IRA Lending™ Blog
Discover a new way to maximize your profits with real estate.
Learn how to buy real estate with your IRA and how North American
Savings Bank ("NASB") can help.
As the only nationwide lender specializing in IRA Lending™, NASB focuses on providing investors with non-recourse loans for their IRAs.
How does this benefit you?
You can obtain a loan to buy real estate with your IRA, and ultimately
maximize your profits.
Your investment options are expanded outside the traditional stock market.
You earn the power of leverage with tax-deferred gains.
Start earning great returns today!
Next steps - learn how to move forward and make your first
real estate purchase in an IRA
Learn about 'Prohibited Transactions' to avoid when purchasing real estate
in an IRA
Learn how to take title in your IRA, disburse funds for expenses, and collect rent from your tenants
Learn how to locate a great rental property for your IRA
Learn how to calculate the cash flow for an IRA Real Estate Purchase
Learn how to qualify for an IRA Non-Recourse Loan
Read our recent Press Release titled Banker's Plan to Rescue Dwindling IRAs by Helping Investors Buy Real Estate
Learn about IRA Non-Recourse Loans
Learn how to buy real estate in a Self-Directed IRA
Learn how to set up a Self-Directed IRA
Watch our first video on how to purchase real estate with an IRA
Read our FAQ page to learn more about IRA Non-Recourse Loans
Listen to Matt Allen on the "Fox 1270 In the Morning" Radio Show!
Listen to Matt Allen on the Michael Dresser Show!
Leveraging IRAs with Mortgages
Learn How to Buy Real Estate for your IRA with a Non-Recourse Loan
Buy Foreclosures in your IRA with a Non-Recourse Loan
Boomers Discover a New Way to Invest in Real Estate
Refinance a Property You Already Own in Your IRA
"Banking On It" (LA Times article about Self-Directed Investing)
What Can I Buy in My Self-Directed IRA?
Buy Real Estate in an LLC with a Non-Recourse Loan
Who Qualifies for an IRA Non-Recourse Loan?
Three Year Anniversary of NASB Non-Recourse Loans
Non-Recourse Loan - Why Do I Need One with a Self-Directed IRA
Wednesday, March 7, 2012
IRAs Get Sexier
Disillusioned With Returns on Conventional Investments, IRA Owners Are Turning to Private Equity, Condominiums, Farmland and Other Alternatives. Here's What You Need to Know
By Laura Saunders
Presidential candidate Mitt Romney has gotten lots of attention for holding as much as $100 million in his individual retirement account.
Less well known is that the account is also chockablock with complex private partnerships rather than the traditional stocks, bonds and mutual funds that make up most IRAs.
Koa trees in Hawaii, used for furniture and musical instruments, are among the assets allowed in IRAs.
Following a decade of market turmoil, Mr. Romney isn't the only one wise to the fact that IRA rules allow enormous latitude in choosing investments.
"This topic used to be boring tax talk," says Kelly Rodriques, chief executive of Pensco Trust, a San Francisco firm that has helped venture capitalists and private-equity investors put private shares in IRAs. "Now it's lively cocktail-party talk."
For shrewd investors, alternative-asset IRAs can be a boon, allowing them to diversify their portfolios far beyond everyday holdings while deferring income taxes for years.
The ability to put unusual assets in an IRA doesn't mean it always is a good idea, of course. Few people have the expertise of Mitt Romney, and individual investors are notorious for letting hope trump skepticism and buying the wrong asset at the wrong time. What's more, fees to maintain alternative-asset IRA accounts can be high, and cases of fraud involving such IRAs, while rare, are on the rise, regulators say.
Although IRAs have been allowed to hold a variety of assets since Congress first authorized them in 1974, most investors opted for conventional stocks and bonds during the bull markets of the 1980s and '90s. They still do: The Retirement Industry Trust Association, a group of alternative-asset IRA providers, estimates that such accounts make up just 2% to 5% of the $4.6 trillion held in IRAs overall.
Still, "virtually all of our members have experienced explosive growth in the last three years," says Mary Mohr, spokeswoman for RITA, which began tracking assets last year.
Millennium Trust, an alternative-asset IRA provider in Oak Brook, Ill., says assets have doubled since 2009, to $5 billion. Pensco says its assets have doubled to $4 billion since 2008. Equity Trust, based in Elyria, Ohio, declined to provide asset figures, but it says purchases of real estate in its IRAs have increased 90% since 2008.
The Internal Revenue Service has stringent rules affecting IRA management, but a few assets are off limits. They consist mainly of life insurance, subchapter S company stock and collectibles such as wine, antiques, art, stamps and some coins. (For a list, see IRS Publication 590.)
Mr. Romney's portfolio seems almost tame compared with the exotic assets currently held in IRAs by some investors, according to interviews with executives at five firms. Among them: hedge funds, untraded securities, foreign-exchange contracts, precious-metal bullion, tax liens, natural-gas wells, private mortgages and other secured debt, movie partnerships, cattle, fishing rights and even investments in bull semen.
Angela Thomson, a 54-year-old certified financial planner in Lincoln, R.I., recently used IRA assets to bid on a second foreclosed condo in her area. She used cash in her IRA to buy the first for $105,000, far below the previous sale price of $180,000.
During the housing boom, some advisers warned against buying property in IRAs, but now it can make sense. "I would never have done this a few years ago," Ms. Thomson says, "but prices are distressed."
Because she doesn't plan to take payouts for at least a decade, she is willing to put as much as 40% into real estate now, even though it is illiquid. She says she knows her local market well, her first condo rented right away, and the return has been about 8% a year after management fees.
