Using Non-Recourse Loans to Purchase Real Estate in a Self-Directed IRA

Have you found a great real estate investment opportunity for your self-directed IRA, 401(k), or other account, but lack the capital necessary to complete the deal?

There are options available to secure the necessary funds. For example, your IRA could potentially take out a loan – known as a non-recourse loan.

What is a non-recourse loan and how does it differ from a conventional loan or financing?

A non-recourse loan essentially states, in the event of a default, the only recourse that the lender has is against the individual subject property that’s used as collateral. When you go to a traditional bank or traditional financial institution and you borrow money for your primary residence, a secondary residence, or an investment property, they typically are going to ask you to sign a personal guarantee.

Under the guidelines of Internal Revenue Code 4975, you cannot sign a personal guarantee of a loan that your IRA is taking on. You’re considered a disqualified person to your IRA if you were to sign a personal guarantee of a IRA loan. In that particular instance, you’d be engaging in a prohibited transaction, which would invalidate the IRA.

To avoid this, lenders know that they shouldn’t be lending to an IRA and asking for a personal guarantee. You have to identify a non-recourse lender that will loan to your IRA or solo 401(k) or other tax-exempt investment account.

How to find non-recourse loan providers

Search “self-directed IRA non-recourse loan” or “self-directed 401(k) non-recourse loan,” and you’ll likely find a list of individuals or entities that will lend money to self-directed IRAs and 401(k)s.

Generally speaking, national bank lenders will only loan on traditional buy-and-hold rental-type properties or apartment buildings, more longer-term investments. They likely won’t lend on a fix and flip type transaction.

If you want to fund fix-and-flip type transactions, you’ll need to look to a hard money lender or maybe a private lender to loan on a non-recourse basis to your self-directed IRA, 401(k), or other tax-advantaged investment account.

Alternatives to non-recourse loans

You don’t necessarily need to obtain financing to buy real estate with your self-directed IRA. There are other ways to buy properties 100-percent free and clear as a cash buyer with your IRA, including:

• Your IRA partnering with another IRA
• Your IRA with a spouse’s IRA
• IRA with your non-IRA funds
• Real estate joint ventures partnering your IRA with a non-family member’s IRA or non-family member’s non-IRA funds

[Related: Partnering to Purchase Real Estate in an IRA]

These are a few ways to finance real estate acquisitions without needing to take on debt. But if you find yourself in a situation where it makes sense to take on debt financing, it’s important to understand the difference between a non-recourse loan and a conventional mortgage.