IRA real estate investment loans are possible if you are careful and do everything the right way. IRS prohibited transactions state that can’t loan money to or buy money from, your IRA. They also state that you cannot use your account, in whole or in part, as security for a loan. This severely limits funding opportunities when it comes to obtaining financing for purchasing real estate investments for your IRA.
Purchasing real estate is expensive and most people do not have enough funds available to purchase property without some kind of outside financing. Your options are to partially invest in the real estate, obtain funding without involving your IRA account, or leveraging your IRA.
A leveraged IRA means finding a way to maximize your investment and returns. In terms of IRA and adhering to IRS regulations, this means that the funding can’t be based on the individual’s income or assets and the individual can’t be held responsible if the loan goes into default. The IRS states that individuals can use non-recourse loans in conjunction with a leveraged IRA to purchase real estate investments. A non-recourse loan is one where the property purchased is used as collateral to obtain the loan and the borrower is considered the IRA account, not the individual. In the event of default, the lender has the option to sell the property at auction or private sale to recoup loses. If the profit from selling the property doesn’t cover the outstanding balance on the loan, however, the lender has no recourse against the individual to recoup the loss.
IRA real estate investment loans in the form of non-recourse loans are available from banks but they can be difficult to obtain. Because they are a higher risk investment, the interest rates can be higher and most lenders want a substantial down payment. Different banks will also have different requirements before approving a non-recourse loan. It is a good idea to shop around and compare rates and requirements before deciding on this method for purchasing real estate investment properties for your IRA.