Real Estate IRA Strategies: Non-Recourse Loans

If you've ever wondered about using leverage in your self-directed real estate IRA, wonder no more. A non-recourse loan is your answer. If you're eligible, it allows you to use a portion of your IRA funds to leverage a purchase.

In the truest definition, a non-recourse loan is a loan for which the IRA account holder is not personally responsible for repaying. In the event of a default, the lender can only reclaim the property attached to the note as satisfaction. Due to this very unique characteristic, however, non-recourse lenders have very stringent liquidity and down payment requirements for IRA holders who look to use non-recourse loans to fund their real estate purchases.

As a general rule, a non-recourse lender will require that an IRA account holder have between 30% and 35% of the purchase price of the property to be loaned on vested within their IRA account. This places a lender at a more favorable loan-to-value ratio and lessens their initial risk. As well, the IRA account holder should remember that all of the property's expenses (taxes, insurance, improvements, etc.) must be paid out of the cash balance of the IRA as well, so sufficient liquidity beyond just the 30-35% down payment must be available.

There are generally restrictions on the types of properties that non-recourse lenders will fund as well. Cash-flowing residential or commercial structures are preferred. The logic behind this is simply that if the lender has to reclaim the property, they stand a better chance of not suffering a loss. Cash-flowing properties generally attract a wider audience of buyers than more speculative ones like raw land or resort properties. Hence, the decision of most lenders to limit the types of properties on which they're willing to lend. Each lender will have their own list of approved property types, so be sure to check with the lender during your due diligence period.

As with any type of leverage or financing, there will be different loan products available. From traditional fixed-rate mortgages to ARM programs, there's sure to be something out there to suit your particular investment goals. Discuss your needs with the non-recourse lender of your choice.

When researching non-recourse lenders, be aware that there are fees associated with a non-recourse loan, just like any other mortgage. Closing costs, inspection fees, certifications, and recording fees will vary between lenders, so ask the lenders you interview for a complete schedule of fees that could apply to your particular loans with their firm.

In closing, it is possible to use leverage in your IRA to acquire real estate, just as you would if you wanted to make an acquisition outside of your retirement accounts. Not everyone will qualify for this non-traditional lending source due to the liquidity requirements, but it's useful to know that the strategy is available. Whether it's something you can immediately utilize or a plan for your self-directed real estate IRA funds in the future, it's another way to use the strength of your retirement accounts to achieve your real estate investment goals.

Read InvestorLoft's 7-Part Series of Articles on Self-Directed IRAs

The information contained herein is for educational purposes only and not intended to replace the experience counsel of your real estate professional, attorney, tax professional or other advisor. Before initiating any transaction, InvestorLoft recommends you seek professional guidance and perform the necessary due diligence in order to make the best possible decisions for your specific situation.