Today’s REI Classroom Lesson
Clay Malcolm goes over how using hard money can work for IRA real estate investors.
REI Classroom Summary
Learn more about what can be done and why it would make sense to use hard money for your IRA real estate investing.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Mike: Welcome back to the flipnerd.com REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Clay: Hello and welcome to the REI Classroom. My name is Clay Malcolm. I’m with New Direction IRA. Today we’re going to be talking about using hard money for your IRA real estate investing.
Mike: This REI Classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Clay: Okay, let’s start talking about how you might use hard money for your IRA real estate investing. If you’re a fix and flipper or doing redevelopment or development of properties, you may already be very familiar with hard money lending. Obviously, they’re generally designed to be loans that are for shorter terms and things like that. But, one of the advantages of them is that a lot of times you don’t have to have very much money to put in the deal to begin with.
The same idea that you have or that you may have already used outside your IRA you can use inside your IRA. The only thing that really complicates the matter there from an inside your IRA perspective is that it does typically need to be a non-recourse loan which means that you can’t pledge your personal assets in support of the loan. So the terms can be a little bit different. The concept of being able to use hard money to secure property, make the appropriate fixes and improvements on a property and then sell it, that same concept can still work within your IRA.
You need to be a little bit aware at least of a type of lender who will make a hard money non-recourse loan. In fact, we have a hard money lender here near our office. I went over there because they’re kind of an education partner of ours and asked them. I said, “Hey, so for IRA holders who have not a very large amount of cash available in their IRA at this moment, how would they be able to participate in getting a hold of a property and doing a flip let’s say?” We actually crunched the numbers on just a hypothetical situation. It was startling how little amount of money the IRA needed to put in that would still satisfy the hard money lender. It was still non-recourse so the IRS was satisfied.
The IRA holder, as long as they chose a property that worked right in terms of crunching the numbers, was really able to start doing real estate investing on an active scale with a very little amount of money. In this particular case, I don’t remember all the parameter we put on it, but I think it was $100,000 property and they needed to have $12,000 or something like that in their IRA. Again, this is all housed within your IRA and you do need to find a hard money lender that’ll do the non-recourse but it’s really not that unusual.
The thing I’ll also mention about it as we played out that scenario is, you do probably want to get in line financing for afterward just in case you’re going to do a fix and hold or something like that. You want to make sure that you already have your lender for the long run to come in after the repairs are done. Again, probably needs to be non-recourse. You can’t pledge your personal assets. As long as the subject property is the collateral, it would need to be non-recourse. The entire deal is predicated on the property itself, but as long as you find a good deal the lenders will be willing to make loans to you in order to make it happen.
You can take that same strategy of low money in. You probably won’t be able to get away with no money in, in an IRA situation, but it can be quite low. Use hard money to secure the property and do the repairs. Then, if you’re looking to do so then you could get into a longer term loan. That strategy that you may have already perfected or talked to your friends about or be learning about can be grafted into your IRA. Again, if you feel like your IRA has to have a lot of cash in it in order to be a real estate investor or to participate in real estate assets, this may be a way to not have that have to be so you can actually get into it with a smaller amount of money.
Keep that in mind as you’re moving through your thoughts of how you’re going to invest your IRA money. The non-recourse part is important for the IRS. The hard money and the longer term financing are strategies that you would put together that you’re comfortable with. But, put those things together and your IRA could be making money on fix and flips or fix and holds using hard money. Thanks for joining us on the REI Classroom.
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