Non Recourse Financing & IRA Investor Lending Blog - Island View Mortgage

The Self-Directed IRA – A Profitable Long-Term Investment Tool

Josh — Sat, 19 May 2012 13:30:00 +0000

There are quite a few advantages to using a self-directed IRA to invest in real estate. For example, Tom invests $100,000 from his self-directed IRA to acquire a foreclosed four unit property. He obtains a $50,000 non-recourse loan to complete needed updates and repairs necessary to rent the units out. After the repairs are completed, each unit rents for $900, thus generating $3,600 of gross rental income on the property. Depending upon what Tom’s goals and objectives are with his self-directed IRA, he may choose to either sell the property for a profit or keep the property and enjoy the rental income he was able to create after repairing the property.

If he chooses to rent the property, the rental income will be deposited into his self-directed IRA. When Tom sells the property, the proceeds from the sale go into the IRA without attracting capital gains tax. Let’s say Tom’s IRA retains the property for around eight years, the property value is likely to have appreciated and could be a good long term strategy. If Tom where to identify an additional property that looks to have even great potential, he could either finance the new purchase and/or sell his existing property to invest in the new one. These types of open ended options help self-directed IRA holders remain flexible as they look for new investment opportunities that may emerge in the future.

Self-Directed Retirement Account Investments in Real Estate: What Are My Options?

Josh — Fri, 04 May 2012 11:30:00 +0000

Utilizing a self-directed IRA or SDIRA as an acronym, a person is able to diversify their retirement investments to things such as: real property, private companies, promissory notes, commodities, and most any other potential investment not restricted by the I.R.S. Basically, self-directed IRA’s provide an investor total oversight of their retirement dollars.
Real estate is one of the most popular types of alternative investment choices for self-directed IRA holders. Roughly half of all self-directed investors choose real estate as a part of their portfolio. There are four main ways to invest in real estate within the account and they are:

1. A wholesale resale of a property – This is where an IRA is the buyer of a property and then resells or assigns the purchase agreement to another buyer for a higher price, thus making a profit for the IRA. When a Self-directed Roth IRA is being used, the gains from the sale are tax-free.

2. Have your self-directed IRA purchase an option to buy real estate and assign it to a third party for a higher price.

3. Purchase a piece of real estate in conjunction with an IRA non-recourse loan. This scenario will trigger Unrelated Business Income Tax (UBIT) and its financial implications should be examined before taking out a loan.

4. An self-directed IRA investor can also partner with themselves or with another partner/self-directed IRA to raise the capital necessary for a real estate purchase.

Understanding Self-Directed IRA Prohibited Transactions and Disqualified Persons

Josh — Thu, 19 Apr 2012 10:00:00 +0000

Though a self-directed IRA offers more freedom and flexibility than most traditional retirement investment options, it is essential to be aware of guidelines regarding the restrictions and limitations of self-directed IRA’s. One of the more important rules applies to prohibited asset purchases and disqualified persons. The I.R.S. specifies that a disqualified person includes any of the following: a spouse, a parent, any children and their spouses, a grandparent, a grandchild and their spouses, any entity of which you have over a 50% ownership in, and any entity that you own over 10% of a partnership. As the beneficiary of a specific self-directed IRA, you too are defined as a disqualified person, meaning you can’t buy or sell assets to or from yourself and/or your own IRA. This refers to assets owned prior to self-directing IRA funds and any business involving a disqualified person would be considered a prohibited transaction or self-dealing which may result in your self-directed account no longer being tax exempt.

An additional rule to be aware of with self-directed IRA’s is what’s referred to as an “indirect benefit.” The IRA is solely designated as retirement account. Though a good amount of money may be acquired through a self-directed IRA, none of those funds can be utilized for personal use such as a vacation property, work area, or primary residence. All of these uses violate the terms of what’s allow in an IRA and make the account subject to taxation. A self-directed IRA allows an investor total control how their investment funds are allocated, however, it also requires increased responsibility on the beneficiary of the IRA to ensure that I.R.S. compliance in maintained on the account.

Self-directed IRA’s are one of the best kept secrets for retirement investing. For seasoned and savvy investors that are willing to walk through the process of learning how to use the account property, a self- directed IRA could prove to be a very profitable strategy.