The rent payments go straight to her IRA, untaxed, as will any profits if Ms. Thomson sells. The assets grow tax-free within the IRA until withdrawal. In Roth IRAs, which also are allowed to hold alternative assets, withdrawals can also be tax-free.
Gary Hutto, a 48-year-old financial planner in Tustin, Calif., has grander dreams for his alternative investment. He has put about 20% of his IRA assets into Koa trees in Hawaii. Koa is an exotic hardwood prized for use in furniture and musical instruments such as guitars.
Mr. Hutto says he learned about the investment from one of his clients. With no payout for eight years, it requires extreme patience, but he is hoping for a return of more than $250,000 on each $7,500 investment for a lot of 100 trees over the deals' 25-year life cycle—an average annual return of about 15%. "Koa wood only grows in Hawaii, and at certain elevation," he says.
Some investors have run into trouble with alternative-asset IRAs. Last year the SEC and some state securities regulators warned that they have become vehicles for Ponzi schemes and other frauds.
In one ongoing case, the SEC alleged in a civil suit in an Albuquerque, N.M., federal court that a firm called United American Ventures sold fraudulent convertible bonds to some IRA owners that purported to pay an annualized interest rate of 25%, plus a 10% upfront "interest bonus." The SEC also alleged that UAV claimed to be a venture-capital fund investing in pharmaceutical or medical technologies.
Eric Hollowell, the new president of United American Ventures, disputes the allegations. "Our doctors created real economic value," he says. "In support of us, our investors have petitioned for the disbarment of the SEC lawyers."
IRA custodians say they work with regulators to stymie fraud by, among other things, rejecting assets from unregistered brokers who approach them with money from clients.
The bottom line: Alternative-asset IRAs can work well, but investors who want to go this route have plenty of homework in store. Here is a to-do list.
Brace yourself for higher fees. IRAs invested in conventional assets often cost nothing to maintain beyond investment fees, but that is far from true for alternative-asset accounts. Fee schedules vary: Pensco has a base charge of $395 plus additional fees for certain assets. Mr. Rodriques says the firm's average account of $180,000 incurs average annual fees of $700. Providers often charge extra to exit an account.
Also be prepared to pay for specialized legal advice, which the IRA provider may require before accepting certain assets.
Research providers carefully. There are two general categories of providers. Some are state-regulated banks or trust companies, such as Pensco Trust, Millennium Trust and Equity Trust. "Third-party" administrators, such as Guidant Financial and Entrust Group, maintain records but place accounts at a different institution. Entrust, based in Oakland, Calif., says its lead custodians are Provident Trust in Las Vegas and Kingdom Trust in Murray, Ky.
Segregate alternative assets. IRS rules allow owners to split one IRA into two or more smaller accounts, each distinct from the others, with no tax consequences. Ami Givon, a lawyer at GCA Law Partners in San Francisco, suggests putting each class of alternative asset in its own IRA so that if a problem causes it to be taxable, the other accounts can remain intact.
Mandatory payouts on regular IRAs, which begin at age 70½, don't have to be taken proportionally from each account.
Bone up on tax rules. While a variety of assets are allowed in IRAs, there are strict rules on how investors manage those assets. Any "prohibited transaction" can cause the account to dissolve and become fully taxable, and the owner will often owe a 10% penalty if he or she is younger than 59½.
The IRS defines prohibited transactions as any improper use of your account by you or any disqualified person. Disqualified persons include the owner, his fiduciary, a member of his family, or any entity such as a corporation, partnership, trust or estate that is at least 50% controlled by the owner or a disqualified person.
What's improper behavior? It often boils down to "self-dealing." That includes, but isn't limited to, buying, selling or leasing an asset to or from your IRA; borrowing or lending money to or from your IRA; and personal use of IRA property.
Here are examples supplied by Mr. Givon: cutting a Christmas tree from a farm in your IRA for personal use; lending your IRA assets to your child to buy a house; selling your medical practice or other business to your IRA; or staying in a vacation timeshare owned by your IRA.
He adds that owners of rental property held in IRAs shouldn't perform maintenance like painting or make improvements like redoing a kitchen themselves. The value of the labor could be considered an excess contribution to the account, which incurs a penalty.
If an IRA owns a business or borrows money, things get more complex. Debt is allowed in an IRA so long as the loan isn't guaranteed by a disqualified person, but the IRA may then owe "unrelated business-income tax" on earnings. With certain assets, one end-run around this can be to put the debt in an offshore corporation that is then owned by the IRA.
Despite the prohibitions, some rules are flexible. Two IRA owners, such as a husband and wife, could buy an asset such as a rental property together, and split the ownership according to the amount each put up. Payouts from accounts can also be taken "in kind," meaning the account could distribute an acre of land or a cow rather than having to sell the asset and pay out cash. Applicable taxes would still be owed, however.
Expect more paperwork—and possible snafus. Don't underestimate the red tape required to place and maintain an alternative asset in an IRA. Simply to put one private placement in an account can mean sending the custodian 10 or more documents, including the articles of organization, investor agreements and a certificate from the secretary of state. The custodian keeps these on file.
All IRAs must be valued once a year for the IRS, and elaborate steps are sometimes necessary to avoid prohibited transactions. Ms. Thomson, for instance, mails every rent check she receives for her IRA's condo across the country to the custodian. Depositing it into her own account and transferring the money later might kill the IRA.
Alternative-asset IRA management is a service-intensive business, and rapid expansion in recent years has resulted in delays in processing customer requests. The firms say they are working to improve their systems.
Friday, September 23, 2011
This video discusses ways you can maintain your momentum and move forward with your first rental property in your
Video 10: Next steps - how to move forward and make your first real estate purchase in an IRA!
Friday, September 23, 2011
The IRS allows you to purchase real estate in an IRA but there are some rules you need to follow.
