Non recourse loan with a self directed IRA to buy rental prop?

[Eldon Hongo]

Any experiences with using a non recourse loan for a self directed IRA to buy a rental property? Pro's, con's?

[Brian Eastman]

@Eldon Hongo

The use of debt-financing such as a mortgage in your IRA is a more complex strategy, but one that can really boost the returns of your IRA.

There are two key considerations:

The debt must be non-recourse, meaning no personal guarantee from you.  As Dmitriy noted, there are a handful of banks that do such loans.  Expect higher down payment amounts, reserve requirements and interest.  The loan terms will be more conservative than what you could do personally.  

The use of borrowed funds within an IRA generates Unrelated Debt-Financed Income, which is taxed. The tax burden is generally nominal. Being prepared in advance, both by understanding the impact of the tax on your returns and the administrative requirements that will come into plan is important.

The bottom line is that your IRA is getting to use leverage, and will achieve a higher cash-on-cash return as a result. You up the risk and complexity a bit, but should see a real reward to doing so.

Using leverage in an IRA is a great strategy. If you happen to qualify for the Solo 401(k) plan type by being self-employed and having no full time employees, then the tax on UDFI is exempted. Again, the tax is not significant, so spending a lot of time or money to "become" self-employed if you are not already is not typically productive.