Refinancing loans held by Retirement Plans

[Arpan Patel]

Hey all,

I'm a bit newer to bigger pockets as an active member and I had a question concerning retirement plans and leverage. If a retirement plan owns a rental property (say 5+ units) - leveraged with a non recourse loan - and in the process of renovations and other additions and expense subtractions, the NOI increased. Is it possible to refinance the non recourse loan to another with a higher principal amount in order to recoup costs associated with the build out?

I am not sure and I cannot seem to get a direct answer from any of my professional team members. One one hand, the property is worth more so why not? On the other hand, would that not be compensating the retirement plan for labor (of the owner and others) which would fly in the face of what a retirement plan was conceived for - passive gains? Any thoughts?

Thanks in advance

[Dmitriy Fomichenko]

@Arpan Patel

yes it is possible to refinance a non-recourse loan in your IRA with another loan, you just need to find a lender who would be willing to work with you on this particular property.

Usually, most lenders will require seasoning. North American Savings Bank (one of the lenders specializing in non-recourse financing for retirement accounts) for example will require 3 years seasoning before they can use a new appraised value, if it is less than 3 years they will use the original purchase price. That means that you will not be able to cash out on any expenses for the repairs and improvements, this is important to keep in mind.

There is only a handful of lenders who specialize in these types of loans (NASB is only one of them), each have different terms and guidelines so you would have to check with them individually. If you want to get the list just PM me and I'll send you the link.

Also, I want to emphasize what Brian mentioned in his comment above: when your IRA owns a property - all of the expenses and property improvements related to that property must be paid from the IRA. Using personal funds would be illegal and will disqualify your IRA. And as a 'disqualified person' you are prohibited from personally doing any work on the property.

And lastly you need to be aware of the tax consequences when using leverage to finance investment properties in your IRA. The income that is derived from financed portion of the property is considered Unrelated Debt Financed Income (UDFI) and is subject to UBIT (Unrelated Business Income Tax), which tops at 39%. Be sure to consult with the experienced tax professional such @Brandon Hall or @Steven Hamilton II so that you are fully aware of the tax-impact. I see that you are in a fix and flip business which makes you self-employed - thus you are eligible for a Solo 401k plan. Unlike an IRA, 401k is NOT a subject to UBIT on leveraged real estate, this is one of several major advantages truly self-directed Solo 401k plan has over self-directed IRA and since you qualify for it you owe it to yourself to examine this option. In this blog post I compare them and go into details, hope it will be helpful:

https://www.biggerpockets.com/blogs/2810/21298-sol...

And in the end I want to mention that usually it is best to use your retirement plan to for passive investments such as trust deeds or private lending and own tax advantageous investments such as rentals in your own name. Of course everyone's situation is different so be sure to carefully evaluate your strategy, ask questions and assemble a team of experts who can help you be more successful achieving your goals. 

“In abundance of counselors there is victory.”