There is a common misconception that a Self Directed Retirement Account (SDIRA) cannot own property with financing. In Mat Sorensen’s Handbook on The Self Directed IRA, he debunks this myth.
“It is possible for an IRA to obtain a loan in connection with its cash investment to purchase real estate. However, the loan must not result in an extension of credit prohibited transaction under IRC §4975 (c)(1)(B)” (pp 117).
Due to this restriction, owning property with your retirement account is typically done through what is called a non-recourse loan. A Non-recourse loan is a type of mortgage loan secured by the real estate itself, without a personal guarantee from the owner of SDIRA, and the borrower, SDIRA or the owner of the SDIRA, is not liable for any loss incurred by the lender if the collateral loses value.
The Property Management Dilemma.
With a non-recourse loan in place, you can use your SDIRA to purchase investment real estate. This is an extremely effective strategy to help grow your investment portfolio. Managing your investment property will be challenging, as you are unable to perform any of the improvements or required maintenance yourself.
Owning property and managing the property yourself, inside of your retirement account, is cumbersome and limiting. If, for example, you need to repair a sprinkler head, you, as an individual, cannot just hop on over there and do the fix yourself. You will need to hire a 3rd party to complete the repair for you. Collecting bids for simple repairs, organizing a repair schedule, and constantly going back to your IRA custodian asking for bills to be paid is exhausting.
Property Management Option
An alternative to self-management is using a qualified property management company. A property manager will be able to reduce the friction of owning investment real estate inside of your retirement account by collecting rents, removing their fee and other property expenses, and sending the balance to your retirement account. Decisions can be made quickly, and your IRA custodian is not issuing payments to suppliers and vendors.
Single Tenant, Net Lease Option
Owning commercial real estate inside of your Self Directed IRA is also an option and may be the best choice for many investors. In a Single Tenant, Triple Net Leased (“STNL”) property, the tenant does all of the heavy lifting. The tenant buys property insurance, pays the property taxes, hires the plumber, gets the HVAC bid, and maintains the landscaping. The burden of managing a property is removed from the landlord and assumed by the tenant.
Supercharge Your Portfolio Growth
CVS and Wells Fargo offer a perfect product for your SDIRA if your goal is long-term growth. CVS signs, and guarantees, a non-recourse 467 loan provided by Wells Fargo. This works because every penny of the rent from CVS is assigned directly to pay off the mortgage with Wells Fargo. The non-recourse loan allows for compliance with the prohibited transaction rules when investing with a Self Directed IRA.
These loans must meet the LTV requirements of around 75%. There is a considerable prepayment penalty, and the loan must be repaid during the initial lease term, which is usually 25 years.
If you had $250,000 available in your SDIRA, you could take advantage of this secret weapon by buying $1,000,000 interest in a CVS. You bring the $250,000 from your retirement account, and $750,000 of the non-recourse loan will be assigned to you since CVS guarantees the loan and Wells Fargo doesn’t care who owns the debt.
This strategy will bolster your SDIRA by using smart leverage, backed by a top credit-rated tenant.
At Millcreek Commercial, we help investors co-own commercial real estate through their self-directed retirement accounts. We assist in the process to transition your current investment into one compatible with owning real estate. With this model, you can direct your retirement account(s) and diversify a portion of those funds into commercial real estate.
Self-directed IRAs are best suited for savvy investors who already understand the alternative investments and who want to diversify in an account with tax advantages.