Non-recourse loans are more often used for investors who want to acquire property using their self-directed IRA but don't have enough capital to purchase the property, and don't want to use their hard earned IRA as collateral. Non-recourse loans allow clients to purchase and use the property and only the property as collateral for a loan. That means that credit/fico scores are often not used in the underwriting decision on these loans because the borrower is not the guarantor for the loan. This does however require the properties being lent on being cash flow positive. Most of the time non recourse lenders will even lend up to 70% loan to value.
For example lets say investor Bob has $90k in his 401k IRA that he is looking to invest but really doesn't want to use it all on one property. While searching for the right investment he finds an amazing property that is going for $100k, that he knows is way under valued and can cash flow positively even in the current market. Bob knows he can do a 401k rollover into a self-directed IRA for $30k and then obtain a non-recourse loan for $70k in order to complete the purchase.
Assuming that the property is cash flow positive, which is extremely common in this market, Bob can now use the remaining funds within his IRA account and purchase several properties instead of just one. This not only diversifies his portfolio but reduces his exposure to any potential down turn in the market, or unexpected vacancy. Now with the $90k Bob had ready to purchase an investment property he now has 3 properties that are all cash flow positive and each month the rental checks go right back into his self-directed IRA account.
Here are some basic guidelines for IRA financing:
Requirements for IRA Debt Financing:
1. Purchase transactions for investment properties only
2. IRA assets to be managed by a custodian in a self-directed IRA or SEP.
3. IRA assets must be verified for purchase and reserves. IRA reserve requirement may be up to 20% of the loan amount, to be available in the event of insufficient cash flow to pay operating expenses and mortgage payments.
4. No employment or income verification
Documentation Require for Loan Approval:
1. Completed loan application
2. Current detailed Rent Roll or copies of signed leases.
3. Most recent asset statement verifying IRA assets for purchase and reserves.
4. Purchase/Sale contract, signed by the IRA account holder and the custodian. The contract must show the buyer to be in the name of IRA.
5. Appraisal fee required at the time of loan application for 1-4 family.
Obviously each deal is different and some restrictions may apply, but this is another tool that can be used to help your IRA account grow and to diversify the assets held within it.
Faisal is the Co-Founder of Brooklyn Troy, a real estate land acquisition and self-directed IRA company. He graduated with honors from University of California San Diego with a BS in Management Science and a minor in Spanish.In 2003 he co-founded La Jolla Wealth Management, a real estate finance and private equity company. He has assisted in the acquisition and management of over $45 million dollars in assets. http://www.brooklyntroy.com
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