Patricia McCrystal
October 7th, 2015
Many real estate investors turn to self-directed IRAs to
fund their investments with tax-advantaged retirement savings. Self-directed
IRAs grant investors more freedom and control over their real estate
investments, as they allow account holders to purchase nearly any asset type
they desire to bring balance and diversity to their retirement portfolio
(excluding life insurance and collectibles, per IRS rules). Any IRA account
type can be self-directed, as long as you hold your IRA with a self-directed
IRA provider like New Direction IRA.
There are several strategies real estate investors can
utilize when investing their IRA funds. Investors are free to buy properties outright
with IRA cash if they have the funds to do so. However, real estate investors may
also consider purchasing two or three properties using leverage (a non-recourse
loan) for the same amount of cash it would otherwise take to purchase a single
property. Multiple properties can potentially award IRA real estate investors
with more cash flow.
In order for a self-directed IRA to acquire a mortgage, the
account holder must take out a non-recourse loan with their IRA. IRA
non-recourse loans are not reported on investor’s credit records, because the
loan is in the name of the IRA rather than the IRA account holder. A non-recourse
loan stands to offer a great incentive for real estate investors who are
interested in financing a multi-property portfolio. Keep in mind, with
non-recourse financing, the bank’s only recourse is the property itself.
Reasons IRA Real Estate
investors may use leverage to purchase multiple properties:
- After expenses, an investor can potentially accrue more net profits on a monthly basis with three properties rather than just one.
- The tenants of each property will be paying your mortgage through rent payments, in addition to building equity for you.
- You can use your properties’ cash flow to reduce your debt and therefore accelerate the payoff of your IRA’s loan.
- If the property value of each investment appreciates, you can gain three times the income flow that you would with only one property.
- If you are able to pay off any of your mortgage loans completely, your monthly cash flow in retirement increases dramatically.
Reasons that may hinder a real estate investor from
debt-leveraging multiple properties with their IRA funds include the desire to
avoid debt, the desire to avoid UBIT (Unrelated Business Income Tax ), and the hassle of managing three rental
properties. Investors may also worry that there is a bigger chance of one of
their tenants damaging their IRA properties and costing the investor money.
Exercising due diligence when finding potential renters can help investors avoid
long term damage or eviction costs.
Successful real estate investors are always conscious of current
and projected market trends before making investments. When considering
purchasing multiple properties, a real estate investor may be concerned about
losing money if the real estate market turns, and they can no longer afford
their mortgage payments.
One possible strategy for avoiding market woes: When
considered a mortgage with your IRA, create a plan to pay off your mortgage
before you retire. How large of a down payment can you afford? How quickly can
you pay down the mortgage every month or year? If you can come up with logical
solutions to these questions, you can potentially wind up with more cash flow
from your real estate investments, sending more tax-advantaged savings back
into your IRA and making retirement that much easier! Feel free to contact NewDirection IRA toll free at 877-742-1270 to learn more about leveraging your IRA
real estate investments, and as always, happy investing!