This video discusses the prohibited transactions put in place by the IRS.
Video 9: Learn about 'Prohibited Transactions' to avoid when purchasing real estate in an IRA.
Friday, September 23, 2011
In this video, we discuss the correct way to take title in your IRA, how your IRA should disburse funds for expenses,
and how to collect rent from your tenants.
Video 8: How do I take title in my Self-Directed IRA, make mortgage payments, and collect rent?
Friday, September 23, 2011
Many people like the idea of purchasing real estate in their IRA but don't know where to search for that first rental property. So in this brief video, we offer some tips on how you can locate a great rental property to purchase in
your Self-Directed IRA.
Video 7: How to locate a great rental property for your IRA!
Tuesday, August 9, 2011
Learn how to calculate the cash flow for an IRA Real Estate Purchase.
Video 6: How do I calculate the cash flow (DSCR) for my IRA Real Estate Purchase?
Tuesday, July 12, 2011
Learn how to qualify for an IRA Non-Recourse Loan.
Video 5: How do you qualify for an IRA Non-Recourse Loan?
Friday, June 10, 2011
Read our recent Press Release titled Banker's Plan to Rescue Dwindling IRAs by Helping Investors Buy Real Estate
Friday, April 22, 2011
Learn how to buy real estate in a Self-Directed IRA.
Video 3: How can I purchase real estate in a Self-Directed IRA?
Tuesday, November 30, 2010
Matt Allen was a guest on the "Fox 1270 In The Morning" radio show in Reno, NV on November 16, 2010. Matt was interviewed about his new book "Leverage Your IRA" and discussed buying real estate in an IRA. Click on the link below to listen to the interview.
Listen to Matt Allen on the Fox 1270 In the Morning Radio Show!
Wednesday, November 3, 2010
Matt Allen was a guest on the "Dresser After Dark" radio show with Michael Dresser on October 12, 2010. Michael interviewed Matt about his new book "Leverage Your IRA" and discussed buying real estate in an IRA. Click on the link below to listen to the interview.
Leveraging IRAs with mortgages
Retirement Savers Can Take Loans to Buy Rental Property
By Chris Pummer April 2, 2009, 6:36 p.m. EDT
Third of three parts
SAN FRANCISCO (MarketWatch) -- So you'd like to take advantage of depressed housing prices and buy a rental property, but you lack a down payment or can't meet lending criteria for investment properties? Consider using your IRA assets -- even if the purchase price exceeds their reach.
Little-known IRS rules allow retirement savers to take "nonrecourse" loans against IRAs and leverage their savings as a down payment to buy investment real estate. With 30% to 40% down, IRA borrowers can get loans on a condo or townhouse, a single-family home, a multiunit apartment building and even commercial property -- so long as the rental income will yield positive cash flow.
While the market for these mortgages has been miniscule -- recognized leader North American Savings Bank /quotes/comstock/15*!nasb/quotes/nls/nasb (NASB 23.65, -0.05, -0.20%) has closed about 850 residential IRA loans since 2005 -- demand is expected to mushroom in coming years, especially among baby boomers seeking to diversify out of stocks and into income-producing investments.
Eager to lend
Unlike cash-hoarding banks today, lenders in the IRA nonrecourse loan market are champing at the bit to extend mortgages. The reasons:
- By putting up coveted retirement savings, IRA borrowers have valuable "skin in the game" and are less likely to default on their loans
- Most IRA-backed loans made today are on foreclosed properties bought at steeply marked-down prices rather than the risky hyperinflated prices of three years ago
- The minimum 30% down payments give lenders a considerable downside allowance in the event they must take back a property and resell it
Michael McNair, trust officer for self-directed IRA custodial firm IRA Services Trust, suggests clients initially buy property outright with cash if possible to "keep things simple." Yet he recognizes the opportunity in leveraging IRA funds now given fire-sale prices and historically low borrowing costs. Read six reasons why now is a good time to buy real estate with your IRA.
"If you have a quarter-million dollars, you could buy one property outright, or buy multiple properties putting 30% down on each one," McNair says. "The math in leveraging can make good sense."
Adds Matt Allen, North American Savings' director of IRA lending: "This is a niche product that a lot of people could benefit from right now." Read more on owning and managing property in an IRA.
Ins and outs
A nonrecourse loan means the lender can only recoup the pledged collateral in the event of default -- in this case the piece of real estate -- and can't go after an individual's personal assets as with a traditional mortgage to cover any shortfall on the loan balance.
For that reason, rates on nonrecourse IRA loans tend to be slightly higher than those on owner-occupied properties, but are roughly on par with typical investor mortgage rates.
Grandview, Mo.-based NASB is considered the nationwide leader in the nonrecourse IRA mortgage market. Founded in 1927, the bank will loan up to 60% of the purchase price on condominiums and townhouses, 70% for one- to four-unit residences and 65% on five- to 12-unit buildings.
Because a property's appraised value and cash flow are its key concerns, NASB doesn't care about employment status nor ask for W2s, pay stubs, tax returns and other personal financial data typically required by mortgage lenders.
A borrower's personal credit rating and debt-to-income ratios also are of little consequence, says Allen, who is co-authoring a forthcoming book "Leverage Your IRA."
The overriding factors are whether the property appraises for the sale price and will produce enough income to cover mortgage payments, property taxes, insurance and related costs.
"We're not lending to the person so we don't get personal," says Roger St. Pierre, senior vice president of First Western Federal Savings Bank, which entered the IRA loan market last year with similar underwriting practices. "Qualifying is very simple. It's all about common sense, which unfortunately left the banking industry 15 years ago."
