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How to Invest in Real Estate Using Your IRA

The ability to purchase investor property with your IRA has been in existence for many years. However, most real estate investors believed that they had to buy their investment property entirely with cash. They did not know that they could obtain an investor loan to help them with their purchase.

For those few who have heard they could get a loan, they have not known how to go about getting one. Further, for those real estate investors who have known they could get an investor loan, they have not known who to call on for help to obtain this special financing.

Before you can learn how to invest your IRA funds into investment property, you need to know the reason it's so difficult to do. The IRS does not permit the IRA owner to personally guarantee a mortgage for the purchase of property with their IRA. The majority of banks that issue mortgages require a personal guarantee for those investor loans.

Under normal circumstances, if the mortgagee (property owner) cannot or does not meet the payment requirements of the mortgage, the bank can use whatever legal means at its disposal to obtain payment from the mortgagee. The bank can sue the property owner and obtain that individual's personal assets to satisfy the mortgage debt.

As a result most banks will NOT lend money to purchase real estate through an IRA, because they cannot obtain that personal guarantee from the borrower. The only "recourse" the bank has to satisfy the mortgage debt incurred by the IRA is the property and the rental revenue that the property generates. Therefore, the IRA owner must obtain what is called a NON-RECOURSE loan in order to purchase investment property if they cannot pay the entire purchase price in cash.

That brings us to the "HOW TO" of making an investment in property with your IRA. The first step in this process is to establish your IRA account with a custodian/trust type company that specializes in handling an individual's IRA investment in real estate.

This is necessary for several reasons. Again, the IRS does not permit the IRA owner to handle any financial transactions in respect to the ownership of the investment property. The custodial company must pay all bills and receive all rents associated with the
ownership of this real estate.

Once you have established this account, the time is right to find a property worthy of your investment. In order to identify the right investment property, there are a few important things for you to know.

First, you'll need to have enough money in your IRA to make a minimum down payment of 30-35%. Depending upon the type of property and the lender, you may need to make a greater down payment.

Second, you need to find an investment property that's either already rented or will be easily rentable once you own it. The property being purchased by your IRA must be an investment property. It cannot be a primary or secondary home.

The third thing you need to keep in mind is that the rent the property will generate should be 1.2 times greater than the mortgage payment required by the loan. If you find that your investment property is not generating enough rent to exceed your mortgage payment by 20%, then make sure that your IRA has sufficient assets to cover any deficit for a prolonged period of time. This will include other monetary items such as property taxes, insurance and homeowner association dues. The lender will look closely at the IRA's assets as a pre-requisite to obtaining the mortgage.

Once you have identified an investment property to purchase, then you need to call a mortgage broker who knows how to help you structure a non-recourse loan with a non-recourse lender. As previously mentioned, there are very few non-recourse lenders.

After many months of research, I have found several lenders that will establish a non-recourse mortgage for an IRA owner. It is important to have the right mortgage broker for this kind of transaction so they can make sure that you have all the necessary qualifications to get the loan approved.

Once you have consulted with a mortgage broker who is well versed in this subject, there are several items that will be needed to complete a loan package for the lender. All lenders require a financial statement and credit report. You will also need to provide a copy of your agreement with the custodial company that is managing your IRA account and a recent statement of your IRA's assets. Some lenders require 2 years of tax returns even though you're not personally guaranteeing the loan.

This is why it is best to consult with a mortgage expert who knows about non-recourse loans and their specific requirements. If you want to obtain the subject investment property that you're in contract to purchase, it is best that you know ahead of time what lender you�re going to use and what they�re going to require. This will protect you against any surprises that might result in being turned down for your non-recourse loan.

In summary, it is in your best interest to contact a mortgage expert who is knowledgeable about the "NON-RECOURSE" loan so that you can be better assured that you and your IRA will qualify for it.

This will put the odds in your favor so you can successfully complete your IRA purchase transaction.

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