Did you know that you can use your self-directed IRA to get Non Recourse Fix and Flip Loans? 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. Read on for more…
Use a Self-Directed IRA for Non-Recourse Loans
For starters, what is a self-directed IRA? 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 in to 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
- Notes or trust deeds
- Other type of investments
Whatever the IRS permits you to invest in, you can with a self-directed IRA.
Using Your IRA Funds for Seed Money
In some cases, you might have assets that you can’t (or its difficult) to draw out funds for investment. Or, you might have cash on hand, but not enough. These 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 the following to find self-directed IRA options. 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 be a difference maker in building your portfolio.
- Alto IRA
- Equity Trust Company
- Strata Trust Company
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.
Once you sell the property, all those monies received flow back into your IRA, building your retirement account and substantially.
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.
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.
The lender cannot go after other assets inside your IRA that are not included under the loan
First, we should 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 NOT personally guarantee the loan.
Also, the lender can NOT go after any other asset you hold in your IRA, just the one they lent capital on.
Now because of that, it is 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.
In a lot of cases, you do not have immediate tax liabilities when investing through tax advantaged accounts like self-directed IRA’s.
However, 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 percent of the asset with your self-directed IRA funds and finance the remaining 75 percent. When you sell the asset, 75 percent 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 do not have these tax liabilities, so why would I want to use this strategy?
Our opinion (not advice as we are not licensed tax professionals) 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.
Our very own Lee Arnold used a loan of $130,000 from his IRA with $60,000 cash to purchase a home in Spokane, Washington for $180,000. The loan to value (LTV) percentage is 53 percent, meaning Lee will enjoy a healthy rate of return after rehab. Lee has used non-recourse fix and flip loans many times to free up cash for investment and build his IRA quickly.
Lee borrowed from his own IRA to purchase this property for a fix and flip
For More Information
Non-recourse loans are a great way to grow wealth and build up a retirement account. For those that may have more in their retirement accounts than they 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 cannot pay yourself any of the profits, as it all flows back into your IRA.
For questions about self-directed IRA’s, give Cogo Capital a call at (800) 473-6051 and contact us today!
Earning and Income statements made by our company and its customers are supplied directly from the company or customer. Any and all claims or representations as to income earnings made on our web sites or in our materials or information are not to be considered as average earnings. There is no guarantee that you will make these levels of income — in fact, most people do not — and you accept the risk that the earnings and income statements differ by individual. Individual performance depends upon each customer’s unique skills, time commitment and effort. Our programs are not designed or intended to qualify individuals for employment. Our programs are avocational in nature and are intended for the purpose of the personal enrichment, development, and enjoyment of individuals.
Past performance is not an indicator of any future results. All investments contain risk and may lose value. Any historical returns, target returns, expected returns or probability projections may not reflect actual future performance. Investors should not rely on forward-looking statements because such statements are inherently uncertain and involve risks. While the data we use from third parties is believed to be reliable, we cannot ensure the accuracy or completeness of data provided by investors or other third parties. We do not make any representations as to the accuracy or completeness of the information contained on this website and undertake no obligation to update the information. Neither Secured Investment Corp. nor any of its affiliates are registered investment advisors or broker-dealers and do not provide investment advice. No communication from Secured Investment Corp. or its affiliates through this website or any other materials is intended to be or should be construed as investment, tax, financial, accounting or legal advice.
THERE IS NO ASSURANCE THAT ANY STRATEGY WILL SUCCEED OR THAT ANY PROGRAM WILL MEET ITS INVESTMENT OBJECTIVES.
Secured Investment High Yield Fund II, LLC is open to “accredited investors” only, through an offering made in accordance with Regulation D, Rule 506(c) of the Securities Act of 1933, as amended. In purchasing securities through a 506(c) offering, we are obligated to verify any participating investor’s status as an “accredited investor” in accordance with Rule 501 of Regulation D.
Circle of Wealth Fund III LLC has filed offering circulars and may make additional filings with the Securities and Exchange Commission covering its current offering of membership interests. Each investor should carefully consider the risk factors and other information discussed in the qualified offering circulars (including any amendments) before purchasing membership interests. The Offering Circular and other supporting documentation may be found at: https://www.sec.gov/cgi-bin/browse-edgar?CIK=1762825