Colorado Association of REALTORS | Self-Directed IRA Appealing to Investors
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Self-Directed IRA Appealing to Investors

Self-Directed IRA Appealing to Investors

Self-directed IRAs (SDIRAs) are appealing to investors for several reasons, among them to diversify retirement funds, adapt to economic conditions and invest in assets they know and, in some cases, control.   However, there is an opportunity for enhanced returns on IRA real estate investing that is not known to many SDIRA holders.

Many investors are using their SDIRAs to purchase real estate while still enjoying the IRA’s tax benefits. It is a myth that IRA funds must be distributed in order to invest in real estate; an IRA is able to directly buy commercial or residential properties, fix and flips, land, apartment complexes and more, allowing the property to generate income for the IRA.  When it comes time for distribution after retirement age, the IRA holder can liquidate the property and distribute cash or simply distribute the asset in-kind.

A lesser known and potentially lucrative aspect of SDIRAs is that it can obtain a loan to buy real estate if it doesn’t have the entire purchase price available. The IRS has contribution rules for IRAs including annual contribution limits, the requirement that contributions must be in cash, and that no contributions can be made after age 70.5 for Traditional IRAs.  Using leverage with your IRA funds allows an investor to make money on money that they did not have to contribute to their IRA.

IRS rules require that the leverage in the SDIRA is non-recourse.  The owner of the retirement fund is not allowed to personally guarantee the loan.  Finding a lender who understands this type of financing is critical.  Luckily in Colorado, FirstBank has a unique mortgage loan program specifically to allow a self-directed retirement fund to purchase 1-4 family residential real estate using leverage.  Since the program was started in 2004, FirstBank has aided in this type of financing for 400+ mortgages to self-directed retirement plans totaling over $40M in originations.  The FirstBank loan program requires that the property being financed is income producing and located in the same area where FirstBank has bank locations.  Additionally, as these loans do not have a personal guaranty, the SDIRA is required to put a 35% down payment on the property.   FirstBank officers across the state are knowledgeable in this type of financing and would be happy to field any questions.

It’s also important to note that there are some restrictions with real estate IRAs. The property may not be used by any disqualified persons, which include the IRA holder and his lineal ascendants and descendants (and their spouses), nor can any disqualified person fund or make repairs to the property.

If you or your clients are interested in learning more about or establishing a self-directed retirement accounts please contact Clay Malcolm with New Direction IRA at or 877-742-1270.  If you have questions concerning financing your self-directed retirement plan purchase please call Nicole Reeves at or 970-282-3941 (direct).   FirstBank has been supporters of CAR since ___.  This Article is published by Clay Malcolm, New Direction IRA and Nicole Reeves, FirstBank for general information purposes only.  The content should not be construed as legal or tax advice or opinion.

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