Non Recourse Fix and Flip Loans

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
• Mortgages
• 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.

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.
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.

Tax Benefits

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.

Case Study

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!