The NonRecourse Loan
As mentioned in the beginning of this article , prior to 2004 no banks issued nonrecourse loans for the purchase of real estate , let alone the purchase of real estate by an IRA , as opposed to an individual . The fact of the matter is this : The IRS does not permit the IRA investor to personally guarantee a loan when the investor is using their retirement money , along with a mortgage , to purchase real estate with their retirement funds . Why is this the case ? Answer : Because these retirement funds haven ’ t been taxed by the IRS . These funds are taxdeferred , and the IRS doesn ’ t want the investor commingling his personal assets and / or personal obligations with the property subject to the purchase with the IRA or other retirement funds .
Under a normal , conventional , personallyguaranteed loan , if the mortgagor ( property owner ) cannot , or does not , meet their payment requirements of the mortgage , the bank can use whatever legal means at its disposal to obtain payment from the mortgagor . The bank can sue the property owner and obtain that individual ’ s personal assets to satisfy the mortgage debt , if necessary .
As a result , most banks will not lend money to purchase real estate through a retirementfunded account because they cannot obtain that personal guarantee from the borrower . With a nonrecourse loan the only recourse the bank has is the property and the rental revenue that the property generates . The bank cannot even go after the retirement account ’ s other funds or assets .
Hence , this is a protective measure for the investor . The result of this stringent requirement is some fairly strict guidelines by the banks to issue these nonrecourse loans .
NonRecourse Loan Requirements
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 retirement accounts for investments in real estate with IRA ’ s , such as the SDIRA ( SelfDirected Individual Retirement Account ), or a Roth IRA , or an IRA in an LLC , or a Solo 401K , or individual trust . This is necessary for several reasons . Again , the IRS does not permit the 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 ownership of this real estate with exceptions of a Checkbook LLC or a Solo 401K . Nevertheless , one still needs a custodian to make sure the investment rules are being followed .
Once you have established an 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 retirement account to make a minimum downpayment of 40 % of the purchase price . Depending upon the type of property and the lender , you might need to make a greater downpayment . This is usually dictated by the lender for the transaction .
80