Self-directed IRA investment options go beyond traditional stocks and bonds to real estate, limited liability companies and partnerships; Tax liens, mortgage loans, precious metals, promissory notes, etc.

To establish a real estate IRA investment account, the first step is to establish an IRA. A self-directed IRA allows the account owner to control and make the final decisions about the type of IRA investments he or she finds the most profitable.

Self-directed IRA investors can leverage their real estate investment through a non-recourse mortgage, also known as an IRA loan. Through an IRA loan, the real estate investor can purchase property with their IRA account without needing the full sales price in their IRA account to do so. The IRS requires that any loan related to a self-directed IRA must be “non-recourse” when the borrower does not personally guarantee the loan. This means that even in the event of a loan default, the collateral is only held by the lender as a remedy to repay the loan and not in the IRA or the borrower. This is true even if the collateral property value does not fully cover the delinquent loan amount. In short, the IRA and the borrower are free from personal liability with this type of loan.

Once the self-directed IRA has been established, the investor must identify a lender for the non-recourse mortgage. At the time of application to the lender, the borrower will be required to submit statements regarding their self-directed IRA, their credit application, and their latest credit report. Once the loan is approved, the borrower locates a suitable property and purchases it through the self-directed IRA.

Invest self-directed IRA funds

The owner of a self-directed IRA account can invest the IRA funds in two ways:

a) Instruct the IRA custodian to directly purchase the property with the IRA assets
b) Form a limited liability company and purchase the property through the LLC

Both of the above methods involve typical estate planning challenges. The account holder needs to know what transactions are prohibited and discuss the tax implications with a competent tax advisor.

Investing in real estate through a non-recourse mortgage is one of the most profitable ways to make the most of a self-directed IRA, allowing the investor to enjoy a comfortable retirement. The main advantage of IRA real estate financing is the ability to purchase properties at a significant discount (for example, an investor could purchase foreclosed properties) and earn enough profit to repay the loan. The other advantage of the non-recourse mortgage option is its ability to protect the investor’s assets, since the property being purchased is the collateral for the loan. This releases the IRA owner from any liability.

The non-recourse option for a real estate IRA empowers the account owner to be self-directed, providing complete freedom and control over the investment along with specific benefits such as tax-deferred income, asset protection, and compound interest.