Loan Structure vs Financing

[Peggy Mitchell]

Hello everyone! 

Buying a new rental in New Jersey. Struggling with how to properly structure this purchase. My personal credit is in the 800 range and traditional lending can get me financed at 4 to 5%, this is my 5th property. I was going to fund the 20% + closing with my SDIRA and finance out the rest with a traditional loan. Not sure how that would work, would tenant make two payments every month 1) to IRA based on % contributed to purchase and 1) to us and/or LLC? LLC is newly established and has no credit per se. I'm guessing that means it's not eligible for traditional financing correct? How can I purchase this property and acquire the financing I need without putting it on our personal credit or paying a higher interest rate? I'm guessing there are plenty of experts out there that can help me work through this.

Any help you can offer would be greatly appreciated.

Thanks

Peggy Sue

[Brian Eastman]

@Peggy,

You will require a non-recourse loan in order to purchase a property with IRA funds. You cannot put a personal guarantee on the loan for which your IRA is the borrower.

Typically, a non-recourse lender will want 30-40% down and 10%+ in reserves.

Your creditworthiness does not fit into the picture at all.  The property is qualifying for the loan.

The owner of the property is the IRA, and the tenant will pay their rent to the IRA. From those rents, the IRA will need to cover all operating expenses, including the mortgage.

It sounds like your LLC is personally owned. That LLC does not touch this deal if IRA funds are used. You must keep a very clear separation between yourself (plus lineal family and entities like companies or trusts that are owned by your and/or family) and the IRA.

You cannot use your IRA for a down payment on a property you intend to own personally (or via a personal LLC).

Please check with both your IRA custodian and your CPA before moving forward. While you note that you are aware of the special rules surrounding IRA's, your question and proposed transaction indicate that you are very much not aware of how a self-directed IRA works.  Not trying to be harsh, just trying to keep you from frying your IRA by engaging in a prohibited transaction.