Can you have debt on a rental with a self directed IRA

[Brett Smith]

When using a self directed IRA to purchase a rental property, are you able to use a combination of the IRA funds with bank financing as well? Then the second part of the question is can you BRRRR the property and remove the IRA funds to use on another property?

[Brian Eastman]

@Brett Smith

An IRA can use debt financing such as a mortgage. Any debt instrument must be non-recourse, meaning no personal guarantee from you.

There are a handful of banks that offer such loans, and the terms for purchases and refinances are more conservative. Be sure to speak with some lenders to get an idea of what is possible. A BRRRR in an IRA is possible, but will be a much less aggressive pathway than you can pursue personally.

In this type of transaction YOU are not putting IRA capital into the deal alongside personal financing. The IRA owns the property and the IRA is the borrower on the loan. A refinance will free up cash for the IRA to make additional investments, not remove the IRA from the deal.

When an IRA uses debt-financing, the portion of the income that is derived from the non-IRA borrowed money is taxable as UDFI. The tax does not typically add up to much because of the favorable write-offs available to real estate investments such as depreciation, interest, etc. It is definitely a topic to become educated about.

If you are self-employed and have no full time employees, you may qualify for a Solo 401(k).  A Solo 401(k) is specifically exempted from tax on UDFI in real estate projects.

The bottom line is that your proposed strategy is possible, but is more complex. That said, leverage is a powerful tool and your IRA will certainly benefit with higher net returns from the right investments when leverage is used.