Self Directed IRAs + Non-recourse

[Mimi H.]

I'm starting to think more broadly about how to structure different "buckets", one of which is an IRA. I'm potentially interested in rolling an existing IRA into a self directed IRA to purchase a multifamily with the self directed IRA. The funds that I'll have available will not be sufficient to make the purchase and I've read a bit of the following:

• purchases of this sort usually requires ~40% down
• might be "easier" to go with private lenders than non-recourse mortgages
• non-recourse mortgages are a niche item and difficult to secure for a small time investor such as myself

Some of the top line questions that I have:

• how does one find non-recourse mortgage lenders? I've done a google search but I'm in the I don't know what I don't know stage so it looks a bit confusing. I don't know the difference between one or the other. 
• If I make the purchase within an IRA, can I presume that the proceeds go back into the IRA tax deferred?
• Has anyone done this "successfully" however you'd like to define that (and would like to share?)

Would appreciate any insight on this matter. I'd like to repeat, I am NOT interested in taking funds OUT of my IRA, I wish to purchase within my IRA.

Thank you! :)

[Brian Eastman]

@Mimi H.

You can leverage with a self directed IRA. It can be a very powerful strategy that when used properly will allow you to secure higher returns for your IRA dollars.

The leading lenders who offer such non-recourse loans at the national level include:

First Western Federal Savings Bank

www.myiralender.com

North American Savings Bank

www.iralending.com

There are some others on a local/regional level.

Because the lender's only security is the property, the terms are a bit more conservative - typically 30-40% down and 10% in reserves.  Rates are currently in the 4.75% - 6.25% range.

Sure, this is more costly money than what an investor could obtain personally in their own name, but, it is still relatively inexpensive capital and it allows you to apply the concept of leverage to your IRA - something you cannot do in the stock market.

The property is qualifying for the loan, not you. The fact that you may be early in your investing career does not impact your IRA's ability to obtain financing if the property is solid.

As with any IRA investment, all returns go to the IRA as you suspect.

When an IRA uses leverage, there is a tax to the IRA for being able to use non-IRA money to grow the IRA called UDFI (see IRS pub 598 and chat with your CPA on the topic). The impact of the tax should not be significant, and you still will achieve a higher cash-on-cash return for your IRA dollars through the use of leverage. That, of course, is the key to evaluating this strategy... what is the risk/return?

As  @Lane Kawaoka indicates, notes are a great investment for a self-directed IRA. They are simple and generally reliable. That said, most IRA investors cannot utilize leverage when investing in notes, and unlike property, notes do not have the potential for appreciation. As such, I would recommend you evaluate both types of investments and see where you will have the best opportunities.

The trap that a lot of folks fall into is trying to compare investing in real estate with an IRA to investing in real estate with non-IRA funds. It just does not make sense because the tax situation is so different. You want to compare one investment you could make with an IRA to other investments the IRA could make in order to have a real evaluation of your options.