Self-Directed Retirement Accounts to Fund Real Estate

Josh — Wed, 04 Apr 2012 13:00:00 +0000

Self-directed IRA’s, are frequently connected to the concept of real estate IRA’s, which permits experienced investors the chance to self-manage their retirement assets and facilitate transactions without having to obtain approval from a custodian. When you decide to purchase an alternative asset, funds are typically sent via wire from your self-directed IRA custodian. Being able to have access to your self-directed retirement funds provides the flexibility to move upon new investment options quickly and autonomously. A main benefit of a self-directed IRA is the platform to achieve increased wealth accumulation compared to traditional venues. Just as stocks, bonds, or more conventional IRA investments are tax free or tax deferred, so are the profits from a self-directed IRA.
Real estate IRA investments in some form, is the most common alternative asset class within self-directed IRA’s accounting for at least 50% of all account holders. Real estate IRA’s seem to be an appealing option primarily because of the ability to acquire properties at fairly low prices, especially distressed properties and then roll over profits from rental income to further expand the self-directed account. In addition to this, utilizing a self-directed IRA also has typically less transaction costs, holding costs, and asset-based fees typically related with conventional type IRA investments. Financing for properties is allowed, however the IRS requires that the loan must be non-recourse. This means that a beneficiary of a self-directed IRA nor any disqualified person can personally guarantee the repayment of a mortgage loan to an IRA. In the event of a loan default, for a non-recourse loan, the sole remedy of the lender for repayment of their loan is to take title back to the real estate through a foreclosure.

Nonrecourse loans for self-directed IRA holders

Josh — Tue, 20 Mar 2012 12:00:00 +0000

Perhaps you are interested in purchasing real estate with a self-directed IRA but your account balance isn’t sufficient to cover the full purchase price of a property. One remedy to this problem is to utilize a nonrecourse loan to facilitate the purchase of real estate. If you choose to go this route, the title to the property is held in your self-directed IRA and a nonrecourse mortgage is placed as a lien on the real estate. The benefit of a nonrecourse loan is that you are not personally obligated for repayment of the loan. Because of this unique type of loan, it generally requires a higher interest rate and large down payment, which helps to protect the lender’s money in the event of a nonrecourse loan default. Commercial banks are generally more inclined to offer nonrecourse financing for commercial real estate or apartment building projects as opposed to 1-4 unit residential investment properties. Another consideration for self-directed IRA holders considering nonrecourse financing is unrelated debt-financed income (UBIT) that takes place occurs if a nonrecourse loan is placed within an IRA.

While very basic, the beneficiary of the account will need to show how the property is capable of covering all the operating expenses including any nonrecourse loan payments. IF a property can’t cash flow, a nonrecourse lender won’t financing it because there’s no way to substantiate the repayment of the loan. Any monthly rental income leftover after all expenses have been paid goes directly back into your self-directed account. There are two main options when looking a real estate investing within a self-directed IRA: First the property can be resold for a profit or second, it can be held for rental income and cash flow purposes.

Self-Directed IRA Real Estate Acquisitions

Josh — Mon, 05 Mar 2012 17:08:24 +0000

Real estate IRA’s provides a wide variety of investment options and is lucrative for those with experience in real estate investing. A real estate IRA provides a much broader variety of assets in which a person can invest. There are numerous benefits to real estate IRA’s:

The financial gains are compoundable through tax deferred reinvestment;
You are given the liberty to choose what real estate to invest in;
Your retirement account assets are protected from personal liability.

Conversely, there are a few potential concerns you should consider before acquiring real estate in a Self-directed IRA:

You must purchase a property from an unrelated third party. You can’t acquire a property that you currently own personally with your self-directed IRA. Nor can a property owned by your IRA be used by the beneficiary of the IRA or a disqualified person. The reason being, is that your self-directed IRA is to benefit you in the future, not the present. This would include any potential ‘indirect benefits’ that may occur because of the transaction taking place.

In addition to not selling a property to yourself, you also can’t sell the real estate to:
- a family member or person of lineal descent;
- any beneficiaries of your IRA;
- the fiduciary of the account.
Any asset acquisition made through your self-directed IRA must be titled correctly and not in your personal name. This would include the purchase agreements and deed to a property. Rent checks written by tenants should be made out to your self-directed IRA, not you personally.
If you are managing the property yourself, your self-directed IRA should pay you a market rate for the property management fee for services you provide.
Be sure that you utilize knowledgeable professionals to assist you with the purchasing real estate in this way. The market value of real estate isn’t subject to fluctuations in the stock market and primarily relies upon the local geographic market and economic climate to determine a valuation.

Self Directed IRA’s: Funding Businesses as Alternative Investments

Josh — Fri, 10 Feb 2012 19:45:18 +0000

Some individuals choose to invest self-directed IRA’s in businesses owned by a neighbor, friend or sibling. For example, an individual could roll over money from a previous 401k or existing IRA into a self directed IRA. Once this process took place, they could then designate their business investment and their retirement account could collect profits from the investment. All this tax deferred or tax free depending upon the type of retirement account.

There are a variety of Self-directed retirement plans that can be funded via a self-directed retirement account which include: A Roth Solo 401(k), which can provide many similar tax benefits as the Roth IRA (tax deductible contributions and no taxation upon withdrawals); Savings Incentive Match Plan for Employees, also known as a S.I.M.P.L.E., a smart decision for investors with lower incomes ($45,000 per year or less) who would like to invest in small corporations of less than one hundred employees. The S.I.M.P.L.E. account allows tax deductible contributions and taxable deferment on any gains until distributions are made. If you’d prefer not to invest directly into a business, another option is to make an IRA loan from the account. Before deciding upon an investment, be sure to speak with a knowledgeable accountant or tax advisor concerning Unrelated Business Income Tax (UBIT).

