Three Ways To Finance Your Self-Directed IRA Income Property

A self directed IRA is a unique investment vehicle that allows the investor to sit in the driver seat by controlling the investment decisions the account will engage …

A self directed IRA is a unique investment vehicle that allows the investor to sit in the driver seat by controlling the investment decisions the account will engage in. Many people set up this account to pursue the lifetime desires to be involved in real estate investments. This account allows its holders to profit form such investment while enjoying the tax advantages of an IRA.

Those who have been established for years may or may not have the ability to roll their funds from an existing 401(k), IRA, SEP, or other retirement account into a self directed IRA. Unfortunately many people do not have this capacity. So what other options are available for those who don’t have enough money to get started? Most banks will not loan to a self-directed IRA because the account holder cannot include any personal guaranty that he or she will pay. This makes is hard for anyone that is attempting to get started, however, there are still some options available. This article will discuss three options that require a little more creativity than what the traditional investor may be used to:

1.     Sandwich Lease Options: The first method is a little more complex. The sandwich lease option means that your self directed IRA enters into a contract to lease a property then leases the property to a third party. For example lets say your self directed IRA leases a property for $1000 a month. You then immediately turn around and lease the property to someone else for $1200. Immediately your self directed IRA, without any money down, began making $200 a month. Not bad. Now lets consider the option part of this agreement. When signing the lease your self directed IRA received the option to buy the property for $100,000 within three years. Three years later the property is worth $130,000. Not only has your self directed IRA made $200 a month, it has also made $30,000 when it bought and sold the property after the three year period. This is getting pretty good.

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To top this strategy off, many “motivated sellers” are willing to turn over a property without any money down. Simultaneously many renters are willing to pay a security deposit first months rent and many other upfront fees providing for cash when you start the agreement as well. Not a bad route to take if you know what you are doing.

2.     Subject to the Existing Mortgage: This second method is another one that requires finding a motivated seller. Many people are in trouble with their mortgages and need to bring the loan current or the bank will foreclose on the property. One way to keep the property from going to the bank is by bringing the loan current and then making the payments on time (this is actually the best route for the homeowners’ credit score).  If an investor buys the property “subject to the existing mortgage” then the property transfers into the name of the self directed IRA while leaving the existing mortgage in the name of the sellers. This allows the self directed IRA to essentially have a loan on a property.

Many people frown on this strategy because this is more risky. Many banks issue loans with a clause that allows them to call the mortgage due if the property is ever sold. Most banks, however, have so many delinquent property owners that they never come looking on those properties that are current. So as long as your self directed IRA is current you typically do not need to worry.

3.     Capital Raise: The third and final point is somewhat obvious. If you do not have enough money to acquire your first property in your self directed IRA then partner up with someone who does have the money. This method will require the use of a network of wealthy friends; however, make sure that none of your partners are included in those classified as disqualified persons. Doing a deal with a disqualified person will result in a prohibited transaction which will lead to unwanted taxes and fees. Since avoiding taxes is the whole purpose of a self directed IRA we are assuming our readers do not want to pay those.

These are three methods we have seen used within the industry. There remain beside them a myriad of other investment strategies that could be used to increase the number of investments within a self directed IRA’s portfolio. Whatever method you choose to pursue it is highly encouraged that the advice of professional accountants, attorneys, and other IRA professionals is sought after prior to engaging in any investment activities.


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