Tips and Insights on Non-Recourse Loans
Estimated reading time: 5 minutes
Starting back in 2011, The Norris Group began offering our Southern California real estate investor network non-recourse loans for their self-directed IRA accounts. Non-recourse leverage is secured to ensure that if anything were to happen with the real estate investment (disaster, foreclosure, etc.), the property and the property alone would serve as the collateral for non-payment. You’ve worked hard to save inside these accounts and this serves to help protect it from losses.
We get lots of questions about non-recourse lending. Oddly enough, much of the advice we give is practical advice not necessarily real estate specific. Below are a few tips and insights from a lender perspective to help you as you consider how to make your self-directed account profitable.
Know Your Asset
IRAs have become a clear target for those seeking to raise funds for businesses, real estate investments, and even educational courses. We belong to several professional groups focused on estate planning and IRAs and see far too many examples of fraud and Ponzi schemes targeting IRA accounts.
The beauty of a self-directed account is that you have the flexibility to invest in a wide variety of assets. Preferably, your IRA account is investing in assets you personally understand. Your administrator and/or custodian can only help you so much. They aren’t legally allowed to tell you if a deal is bad, if you’re likely to lose money, or perform due diligence on someone with whom you plan to invest.
Be careful, understand your investment, do your due diligence, and make sure you protect your account.
If you plan on using leverage for real estate inside your IRA, it’s helpful if you’ve done real estate deals personally outside of your account. Or, hopefully you’ve selected a team or partner who has a long track record of success. We work with investors who use their IRAs to fix and flip as well as to buy and hold. Each of these transactions comes with their own challenges and it’s helpful to understand these to put your IRA in the strongest position possible.
When you have real estate in your IRA there are usage rules and sweat equity rules which constrict what you as the account holder can do with and for the property. This leads to the next very important item.
Know the Rules
IRA administrators like Entrust do a great job of providing information to their clients on what you can and cannot do with your IRA account. From prohibited transactions to comingling of funds, it’s really important you personally understand these rules.
Far too often we see individuals open a self-directed account and get so excited they throw caution to the wind and immediately break rules that put their IRA account at risk. They comingle funds, they work on the properties themselves, or they create complicated and ultimately illegal transactions by setting up improper entities with family members.
Why risk your account? If you find yourself asking, “I wonder if this is OK?” you’re probably about to do something you’re not supposed to do. Ask your team of advisors.
Build a Team
Our best advice is to have a team of professionals to help you understand the ramifications of your investments in and out of your retirement account. Your account administrator, CPA, and real estate attorney create a hard-to-beat trifecta of professional know-how.
I’ve emailed my administrator several times to ask a question about a particular transaction. They are always helpful and give me the guidelines I need to understand if something I’m about to do (or my client is attempting to do) will put my account in danger. If they don’t know, they’ll tell me to ask my second string of important advisors.
A CPA that specializes in working with real estate investors or estate planning is an incredible resource. They not only help you maximize savings but also help you understand the tax ramifications of what you do in and outside of your retirement accounts. For instance, Unrelated Business Income Tax (UBIT) is a factor you have to consider when placing leverage inside your IRA. A CPA can help you analyze the deal and see if it really makes sense for you and your overall goals for retirement.
Finally, many of our clients utilize a real estate attorney that works in tandem with their CPA. This collaboration is important when entities are created to allow more flexibility for real estate assets. Some of our clients choose to create entities which they fund with their IRA to make things like repairs, purchases of materials, and payments to property managers easier. Attorneys that understand IRAs know to stay away from certain structures and avoid disqualified transactions with prohibited family members. Your savvy CPA will also keep you informed of any additional fees and tax burdens these new entities create for your account. No one likes surprises come tax time.
These three team members will save you time, money, and protect you from making mistakes.
Understand the Process
We’ve been on both sides of the transaction creating trust deeds for IRAs and funding hard money loans for IRAs. No two custodians or administrators have the exact same process. Guidelines and processes also get updated regularly.
Before you embark on any investment inside your IRA, make your life easier by checking in with your administrator and ask for the most current process sheet for the transaction you’re looking to perform.
For example, if you’re using a hard money loan for a real estate deal in your IRA, ask for the information sheet that tells you and the lender you’ve chosen the exact process your account requires to complete the transaction. Not getting this information up front leads to excessive wait times and a very frustrated lender because loan docs must be revised. A little bit of upfront research will ensure a fast and smooth transaction.
Finally, stay on top of trends and information not only in real estate but also for your IRA. Because IRA accounts have been the target of so much fraud and misuse, the IRS appears to be keeping a closer eye on these tax-deferred accounts. Industry rules change just like the economy. Take advantage of the resources and updates provided by your administrator and leverage your team of professional experts to keep you and your self-directed account safe.
About Bruce Norris
Bruce Norris is Founder and President of The Norris Group. He is an active investor, hard money lender, and real estate educator with over 30 years of experience. To learn more visit www.thenorrisgroup.com.