Entrust Learning Center > 5. Real Estate > New Sources of Money for Investment Property

New Sources of Money for Investment Property

Many investors and astute realtors are aware that retirement plans such as IRAs, 401(k)s, qualified plans, etc. can purchase real estate and that it is becoming quite popular in the residential and commercial markets.

By: By: Carl Fischer

What many have not yet learned is retirement plans can borrow money using non-recourse loans, without worrying about personal debt-to-income (DTI), credit scores or the number of properties owned.

Many investors are limited in borrowing money for many reasons: their DTI is too high, they have too many investment properties and /or their credit score is low. None of those factors matter when your retirement plan borrows the money. The big unions and insurance companies have been doing it for a long time.

Investors can leverage retirement plans using the bank’s money to increase the plan’s rate of growth, which improves their overall financial position. Many investors have already utilized their retirement plans to purchase residential and commercial investment property. However, even if investors bought property with their plans, it is not too late to take advantage of leverage. Investors can refinance a property that the IRA already owns with the proceeds being retheir turned to the IRA account and available for the next leveraged purchase.

Investors that have a late start in securing their financial future, or those that realize their previous plans have not matured as expected, use this leverage strategy to make up for lost time. Those that were fortunate enough to be in the real estate market in the last four years and experienced 30%+ growth annually have fantastic gains. However, many worry that those gains can’t be sustained. The following example shows the power of leveraging real estate in great and not so good markets:

An IRA buys a house for $100,000 pays $30,000 and borrows $70,000

Scenario 1: Assume a great market and the house appreciates at 30%
The house value is now $130,000 which equals 100% return on your money in a year.

Scenario 2: Assume the housing bubble bursts and the property only appreciates at 4%
The house value is now $104,000 equaling 13% ($4,000/$30,000) return on your money in a year.

The appreciation rates are examples only and are not to be construed as evidence of any future forecasts.

The tables below are reflective of industry standards for documentation and loan guidelines at many institutions/ banks. Owner financing, and other peoples money, including IRAs or other retirement plans can also lend money in a non-recourse manner.

• Required Documentation
• Loan Application
• Purchase and sale contract
• IRA statement
• Appraisal
• Rent roll
  

Loan Guidelines

• Max Loan to Value = 70%
• Max Term =20 to 30 Years
• 3/1 & 5/1 & 7/1 ARMs
• Income /Expense ratio=
• 1.25
• 3 to 6 months reserves
  

Eligible Properties

• Single Family Residence
• Certain Condo’s
• 2-4 Plex
• Multi-family(5+ units)
• Retail/Office/Warehouse
  

Ineligible Properties

• Mobile Homes
• Time Shares /Condo Hotels
• Certain Restaurants
• Residences w/ 5+ acres
• Farms

A non-recourse loan simply means the security instruments (notes and mortgages) allow no recourse against the individual account holder or the balance in your retirement account. In the event of default or foreclosure, the property is the only source of repayment. The non-recourse lender can’t pursue other assets owned by the individual or the IRA. Non-recourse loans are less cumbersome—no income verification, no employment verification and the rate is no based on any credit report or credit scoring. Closing costs and associated fees are similar to traditional recourse loans.

As always it is recommended that any investment and associated strategy be discussed with professionals such as CPAs, CFPs and/or attorneys to assure a plan that maximizes the increase in overall net worth. As a minimum, the following financial planning considerations should be reviewed: Tax deferred or tax free IRAs (Traditional IRA vs. Roth IRA); Short Term Capital Gains vs. Long Term Capital Gains; Retirement and taxed income related to Social Security; Age and Required Minimum Distributions (RMDs); and Unrelated Business Income Tax (UBIT).

Certain types of properties require different types of lenders. It is prudent to seek the expertise of a mortgage broker who has access to many lenders when looking for this type of financing. Most of the lenders are local, that is, in the same area as the property.

Contact your self-directed IRA administrator or a knowledgeable mortgage broker for information on lenders in your area.

Carl Fischer, is Managing Member Entrust CAMA. Entrust CAMA serves the states of Delaware, Pennsylvania, and Southern New Jersey.