There are options available to secure the necessary funds. For example, your IRA could potentially take out a loan – known as a non-recourse loan.
What is a non-recourse loan and how does it differ from a conventional loan or financing?
A non-recourse loan essentially states, in the event of a default, the only recourse that the lender has is against the individual subject property that’s used as collateral. When you go to a traditional bank or traditional financial institution and you borrow money for your primary residence, a secondary residence, or an investment property, they typically are going to ask you to sign a personal guarantee.
Under the guidelines of Internal Revenue Code 4975, you cannot sign a personal guarantee of a loan that your IRA is taking on. You’re considered a disqualified person to your IRA if you were to sign a personal guarantee of a IRA loan. In that particular instance, you’d be engaging in a prohibited transaction, which would invalidate the IRA.
To avoid this, lenders know that they shouldn’t be lending to an IRA and asking for a personal guarantee. You have to identify a non-recourse lender that will loan to your IRA or solo 401(k) or other tax-exempt investment account.
How to find non-recourse loan providers
Search “self-directed IRA non-recourse loan” or “self-directed 401(k) non-recourse loan,” and you’ll likely find a list of individuals or entities that will lend money to self-directed IRAs and 401(k)s.
Generally speaking, national bank lenders will only loan on traditional buy-and-hold rental-type properties or apartment buildings, more longer-term investments. They likely won’t lend on a fix and flip type transaction.
If you want to fund fix-and-flip type transactions, you’ll need to look to a hard money lender or maybe a private lender to loan on a non-recourse basis to your self-directed IRA, 401(k), or other tax-advantaged investment account.
Alternatives to non-recourse loans
You don’t necessarily need to obtain financing to buy real estate with your self-directed IRA. There are other ways to buy properties 100-percent free and clear as a cash buyer with your IRA, including:
These are a few ways to finance real estate acquisitions without needing to take on debt. But if you find yourself in a situation where it makes sense to take on debt financing, it’s important to understand the difference between a non-recourse loan and a conventional mortgage.
Non-recourse loans and UDFI
Another aspect of your IRA borrowing money is unrelated business income tax (UBIT), also known as unrelated debt-financed income (UDFI) tax, which is a special tax with non-recourse loans to a self-directed IRA when acquiring real estate.
Video: Non-Recourse Loans and Self-Directed IRAs
In this video, John Bowens explains what a non-recourse loan is and how it works when investing in real estate with a self-directed IRA, self-directed Roth IRA, or other tax-advantaged accounts.
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Can I co-invest other funds with my IRA to make an investment?
Yes, partnering your self-directed IRA or other retirement account with another funding source is possible. You can partner your IRA with your non-IRA money, your other retirement accounts, your spouse’s IRA, other people’s IRAs, another investor’s non-IRA money and your children/grandchildren’s CESAs, to name a few options.
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