InvestorLoft Real Estate Investing Blog

Creative Real Estate Financing Strategies

Funding your investment property purchases — how do you get it done these days? No one want to tie-up the bulk of their liquidity to pay cash outright and everytime for a portfolio purchase, so where do you turn when traditional financing and mortgage options are more challenging to obtain?

This week’s blog entry focuses on 3 financing thoughts for the “creative real estate investor” out there. We’d love to hear more thoughts from the lending and Agent/Broker communities on how your clients are getting the deal done as well. Feel free to leave a comment below (and gain a valuable linkback to your site!)

1. Self-Directed and Real Estate IRA Funding – With the recent downturn in the equity markets and bonds being…well…bonds, investors are looking for other places to stash their nest eggs for the long-term. Retirement plans rolled-over to a self-directed or real estate IRA custodian will allow investors to use their retirement assets to invest in real estate. The balance of some retirement plans can allow some lucky investors to pay cash lock, stock and barrell for a rental property and enjoy the benefits of long-term cash flow into their IRA. Others can use a portion of their retirement assets to acquire a qualifying property (and yes, there are restrictions on real estate purchases in an IRA) and utilize leverage to finance the remainder of the purchase with a non-recourse loan.
    
2. Non-Recourse Loans – When using your retirement accounts to fund a real estate investment purchase, most investors don’t want to tie-up all of their account’s liquidity in one transaction. That’s where non-recourse loans come in. There are several institutions out there like North American Savings Bank that will finance the balance of qualifying real estate purchases made through your self-directed IRA. Lenders generally require around a 30% downpayment contribution from your IRA and they’ll be looking for specific types of properties (i.e. cash-flow potential residential or commericial real estate, no raw land, farms ot condo-tels), but these lenders specialize in helping you “get the deal done” when you want to diversify your portfolio and place a certain amount of cash in each deal. More information can be found in our educational article on non recourse loans in our Self-Directed IRA Learning Center.
    
3. Ask the Bank – We know it sounds strange, but it’s the most obvious place to start asking questions. Many investors have long-standing relationships with their financial institutions, so why not talk to the folks who watch your money? Most institutions have lending specialist who are familiar with the bank’s entire array of lending products and can look at your particular situation and recommend what the bank would perceive as the best-fit product. What’s the worst that can happen? You leave learning about a new product that can help you meet your goals or you move on to other financing options. A win-win either way.

In these days of tightened lending criteria and the stated income mortgage having gone by the wayside, what’s a real estate investor to do? Creative financing requires putting on your thinking cap and looking for new, untapped sources of liquidity. Forget thinking outside the box – you need a whole new frame of mind when it comes to your real estate financing needs.

The process of purchasing real estate in your IRA is relatively simple, yet widely unknown and the subject of this week’s blog. For those in search of a financing source for their real estate investment goals, we’ll plant some seeds worth cultivating today.

The lending environment today is a far cry from where we were 12-24 months ago. While many of the tools that real estate investors used to achieve their goals have now been dispensed with (i.e.: stated income loans, 80/20 loans and the Option-ARM), there’s a pile of money just waiting to be used and it’s likely you’ve been sitting on it this whole time: your IRA. Most investors aren’t aware that they’re able to expand beyond the norm of mutual funds, stocks and bonds with their retirement kitty, but it’s an easy process.

Here are 3 tips to get you started on the path of utilizing your IRA to invest in real estate:

1. Find a custodian for your IRA. There are specialized custodians for self-directed and real estate IRAs. Consult our handy list of custodians to begin your due diligence process.
2. Learn about non-recourse loans and how they can help you finance your real estate purchase by using leverage in your IRA.
3. Review permitted and prohibited transactions. Purchasing real estate in your IRA doesn’t come without Uncle Sam’s restrictions. Once you know what they are, finding a qualifying property is simple!