Whatever expenses associated with maintaining the business can be written off on the corporate tax return. Don’t forget that any profits from your investment cannot be used personally (i.e. you are not allowed to work for the company or be paid a salary). Making a business investment is another excellent way to utilize the flexibility associated with a self directed IRA. This is a great way to put your business savvy , corporate experience, and creativity to work by paving the way towards retirement.

A Self-Directed IRA Can Fund a Business

Josh — Fri, 27 Jan 2012 17:00:33 +0000

Self-Directed IRA holders tend to most commonly invest in Real Estate within their accounts. However, did you know that your self-directed IRA can fund a privately owned business? Though providing private capital for companies is oftentimes a more difficult investment to quantify compared to real estate or the stock market, it could prove to be profitable nonetheless. A few options for consideration in that venue may include: opening your own new company, equity investment into an existing business, or purchasing an existing franchise. The ability to decide where and how your self-directed IRA will be invested does allow you the flexibility to consummate the investment at your own pace. For self-directed Roth IRA’s, beneficiaries are able to utilize the tax-free gains to further grow their self-directed retirement account balance.

While making a private equity investment into a business with a self-directed IRA is less traditional compared to other investment options, the I.R.S. prohibited transaction rules are still applicable. If a beneficiary of the self-directed IRA violates the prohibited transactions rules, it may result in devastating federal income tax consequences. If a beneficiary invests in an entity that is owned by a spouse, parent, child or grandchild this would constitute an I.R.S. prohibited transaction, making the entire amount of the investment subject to early distribution plus penalties. To safeguard against prohibited transactions, self-directed IRA custodians help account holders stay in compliance with these rules. Custodians also assist with account disbursements for investments, account recordkeeping, however, as a third party administrator they do not provide any investment advisement.

Non-recourse Loans in Your Self Directed IRA: Purchase and New Construction Financing

Josh — Mon, 16 Jan 2012 21:17:54 +0000

Utilizing a self-directed IRA to acquire unimproved real estate has proved to be a good long term investment option for many investors. If it would be advantageous to finance your land purchase, you may consider the use of a non-recourse loan which could be provided through Island View Mortgage. All capital used to purchase and improve the real estate must come from either the IRA or a non-recourse loan on the property. Most locations within the U.S. are considered non-recourse states. The mortgage you use for any real estate held within a self-directed IRA must be a non-recourse loan. With your self-directed IRA as the borrower, you are not personally liable for any more dollars than the real estate is worth. Any creditor may take your land through the foreclosure process in the event of a loan default. Because it is a non-recourse loan, the creditor is not legally permitted to require any further money from you or your IRA, even if the value of the land is less than the amount owed.

Non-recourse states hold their own unique anti-deficiency statutes that provide protection for borrower of the loan. These states include: Alaska, California, Idaho, Arizona, Texas, Washington, Utah, North Dakota, Minnesota, North Carolina, Connecticut and Florida. It is important to consider that different non-recourse states each have differing laws. For instance, certain states, including California, stipulate that a borrower is only protected by non-recourse laws if the loan is a purchase money loan where they borrow from the seller as opposed to a bank. In addition to non-recourse states, you should also know that there are one-action states, which include: New York, Montana, California, Idaho, Utah and Nevada. Here, lenders are entitled to one lawsuit in which to collect their debt from the property.

Self Directed IRA’s: Buying land or building a property

Josh — Sat, 07 Jan 2012 18:29:20 +0000

A self-directed IRA allows flexibility to acquire any type of residential or commercial property, from an office building, single family investment, or raw land. Self-directed IRA’s combined with real estate investing create many options for investors. One such option is to purchase a parcel of land very inexpensively. There are typically two primary options: you can resell the parcel of land for a higher price than you bought it for or you can build a new structure on the property with additional IRA dollars or obtain a non-recourse construction loan. If you decide to resell the land, all profits flow back into your self-directed IRA. Some advantages of acquiring land in a self-directed IRA are:

The ability to diversify your investment portfolio;
It generally is a stable investment;
When completed properly, there is a higher likelihood of profit over the long term.

If you choose to invest in real estate with your self-directed IRA, there are quite a few prohibited transactions to be aware of. You cannot participate in the following:

Sell land that is owned personally to your IRA
Purchase land from your IRA
Use the land for any personal advantageous reasons
Allow a family member or descendent to utilize the land
Grant a loan from your IRA for the land
Use your IRA as security pledge to obtain a loan
Provide or receive services or goods to or from your self-directed IRA