortgage payment by 20%, then make sure
that your IRA has sufficient assets to cover any deficit for a prolonged
period of time. This will include other monetary items such as property
taxes, insurance and homeowner association dues. The lender will
look closely at the IRA's assets as a pre-requisite to obtaining
the mortgage.
Once you have identified an investment property to purchase, then
you need to call a mortgage broker who knows how to help you structure
a non-recourse loan with a non-recourse lender. As previously mentioned,
there are very few non-recourse lenders. After many months of research,
I have found several lenders that will establish a non-recourse
mortgage for an IRA owner. It is important to have the right mortgage
consultant for this kind of transaction so they can make sure that
you have all the necessary qualifications to get the loan approved.
Once you have consulted with me or another mortgage broker who
is well versed in this subject, there are several items that will
be needed to complete a loan package for the lender. All lenders
require a financial statement and credit report which I will help
you obtain. You will also need to provide a copy of your agreement
with the custodial company that is managing your IRA account and
a recent statement of your IRA's assets. Some lenders require 2
years of tax returns even though you're not personally guaranteeing
the loan. This is why it is best to consult with a mortgage expert.
If you want to obtain the subject property that you're in contract
to purchase, it is best that you know ahead of time what lender
you're going to use and what they're going to require. This will
protect you against any surprises that might result in being turned
down for your non-recourse loan.
In summary, it is in your best interest to contact me or a mortgage
expert who is knowledgeable about the 'NON-RECOURSE' loan so that
you can be better assured that you and your IRA will qualify for
it. This will put the odds in your favor so you can successfully
complete your IRA purchase transaction.
For more information about obtaining a non-recourse loan, contact
Mark Robbins at mark.robbins@ctxmort.com
or 415-893-1744.
To learn more about non-recourse loans and other alternative investment
strategies using IRAs, attend the first ever National
Symposium on Self-Directed IRAs in San Francisco, October 20-21,
2005, hosted by PENSCO Trust Company, and meet Mark Robbins in person.