To ensure the IRA assets can cover mortgage payments during extended vacancy and unforeseen major repairs, NASB and First Western Federal both require that 10% of the loan value remains in the IRA at closing as a reserve, along with enough funds to cover closing costs.
"Real estate needs care and feeding and just because you have positive cash flow, that doesn't mean you can build up enough income in your account in three to six months to pay for a new roof," St. Pierre says. "It's for their own protection as well as ours that we require the 10%; they can keep it in a money-market fund or in stock funds within the IRA, but they must have that set aside."
NASB offers two types of nonrecourse IRA loans, a 30-year-fixed at 7.25% and a five-year ARM at 6.5%, with a 1.5% origination fee. For anyone who might hold the property beyond five years, the minimal added cost of the fixed loan is worth absorbing. The ARM is more appropriate for investors who might resell the property within five years should the housing market recover, perhaps after doing some major remodeling or building an addition to increase its value and marketability.
"The majority of borrowers are taking the 30-year-fixed loans just to be safe," Allen says.
As a newcomer to the market, First Western Federal's rates are higher and its loan durations shorter than NASB's. It offers a one-year ARM at 7.25% and a three-year ARM at 7.75% with a 2% origination fee. Like NASB, First Western holds the loans it originates.
"We've been a portfolio lender for 30 years making loans the old-fashion way, with 30% down on nonconforming deals like 50-acre pieces of land, farms, ranches and lake lots that the secondary market doesn't want," St. Pierre says. "There's going to be a good-sized market for these loans, certainly more business than one bank (NASB) can do, so we realized why shouldn't we get involved in this business given our lending style?"
Risk for lenders
Extending loans without a personal guarantee doesn't pose much risk given the size of the down payments, St. Pierre says, and a borrower has a good reason not to take on considerable risk themselves.
"A person's retirement plan is sacred -- that's how people expect to put food on the table and gas in the car in 20 or 30 years," he says. "They're not going to take these investments lightly because if that money's lost, they're going to be working many extra years. Our interests are really aligned; they want to be safe with their investment and so do we."
And with housing prices down 15% to 30% in most markets, there's far less downside risk for lenders than in the past, St. Pierre says. "I can't tell you where the bottom is, but we're a lot closer to it than we were three years ago."
NASB and First Western Federal both will not loan on properties that need more than cosmetic fixes because they want to be sure the property is rentable at the time of closing. Private-capital, nonrecourse lenders that can be found through an Internet search may do so, but their rates typically run 10% and higher and may require four to five points -- a point is 1% of loan value -- up front.
Lenders tend to have tighter underwriting requirements on condos -- and may require up to 50% down -- because condo values are more volatile than single-family homes and homeowner-association fees reduce cash flow.
One issue to account for when taking a mortgage on IRA-owned property is the requirement to pay "unrelated business income tax," or UBIT.
In any year the IRA-owned real estate generates taxable income -- i.e. income that exceeds expenses -- the IRA must pay UBIT on the percentage of taxable income attributed to the leverage, says Eric Wikstrom, a certified public account and financial planner, and founder of Seattle-based Integrated Wealth Strategies, which specializes in self-directed IRAs.
For example, if an IRA accountholder earned $10,000 in annual income on a 50% mortgaged property, $5,000 would be subject to UBIT, Wikstrom says. Factoring in a $1,000 allowable deduction, $4,000 would be subject to UBIT, which at trust tax rates would be $780.
"If you made that real-estate investment with discretionary funds and generated the same $10,000 of taxable income, you'd owe federal and state income tax at your marginal bracket, which would likely range from 25% to 40% -- or $2,500 to $4,000," Wikstrom said.
"Would you rather pay a UBIT tax of $780 or income taxes four to six times higher?" Wikstrom says. "Having higher taxable income on federal and state tax returns also can reduce the benefit of itemized deductions and personal exemptions."
Leveraged property in an IRA also qualifies for deductions for depreciation, mortgage interest and real-estate taxes in computing UBIT. And contrary to what many accountants only fleetingly familiar with self-directed IRAs will tell you, Wikstrom says the after-tax return on buying, renting and selling a property inside an IRA and then withdrawing funds is better than buying with nonretirement funds, even with depreciation allowances and tax deductions.
"At the end of the day, you'll ultimately keep more of the income and gain working for you as opposed to paying immediate taxes on that income and gain if that investment is owned with discretionary funds," Wikstrom says.
Cash flow vs. future capital gains
The key question for borrowers is whether they want to keep their loan amount to a minimum to reap the most current income, which they can direct into stocks, mutual funds or money market accounts. The alternative: Sacrifice cash flow now to leverage into a more expensive property in the hope it regains significant value for an eventual resale.
The first strategy means more money in the bank, where the latter entails gambling on the time frame and scope of a housing recovery when it ultimately comes.
Investors who choose to buy a property outright can take out a loan later of up to 70% on its value and use the proceeds to buy another property or as a down payment on another mortgaged purchase. That way, they can gain experience with a single property and then decide if they want to take a bigger leap and be a landlord on multiple properties.
Chris Pummer is a former senior editor for MarketWatch and Bloomberg News and a reporter for such papers as the Los Angeles Times and San Jose Mercury News.
Sunday, March 02, 2008
All your IRA money is in mutual funds and you'd like to diversify. One way is to buy raw land, a house or a building -- even your retirement home.
By Adriane G. Berg
There it is, the retirement home of your dreams. The trouble is that you're at least a dozen or more years from retirement and most of your money is tied up in your IRA.
Too bad, because by the time you're ready to sell your current home, that oceanfront beauty could be way out of reach.
If only you could access some of that IRA money without paying a penalty. If only you could rent the space and sock away the income, tax-deferred. Until you retire and enjoy it yourself.
