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Real Estate

9 Potential Sources of Funding for Your Next Investment

February 20, 2020

5. Other People’s IRAs, HSAs, or Small Business Retirement Accounts (in Your Family or Network)

According to the Investment Company Institute, Americans hold approximately $30 trillion in total retirement assets, with $9.8 trillion of assets in IRAs.¹ That’s a lot of potential investment capital – some of it sitting in retirement accounts within your network.

Often the first step is to make others aware of the possibilities for their own retirement plans – including the ability to invest in alternative assets like real estate, notes, private loans, private equity and more.

6. Your Children or Grandchildren’s CESAs (Coverdell Education Savings Accounts)

Like IRAs, CESAs can be used to invest in an array of assets. CESAs allow investors to save and invest tax-free for qualified educational expenses for a beneficiary under age 18, such as your child, grandchild, or nieces and nephews.

7. Non-Recourse Loan from a Financial Institution²

If you’re investing with a retirement account but still don’t have all the funding you need, it’s possible to use debt financing. Your IRA may receive a loan, but it must be non-recourse.

IRAs require non-recourse loans because your IRA (or you personally) cannot be the personal guarantor or serve as collateral for the loan. The only recourse is the investment asset that is being financed with the loan.

Note: Your IRA cannot receive a loan or other extension of credit from a disqualified person. Please reference IRC 4975 and consult with a financial professional.

8. Non-Recourse Loan from an Individual²

Non-recourse loans do not have to originate from a financial institution. Any loan made to an IRA must be non-recourse, but the lender can also be a private investor or another retirement account. You may be able to work out terms for a non-recourse loan with another investor or another retirement account holder for an agreed-upon interest rate or rate of return.

As with loans from financial institutions, your IRA cannot receive a loan or other extension of credit from a disqualified person. Please reference IRC 4975 and consult with a financial professional.

9. Non-Recourse Loan from Someone’s Business²

Similar to the non-recourse loans from financial institutions or individuals, it may be possible to work out a lending arrangement with another business in your network. If you have business owners in your network who are interested in your investment opportunity, your IRA may be able to receive non-recourse financing from their business.

Once again, be aware that your IRA cannot receive a loan or other extension of credit from a disqualified person. Please reference IRC 4975 and consult with a financial professional.

Bonus: Combining Sources for More Investing Power

You have the ability to partner multiple funding sources on one investment, even when self-directed IRAs are involved.³ For example, you may choose to co-invest both your Traditional IRA and your Roth IRA so you can split the profits between the tax-free and tax-deferred accounts. You can also partner your IRA with your Health Savings Account (HSA) or small business account (SEP, SIMPLE, Solo 401(k), etc.)

It’s also possible to co-invest your IRA money with another investor’s IRA, or your IRA with non-IRA money.

Read more: couple partners multiple funding sources to complete two real estate deals

Considering all the funding combinations, the funding possibilities for your next investment are nearly limitless!

¹Investment Company Institute quarterly retirement assets report, 9/30/19

²When an IRA receives debt financing, investors must be aware of a potential tax implication called Unrelated Business Income Tax. Get more information on UBIT

³Please review Internal Revenue Code 4975 to ensure your investment follows all IRS rules and regulations for self-directed IRAs. Check that your investment does not involve any disqualified persons or engage in any prohibited transactions. It is also important to ensure all expenses are paid for and income is returned in direct proportion to the percentage of ownership arrangement of your co-investment structure.

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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