Hello investor friend! JP here with a question…
Did you know that you can use your self-directed IRA to get Non-Recourse Fix and Flip Loans?
Well, there are many benefits to using your IRA as a tool to buy and flip. These loans are referred to as “Non-Recourse” because they give you liability protection.
Don’t worry, I’ll explain everything…
Use a Self-Directed IRA for Non-Recourse Loans
For starters, what is a self-directed IRA?
So, you might be thinking, “I have an IRA, can I use it to invest?” Let’s answer a few questions, and you’ll have a better idea about what you can do.
A self-directed IRA is one in which the IRA custodian gives you the power to choose how to invest the funds inside your IRA.
Most IRAs are “traditional.” This means that the financial institution that hosts the IRA controls what stocks, bonds, mutual funds and other investment vehicles you can invest into inside your IRA.
They might provide you options, but those are usually investments that they not only select but generate fees from. 🙁
Now, if you call and ask the financial institution if you have a self-directed IRA, they might answer with a resounding “yes.” But what they mean is that you can choose from all the investments inside their offering…
Investments chosen by them! This is not a self-directed IRA.
A true self-directed IRA means you are not limited. You can invest in:
- Real estate funds
- Tax liens
- Mortgages
- Notes or trust deeds
- Other type of investments
Whatever the IRS permits you to invest in, you can do that with a self-directed IRA.
Using Your IRA Funds for Seed Money
In some cases, you might have assets that you can’t — or it’s difficult — to draw out funds for investment. Or, you might have cash on hand, but not enough.
Those are examples of when pulling money out of your IRA might make a lot of sense.
Whether you are looking to take advantage of non-recourse fix and flip loans or to invest passively in notes and funds, you will need a self-directed IRA.
Research companies like these to find self-directed IRA options:
- Alto IRA
- Equity Trust Company
- Strata Trust Company
So, with a self-directed IRA, you give yourself the chance to take advantage of opportunities like fix and flip and more passive real estate investments like trust deeds. Whatever your strategy is — whether active or passive real estate investing — a non-recourse loan can make a big difference in building your portfolio.
Build Your IRA Nest Egg
Once you’ve established and/or verified you have a self-directed IRA, you can use those funds to buy and flip properties. Yay!
Once you sell the property, all those monies received flow back into your IRA, building your retirement account and substantially. More yay!
What this allows you to do is exceed the maximum annual contribution amounts and quickly grow your IRA. Typical annual contributions to an IRA are $6,000 per year or $7,000 if you’re 50 or older.
Liability Protection
Non-recourse fix and flip loans provide personal protection. Meaning in the case of default or foreclosure, the lender can only go after the assets, not you personally. And, the lender cannot go after other assets inside your IRA that are not included under the loan.
First, I need to touch on a few key points…
Non-recourse loans are loans made to your self-directed IRA, not to you as an individual. This means in the event of default or foreclosure, the lender can ONLY go after the asset itself, not you, as you CAN’T personally guarantee the loan.
Also, the lender CAN’T go after any other asset you hold in your IRA… just the one they lent capital on.
Now, because of that, it’s rare for lenders to originate these types of loans. Typically, lenders want a more traditional recourse loan, requiring you to personally guarantee the repayment of the loan. This allows the lender to seize the asset and come after you to cover any potential losses in the event of default or foreclosure.
Tax Benefits
In a lot of cases, you don’t have immediate tax liabilities when investing through tax-advantaged accounts like self-directed IRAs.
But, through a non-recourse loan, you will likely run into what is called “Unrelated Debt Financed Income” tax or UDFI tax.
UDFI tax applies to the portion of the profits tied to the financed amount of the property.
So, let’s say you cover 25% of the asset with your self-directed IRA funds and finance the remaining 75%. When you sell the asset, 75% of the profits will be subject to UDFI tax.
Now I know what you’re thinking: “I have this IRA set up so that I don’t have these tax liabilities, so why would I want to use this strategy?”
Well, my opinion (read: not advice as I’m not a licensed tax professional) is that taxes such as UDFI tax are a success tax. Your IRA pays it as all the profits sit in that IRA. So why not? This strategy could be a great way to grow your wealth at much faster rates than some other investments.
Quick Case Study
OK, this is cool…
I personally used a loan of $130,000 from my IRA with $60,000 cash to purchase a home in Spokane, Washington, for $180,000.
The loan to value (LTV) percentage was 53%, meaning I can enjoy a healthy rate of return after the rehab.
I’ve used non-recourse fix and flip loans many times to free up cash for investment and build my IRA quickly. Because it’s a smart strategy that works.
I borrowed from my own IRA to purchase this property for a fix and flip.
Bottom Line
Non-recourse loans are a great way to grow wealth and build up a retirement account!
For those of you who may have more in your retirement accounts than you have cash on hand, it’s a great solution for seed capital.
Either way, you can take control of your retirement and your wealth by utilizing this strategy when flipping real estate.
While you can’t pay yourself any of the profits, as it all flows back into your IRA, it’s still a solid way to grow wealth.
Give it a go.