Maybe it's commercial space or raw land
Or how about this scenario: Your landlord has just raised the rent on your office and a little building down the block has come up for sale.
What a dandy idea it would be to grab it and have a building of your own. Once again, your IRA is richer than you are. If only it could be your landlord.
Or maybe: Mabel and Norman always get such good deals on raw land, but this one is the best yet. An acre of waterfront property in Nicaragua, with two sweet little cottages for $45,000. If only that IRA could be tapped without all those penalties.
All your IRA money doesn't have to be in paper
Most investors believe they cannot use IRA money to buy real estate. Developed or undeveloped. They are wrong.
You can invest IRA money in a wide range of investments, including stocks, bonds, mutual funds, money market funds, saving certificates, U.S. Treasury securities, promissory notes secured by mortgages or deeds of trust, limited partnerships and real estate. That includes houses, condos, office buildings -- even if located in another country.
You cannot use IRA money to buy your own residence, or any other property in which you live. It has to be investment property. But when you retire, you can direct your IRA to turn it over to you as a distribution, at the current market value. Let's take a look at one example.
Out of the woods in Maine
Jack Wrigley found himself in a potentially disastrous position and was able to free himself using the real estate IRA.
Jack took early retirement from his corporation at age 55 and rolled his company pension plan money into an IRA worth nearly $250,000. The money was invested in stocks and bonds. He then set out to find his dream retirement home in Maine.
Within a few months, he found it. It was a bargain price, too, because the owner was required to sell within eight weeks. The contract Jack signed required a $25,000 down payment, to be forfeited if the closing didn't take place as scheduled. The balance of the purchase price was $150,000.
The problem hit. The investment condo in Boston that Jack was going to sell to raise the $150,000 fell victim to a soft market. No buyers. Jack was in danger not only of losing the retirement home of his dreams but his $25,000 down payment as well.
The real estate IRA to the rescue
The solution was the real estate IRA. Jack quickly opened a new self-directed IRA, rolled over the entire amount of his old IRA into it, then directed his trustee to make the purchase with the IRA becoming owner.
The closing took place, but that was only the beginning of Jack's IRA advantage. Since the closing, the IRA has made wonderful capital improvements in the Maine property and rented it out for a nice income, all tax-deferred. (It could even have been tax-free if the Roth IRA had been in existence at the time.)
Jack eventually sold his Boston condo and pocketed that profit. Now he is looking forward to his retirement, at which time the IRA will turn the property over to him as a distribution of the then market value.
How come no one knows?
Given the real estate boom of the 1980s, and its current resurgence, it's curious that so little is understood about the real estate IRA. Perhaps it's simply a lack of advertising.
IRA accounts invested in stocks, bonds and other financial paper are very lucrative for banks, mutual funds, insurance companies and brokerage houses.
These institutions will gladly act as your trustee (the middlemen in all IRAs) and sell you their wares. But they won't act as your trustee if you want to buy real estate with IRA money. Why? They're not in the real estate business.
So you're pretty much on your own investing in a real estate IRA. You have to find your own property, trustee and perhaps a management company, to collect rents and maintain the property.
House power' to the people
As a practical matter, you'll find very few professionals who can guide you through the entire process. Housepower has created a manual and audiotapes (priced around $130), but there is no one-stop shopping service you can use. Still, the do-it-yourself process is simple.
Contact an independent trustee for a self-directed IRA. You must find an institution that will open a self-directed IRA and follow your "self-directed" instructions to the letter. It's not as hard as you may think. Try Mid-Ohio Securities in Elyria, Ohio, or Sterling Trust in Waco, Texas.
Sign broker-to-broker papers that will transfer designated portions of your existing IRA to your self-directed IRA.
Find and buy the property using a real estate attorney to create the usual documents. Remember, you most likely will have to explain IRA ownership to him. The trustee will take title at your direction.
The rules governing real estate IRAs are strict:
- The house or property must remain in the trust until distribution at retirement.
- It must be treated like any other investment.
- You cannot manage the property. But your trustee can hire a third party -- a real estate broker, or local manager -- to collect rents and maintain or improve the property.
- All rental profits must be returned to the trustee.
You cannot mortgage your IRA
The biggest drawback of the real estate IRA is that it may lack the funds to make a substantial purchase. At present, it is controversial as to whether your IRA can take a mortgage, or if this would violate several IRS provisions and render all of your IRA assets taxable.
Our advice right now: Don't use IRA money as a down payment and take a mortgage for the balance due. You'll have trouble finding a lender who would go along with such an arrangement, anyway.
As the self-directed IRA becomes more popular, however, we hopefully will see clarification of the borrowing rules, and perhaps more lenders willing to make loans.
Meanwhile, a special technique allows you to participate in real estate ownership through your IRA, even if there is not enough in capital to pay for the entire parcel. That technique consists of buying fractional shares of property through the use of a general or limited partnership.
You can pool real estate IRAs for expensive properties
In this way, folks can get together and even buy all kinds of properties. Tenants in office buildings have pooled their IRAs to buy out their landlords.
In fact, a husband and wife can consolidate their IRAs to have more cash for a purchase, or leave them separate and form a partnership.
Remember, you can always get out of your investment. Just direct your trustee to sell your property or interest, and have the funds reinvested elsewhere.
Use the Roth and pay no tax at all later
Or if you are over 59 , you may withdraw any portion of the proceeds of sale after they are deposited in the IRA. The receipts from the sale must be returned to your IRA account if you are to escape taxation and possible penalties.
The Roth IRA is an ideal vehicle for those who are eligible. If the value of the real estate is expected to appreciate, it would be best to opt for a self-directed Roth IRA and pay the taxes over the next four years. In that way, so long as the real estate is not distributed for five years, it will incur no tax when the deed is transferred to you personally.
