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IRA's and Mortgages
| | Monday, June 07, 2004 @ 08:00 AM EDT
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Contributed by: Guidant
Guidant Properties
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“Most successful real estate investors make their money by leveraging their properties with mortgages, not by paying all cash up-front and tying up all their available money. That kind of leverage is rarely available in an IRA because of the loan restrictions under the prohibited transaction rules,” explains Ed Slott, author of The Retirement Savings Time Bomb… and how
to defuse it. So why then are so many people switching their IRA funds into self-directed accounts to invest in real estate if they cannot take advantage of leverage with these retirement funds? Slott provides us with the answer. “You can… get a mortgage on property purchased with your IRA funds… without a personal guarantee by you.” This is called a non-recourse loan. However, finding mortgage lenders willing to participate in this type of transaction may prove difficult.
Most lenders don’t understand how to underwrite residential loans for properties held by an LLC. For that reason, you probably won’t be able to walk into your local bank branch and obtain a mortgage on a property purchased with IRA funds. We met with several lenders and showed them the unique structure Guidant Financial has devised. The result is we now have lenders willing to lend from 50-95% of the value of the property, depending on the structure,” comments Curt Bateman, Managing Director of the Commercial and Investment division of Absolute Mortgage. He continues, “I am currently working on a project to develop four-plex homes. We will use 150k of his IRA funds to satisfy the equity requirements for the construction loan of $850k. After the sale of the four completed units, roughly six months later, his IRA will receive a profit in the neighborhood of 20k. That’s 26.6% annualized return!” Although this particular client does not want to hold the four-plexes as rental properties, this same program could easily apply to an investor or investors that want to build a portfolio of rental properties.
Earning potential using leverage and real estate inside an IRA have caused many to rethink their current retirement investing strategies. David Nilssen, co-founder of Guidant Financial Group LLC, conveyed, “I can’t tell you how many people I talk to everyday who say they wish they had heard about this strategy three or four years ago. People can see the power of real estate. It is more real than stocks or mutual funds. You can touch it and see it.” Nilssen’s company, Guidant Financial Group LLC, specializes in IRA facilitation. Their purpose is to help average people get started investing in non-traditional IRA investments like real estate. “It is rewarding to help people whose retirement savings have been devastated by the bear market recover their savings through non-traditional investments I have personally lost a great deal of money in the stock market, so I can empathize with the powerlessness one has over Wall Street.”
Using leverage inside your IRA can be very complicated. Using an IRA Facilitator, who can help you through the process of switching into a self-directed IRA and provide a network of professionals familiar with IRA investing, is very important. Nilssen specified, “If you decide to invest with a self-directed IRA, don’t try to do it yourself. Use a professional to handle the process and avoid the severe penalties of doing something incorrectly.”
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