A common practice, when investing in income producing
property from your self-directed retirement plan, is to use leverage by
financing of a portion of the investment.
The obvious advantage is to diversify your investments without tying up
all your retirement funds. Another
associated advantage is this kind of leverage investing does not rely on your
personal credit and there is no associated personal liability. The lender should not need to even check your
Because you, the owner of the retirement account, are a
disqualified person, you are not allowed to secure the loan with your personal
signature. The loan and the property
must stand on its own. The lender can
only look to the property for payments on the loan.
I will get into disqualified persons and entities in a later
blog. Suffice it to say, you cannot do
business with yourself. You cannot
benefit your self-directed investment with your signature.
Very few lending institutions participate in this highly
specialized process. If you are lucky
enough to live within the lending area of Pacific Crest Savings Bank (http://paccrest.com) in the Seattle area, you
could talk with Larry Enselman a true specialist in this line of business. At lunch a few weeks ago, Larry reported that
he has money available and is ready to take your call.
Nationally you could check in with North American Savings
Bank (http://nasb.com/lending/ira.asp). NASB lends in all 50 states and reportedly
has expanded their lending to solo 401(k) plans as well as IRA accounts.
The loan details are important. Because the loan must stand on its own within
the Roth, Regular IRA, or solo 401(k), cash flow must be sufficient to pay the
mortgage and then some. This concept is
similar to that of a commercial loan. Some
lenders talk in terms of cash coverage of the principal and interest payment by
125%. Others say they may require at
least 50% down.
As always, it is best to plan ahead and not be
looking for these lenders during your transaction phase. Do your homework first; establish a
relationship with a lender as well as other members of your acquisition
team. By using leverage, you can make
your retirement dollars go much farther.
How about two properties rather than one? Please leave a comment if you have other
folks you know that do non-recourse lending.