Assuming you and your spouse eventually live in it before selling, $500,000 of profit is completely tax-exempt.
Friday, November 30, 2007
By Kelly Greene
The Wall Street Journal Online
In the midst of the mortgage meltdown, some lenders are actually rooting for foreclosures: investors who make mortgage loans with their IRAs.
Through a little-known tool known as a self-directed individual retirement account, individuals can pursue a wide variety of investments, from real estate to businesses. Now, at least several thousand people are trying to goose their retirement savings by using self-directed IRAs to invest in mortgages, according to companies that promote the strategy.
Typically, IRA investors aren't looking to back 30-year conventional mortgages; more often, they make loans with terms lasting from three months to a few years to fixer-uppers, small-scale developers or families who are relocating and need a bridge loan between home sales. They normally find borrowers through an informal network of real-estate agents, mortgage brokers and other investors.
IRA owners pay an annual custodial fee and transaction fees, ranging from $50 to a few thousand dollars a year, depending on asset size and activity. They typically charge borrowers a rate of at least 10%. If the borrower defaults, the IRA can wind up owning the property at a deep discount, since these deals are typically structured with the property as collateral.
"I really don't trust the stock market right now, and by doing this I can get a great return secured by real estate," says Doug Blackwell, a Phoenix real-estate adviser who set up a self-directed IRA last month with $100,000 from other retirement savings so he can fund mortgages.
For investors, one risk in foreclosing on a house is racking up so many expenses -- from legal fees to repair bills -- that the IRA runs out of money. If that happens, the IRA owner faces a difficult choice: Get a loan, or close out your IRA and pay any taxes or penalties.
Still, some IRA lenders welcome foreclosures because they increase their potential returns. No one tracks IRA loan defaults, but experienced individual lenders say it has happened rarely -- though they are bracing for an uptick, given the shaky state of the housing market in many areas.
"You don't want them to pay you," says Charlie Adams, a Houston investor who has made about 20 mortgage loans through his and his mother's IRAs in the past 10 years, typically charging 15% interest for one-year loans. "What's the worst thing that can happen -- you wind up owning a house at 70% of its cost?" He lends no more than 70% of a property's value and charges interest-only payments. More conservative lenders will go no higher than 50%.
With the one foreclosure he's done, his mother had lent $40,000 to a renovator to refurbish a house worth $85,000. The borrower made 12 months of interest payments, then stopped, and did not make the balloon payment due. Mr. Adams foreclosed on the house, his mother's IRA spent $14,000 to finish fixing it up, and they sold it in three months for $85,000, he says, adding that he helped his mother's IRA increase in value to $140,000 from $50,000 in five years.
Other lenders try to avoid foreclosures. Dennis Galbraith, who also lives in Houston, makes short-term bridge loans with his IRA, for which he says he charges 12% to 15% interest, and takes what's called "first-lien position," meaning he's first in line to get his money back from the borrower. But he's had to restructure two loans in recent months because the borrowers' "exit strategy was initially to sell the house, and it didn't work because the buyer didn't get financing approval."
Mr. Galbraith extended the loan terms so the borrowers can rent out the properties for a year and pay him off "like a normal mortgage" with the rental income. "If I choose to foreclose, I could, but I'm personally willing to work with the borrowers," says Mr. Galbraith, who works for an energy company and moonlights as a real-estate agent.
Like Mr. Galbraith, many people lending their IRA assets are connected to the residential real-estate business. Others are people phasing out of corporate careers who learn about such lending through local clubs for real-estate investors. They say that they usually connect with borrowers through word of mouth.
The maximum loan rates that self-styled IRA lenders can charge are regulated by usury laws that vary from state to state. In California, for instance, interest rates are typically capped at 10%, says Hugh Bromma, chief executive of Entrust Group Inc. in Oakland, Calif., which administers self-directed IRAs.
Self-directed IRAs make up less than 2% of the overall $4.2 trillion IRA market, but they are increasing in popularity. And the handful of firms that handle such accounts are logging increased usage by self-styled mortgage lenders.
Two thousand of the 40,000 self-directed IRAs handled by Entrust are making real-estate loans, and the average account is valued at $250,000, says Mr. Bromma. The number of accounts with such activity has doubled each year since 2005.
The story is much the same at Pensco Trust Co. of San Francisco, where about $367 million of the $2.2 billion in IRA assets it has in its custody has been lent for real-estate deals.
Guidant Financial Group Inc. in Bellevue, Wash., sets up limited-liability companies through which IRA owners invest in accounts with an average value of $180,000. It says it has seen interest in lending, mainly for real estate, increase 20% in the past two months.
With a self-directed IRA, you can invest in things other than mutual funds, such as rental property, businesses or community-bank stock -- just as long as any profits go to the IRA and not your regular bank account. (You're also prohibited from using the property as a personal residence.)
Entrust charges IRA owners $250 a year to invest in one mortgage, or $2,000 a year for unlimited transactions. Setting up a Guidant account costs $130. IRA lenders also have to pay other mortgage loan costs, including escrow and closing fees. At least some of those costs, though, usually can be passed along to borrowers.
Another risk to investors is running afoul of the Internal Revenue Service's rules for IRAs. "You cannot take any kind of fee from your IRA for doing something inside your IRA, and if you have to start using money from other sources to bail out something happening with the loan inside the IRA, that's a big problem," says Natalie Choate, a Boston tax attorney. So it's important to make sure the IRA has enough money in it to pay any legal fees involved in foreclosure, or property taxes and insurance costs if you wind up owning a house for a while before you can sell it.
