When buying property in a self-directed IRA, getting the right loan is key to making your IRA more profitable. If you have a self-directed IRA, you can use it to buy real estate in any form: residential, commercial, and even raw land. Another option is to buy raw land and build new construction through the self-directed IRA.
If you’re serious about retirement planning, it’s worth considering where the maximum earning potential exists. While most custodians traditionally preferred their investors to put their money in stocks, mutual funds, and bonds, many custodians today allow real estate and other unconventional alternative investments.
The real estate market is currently in a prime position to offer great returns on your investment. Low property prices are the main reason investors head straight for real estate transactions. You can buy land, buildings, and other real estate at very little cost and rent it out, with the rent adding significantly to the IRA balance.
You can buy raw land or distressed property by using an IRA loan. The IRA loan allows people to take advantage of their self-directed IRA to buy real estate, even if the IRA is not cash rich. An IRA loan also meets IRS rules regarding liability. According to the IRS, you cannot offer any IRA assets as collateral for a loan, except for real estate that is being purchased. However, there is no rule that prevents you from getting a loan against the property when you buy through a self-directed IRA. This type of loan, also commonly known as non-recourse financing, helps people finance their real estate projects without assuming personal responsibility for the payment of the debt.
Get a construction real estate loan
Before you can start applying for an IRA loan, you must have an IRA with at least 20-40% of the total construction and land costs of the real estate. Some lenders may insist that the amount be higher to ensure that you can repay the loan.
Before you approach the lender, you should know exactly how much the construction will cost. If you plan to build from scratch, you need to buy raw land. Next, you’ll need to consider the cost of the actual construction. You will also need to factor in additional costs, such as interest payments for non-recourse financing, having an architect design the house, etc.
Although IRA investments do not require ordinary income tax on earnings, you may want to discuss UBIT with an accountant or tax advisor.
Loans for All Types of Construction
An IRA construction loan is available for residential and commercial properties. Although IRS rules say you can’t buy residential property for personal use, you can rent it out and add the proceeds to the IRA. The same is true for commercial property.
You need to choose the right lender if you want the best IRA loan terms and rates. Most lenders are willing to offer up to 60% of the cost of a new construction property once it is complete. The borrower finances the remainder through their IRA savings. If careful planning is done prior to purchase, a properly executed real estate deal can greatly increase the balance of a self-directed IRA.
