Non-Recourse Real Estate Loans Explained
With so many alternative assets to choose from when self-directed investing, an account holder can build a diversified portfolio and grow their retirement savings over the long term.
When selecting the best assets for a portfolio, real estate is a common option. Real estate can be an expensive investment; many would-be investors may not have the upfront funds in their IRA.
Non-recourse loans provide a way to purchase real estate with your IRA even if you don’t have the funds up-front. Non-recourse loans can be beneficial for investors looking to get into high price-tag investments. If you are considering a non-recourse loan, here are a few benefits.
What is a non-recourse loan?
Before we talk about the benefits, let’s first define a non-recourse loan. This is a type of loan that you can take out using your IRA to purchase real estate investments. Often facilitated by a private lender, these loans are owned by your IRA, are subject to UDFI (Unrelated debt-financed income), and must be repaid through your IRA. You should shop carefully for a non-recourse loan. And know that not many banks offer them. If you can get one, they can help you finance your real estate investment. But, how can they benefit you?
1. You Are Not Personally Liable – Your IRA Is.
If you open a non-recourse loan, you will not own the loan. Your IRA will own it. Should anything happen over the life of the loan, you are not personally held liable for it. Also, though the loan is in your IRA’s name, your account will not experience repercussions either.
2. The Lender will Have No Recourse Against You or Your IRA Balance If You Default.
In the cause of a default, not only are you protected but so is your IRA. In addition to not suffering any financial backlash, the lender cannot take anything from you or your IRA. You are not obligated to pay out the loan or pay back the loan using any of your retirement assets.
3. These Loans Will Allow You to Purchase Real Estate If You Don’t have Enough Funds.
If you want to invest in real estate, but cannot afford it using your IRA, this is an alternative. You can use the loan to purchase property, and all payments to the loan will be made from your IRA. Keep in mind that you cannot use any of your personal funds to pay back the non-recourse loan. Again, this type of loan must be paid back using only your IRA.
4. Personal Credit Does Not Come Into Play When Applying for a Non-Recourse Loan.
As stated earlier, you do not personally own the non-recourse loan. The lender offering is through your IRA directly. They will not need to check your credit score, but they may need personal information from you and your spouse. While this can help those with less than perfect credit purchase real estate, the terms of the loan may be adjusted to fit your financial situation.
5. You Become the Account Manager for Your IRA’s Owned Property.
As the IRA owner, you become account manager of your IRA real estate. This puts you in charge of anything that needs to be done to the property. While you or any disqualified individual cannot perform any of the following services, you can decide who will. Account owners decide the tenants, plumbers, and maintenance workers that work on your property. You are in charge of you bringing in money for your IRA.
6. The Terms of Your Loan Will Vary Based on The Property.
Depending on the condition, repair requirements, and other circumstances, it may determine the terms of your loan. Terms are often negotiable; however, this is controlled by the lender. Your lender may be flexible and offer various financing options. Carefully consider which property you invest in so the terms can be in your favor.
7. In The Case Of A Default, The Lender Can Seize Only The Collateral.
No matter what happens, should you fail to pay back the loan, this is a borrower’s market. You will only lose the collateral and nothing more. Since the loan is for your IRA, your credit will not drop, and you will not lose any additional assets. You will, however, lose the property.
Performing Due Diligence
Real estate can be an expensive investment, but when done right, you can use your asset to build a solid nest egg. While borrowing may not be ideal, a non-recourse loan can not only get you the property you want, but it can help protect you and your IRA in the case of a default. Before investing in real estate, perform your due diligence. Research real estate investing and seek out financial counseling to determine if it is right for you. If you have any questions, contact a trusted Horizon Trust custodian today.