The IRA can borrow to pay those costs, Ms. Choate says, but doing so creates taxable income and complicates your tax return.
Don Baglien, a truck-stop manager in Roseburg, Ore., recently rolled over $100,000 from a former employer's 401(k) to a self-directed IRA because "I'm just too busy to follow the stock market closely and stay on top of it," he says. After attending a Guidant seminar, he set up an account and recently made a second-mortgage loan, with a two-year term and 20% interest, to a local pizza parlor in need of repair. So far, it's borrowed $40,000 for a new heating-and-air-conditioning system and roof, he says. The restaurant owner owes $900,000 on the building, appraised at $1.3 million, "so I definitely felt like there's some equity there.
"If he doesn't pay, I guess I'm going to be eating an awful lot of pizza," Mr. Baglien says. "Hopefully, they'll still have some beer left."
Thursday, October 18, 2007
Boomers discover powerful way to leverage their self-directed IRAs - borrow and buy real estate
Retired pilot fuels his IRA with a mortgage from North American Savings Bank
Like the millions of baby boomers retiring every year, when airline pilot Tom Ebenhack hung up his uniform he took control of his personal finances with a self-directed IRA. The difference? He rolled over his lump-sum retirement payment into an IRA investment he understands--real estate.
"Leverage is the whole benefit of real estate", says Ebenhack, who was surprised to discover he could borrow and buy property through his IRA with a special non-recourse loan from North American Savings Bank (NASB). In response to client requests, NASB created the nation's first non-recourse loans, or mortgages for IRAs. The loans are structured to meet the stringent IRS requirements for real estate purchases through self-directed retirement accounts, and NASB is the only lender to offer investors nationwide access to the product.
Leverage your retirement with IRA non-recourse loans
When proactive investors find out about the growth and tax advantages of investing their IRAs in real estate, they often ask:
· What organization is suppressing this information?
· Why didn't my CPA tell me I could invest my IRA in real estate?
· What's the catch? It seems too good to be true.
Matt Allen, Director of IRA Lending at NASB, says, "The catch is finding professionals who can help you make the real estate investment happen. At NASB, we're filling the gap by offering mortgages specifically for IRAs and by educating financial advisors to meet the demand." As America's leading IRA lender, NASB teams up with national self-directed IRA experts to teach investors and CPAs, attorneys and brokers the how-tos.
To learn more about IRA borrowing requirements, contact NASB at (866)735-6272 or ww.iralending.com.
About North American Savings Bank
Founded in 1927, Grandview, Missouri-based NASB is the only nationwide lender that specializes in IRA lending, including 30-year fixed and 5-year adjustable IRA mortgages. their dedicated IRA lending team typically processes and funds loans within 30 days. NASB maintains a network of IRA professionals, including attorneys, real estate brokers and custodians, to help clients invest their self-directed IRA accounts in real estate.
Thursday, August 30, 2007
Yes, you can refinance a property you currently own in your Self-Directed IRA with a non-recourse loan. NASB allows an IRA to take the equity out of the property and put liquid funds back into the IRA. This allows the account holder the opportunity to improve the property or purchase more assets in the Self-Directed IRA. NASB typically lends up to 70% of the original purchase price or 50% of the current value, whichever is less.
Please contact NASB at 1-866-735-6272 if you have questions about this loan option.
Monday, July 09, 2007
Banking on it
More IRA investors are taking control of their retirement funds -- and chasing their real estate dreams.
By Ann Brenoff, Times Staff Writer
June 24, 2007
If your retirement garden — specifically your individual retirement account or IRA — hasn't been growing fast enough to meet your future retirement needs, you might want to join a club of contrarians: those who have decided to take matters into their own hands. Literally.
Self-directed IRAs are billed as "putting the 'I' back in IRA." They let individuals determine what, when and where to invest their retirement money. And they are catching on — in no small part thanks to the stock market's volatility and the real estate market's recent riches.
Real estate has always been permitted in IRAs, but few people know about this option. Financial institutions — mutual funds, stock brokerages, banks — are typically where IRAs are held. But investments in other things, most notably real estate, are fully permissible under the Employee Retirement Income Security Act of 1974. It prohibits retirement plans from investing in just two types of investments — life insurance contracts and collectibles. Everything else is fair game.
But ERISA or no, the other thing standing in your way may be your employer. If your IRA is held in a company plan through your job, the plan's guidelines may specify what type of investments can be made — and real estate is rarely among them. If this is the case, establishing a self-directed IRA isn't an option until you and your employer part ways. Once you leave, no matter the reason, you can roll over the funds in your IRA and 401(k) to a self-directed IRA.
It is estimated that only about 4% of America's retirement funds are held in nontraditional accounts, including IRAs invested in real estate. But the trend, experts agree, is toward more money being funneled into these little-known, little-used, self-directed IRAs.
Although investors use self-directed IRAs for a variety of investments, among nontraditional accounts, real estate is by far the most popular.
It certainly was the motivation for Anthony Moreno, 56, of Oceanside, Calif., to establish his self-directed IRA.
Moreno retired in July 2005 after working more than 24 years as a nuclear computer technician at San Onofre Nuclear Generating Station. When he left Southern California Edison's employment, he initially left his pension and 401(k) with the company — primarily because he didn't know what else to do with it, he said. But concerns about a low rate of return and a lifelong desire to own international real estate led him to research self-directed IRAs with the idea of putting his money into real estate. Opening one simply made sense for him, he said.
Now Moreno is in escrow on a pristine 68-acre private island 300 yards off of Roatán Island in the Caribbean Honduras. It was listed at $850,000, and he plans to develop a day resort on it, ferrying cruise-ship passengers by private speedboat to his island. Carnival Cruise Line is building a $50-million terminal at Roatán Island that will be able to accommodate two mega-ships and 7,000 passengers a day, and Moreno plans to tap into this burgeoning tourist market.
Moreno's self-directed IRA was set up by Guidant Financial Group, which specializes in facilitating real estate investments using an IRA.
"I don't see it as gambling," Moreno said of investing his retirement funds in this venture, although he acknowledges that "conventional thinking would probably view this as very risky for someone of my age" and that "there are many 'safer' investments which I could have chosen." But, he added, none of those other investments had "the potential for making my dreams come true."
"I don't know of anybody who ever realized a dream by allowing their fears to prevent them from giving it their best shot. Regardless of the outcome, I will never regret going for my dream. If I hadn't tried, I would have always wondered: What might have been?"
As romantic as the idea of buying your own island sounds, many caution that real estate purchases made through self-directed IRAs aren't the answer to everyone's investment goals. Experts, such as Jeff Nabler of the IRA Assn. of America, strongly urge people to consult a professional advisor before moving their money into one.
For one thing, the tax laws concerning self-directed IRAs are complicated — and likely beyond a layman's interpretation. Mistakes can be costly; early withdrawal penalties may be imposed if funds are misused.
The Internal Revenue Code 4975 defines what are prohibited transactions for IRAs, said David Nilssen, chief executive of Guidant Financial Group, a Washington-based company that he says is rolling over about 200 accounts each month. Basically, any investment the IRA participates in must be for the exclusive benefit of the IRA, Nilssen said.
For instance, you can't use your IRA to buy a home for your mother to rent because there might be a conflict of interest to act in the best interest of the IRA (eviction) should Mom fail to make the rent payments.
For the same "exclusive-benefit" reason, self-directed IRAs cannot be used to purchase a principal residence or a vacation home. They can be used to buy income property, such as land or an apartment building. The title to the property would be held by a custodian, who acts as a trustee for the account and does not offer investment advice but functions essentially as a conduit for your wishes as they relate to buying and selling. The custodian would collect rent checks, pay the mortgage and taxes and handle the other financial aspects of your ownership — for a fee.
The fees vary, and investors are advised to check them carefully and do some price-comparison shopping before moving IRA money from a traditional fund to a self-directed one.
In the last seven years, Guidant's Nilssen said, the self-directed IRA industry has "exploded." Before 2000, "investors couldn't justify leaving the stock market because it was performing too well," Nilssen said. "The industry has more than doubled since that time."
Self-directed IRAs can produce great returns, Nilssen said, but he too cautioned that there are specific guidelines an investor must adhere to. "This is why we recommend that people not try to structure these investments themselves without the help of a qualified professional."
Friday, July 06, 2007
You can buy almost anything with your Self-Directed IRA. The options are unlimited...you can buy real estate, cattle, start up your own business, and offshore property. There a 3 things the IRS won't allow in a Self-Directed IRA:
1. Life Insurance
2. Collectibles such as cars, stamps, and furniture.
3. Stock in a "S" Corporation
That's it! Everything else is acceptable in a Self-Directed IRA.
NASB focuses on real estate in an IRA. We provide non-recourse loans for single family homes, 2-4 units, condos, townhomes, and multi-family units (5 +). Please contact NASB at (866)-735-6272 for more information about non-recourse loans and how you can use leverage to bolster your gains.
Monday, June 04, 2007
Many investors prefer to purchase real estate in a LLC rather than their Self-Directed IRA because it allows for more flexibilty. NASB provides non-recourse financing to LLC's as long as a portion of the shareholders in the LLC are self-directed IRA funds. The managing member of the LLC signs the closing documents where a Self-Directed IRA Custodian would sign on behalf of the IRA. You can also purchase real estate in the name of a Partnership, C-Corporation, and Self-Directed 401(k) with a non-recourse loan.
Thursday, May 03, 2007
A borrower doesn't qualify for a non-recourse loan when they purchase real estate in their Self-Directed IRA. NASB won't require the borrower's tax returns, W2's, paystubs, or employment info. Everything is contingent on the property and cash flow. Credit scores don't have an impact on the rate or approval. The appraisal is the most important component NASB will look at during the non-recourse loan process. NASB requires a full appraisal with rent schedules to verify going market rents in the area for similar style properties.
3 Year Anniversary of NASB Non-Recourse Loans
North American Savings Bank provided its first IRA Non-Recourse Loan in April 2004. We stumbled across this type of investment opportunity by chance but soon realized a nationwide need for Non-Recourse Loans. NASB has spent the last 3 yrs specializing in Non-Recourse Loans for Self-Directed IRAs and continues to be the leader in this arena. A warm thank you to everyone who has helped us along the way!
Non-Recourse Loan? Why Do I Need One With a Self-Directed IRA?
The IRS doesn't go into specifics as to what you can do with a Self-Directed IRA but details what you can’t do with an IRA. Page 47 of IRS Publication 590 (2006 version found on www.irs.gov) has a list of prohibited transactions in conjunction with a Self-Directed IRA.
The fourth item states that the IRA can not be used as security for a loan. Most loans are recourse loans. The borrower/account holder sign a personal guaranty at closing. This allows the lender the right to recoup any losses from the borrower that weren’t recovered from the foreclosure sale.
Non-recourse loans are just the opposite. There is no personal guaranty signed at closing. The security for the loan is the property itself not the Self-Directed IRA or the individual. The lender can only recover the property in case of a foreclosure. They have no recourse against the Self-Directed IRA or the account holder.
Just remember that a Non-Recourse Loan absolutely has to be used with an IRA if financing is desired. Without one, the transaction is considered prohibited and can trigger a penalty for the account.