How to Invest in Real Estate with Non-Recourse Loans

When using your Self-Directed IRA, there might come a time when you need to get additional funds for a deal.  Sometimes, other strategies like partnering, may not work for your situation. So, what happens if your Self-Directed IRA needs to get financing?

In this guest interview article, I’ve interviewed one of Quest’s Real Estate Specialists, and we will discuss the certain types of loans for Self-Directed IRAs, along with additional information and rules that come with them. 

Sarah: Hi, thanks for joining me. Today, I have Courtney with me; she’s one of our transaction specialists who has been with us for quite a while. Now, how long have you been with the company?

Courtney: Almost two years! I've been in the real estate industry for about six years now. I got licensed in 2015, and from there I've been in any type of real estate transaction you can think of from apartment locating, wholesaling, fix and flips, residential sales, new construction home sales, leases, and I've been in commercial real estate, too. That’s one of the things I really like about it, because there's so many different avenues and ways to make money. I enjoy real estate! 

Sarah: That’s awesome! I can see that passion!

Courtney: And now, with Quest, you can buy real estate with your IRA! It's just another thing under my belt. I'm always looking to learn and to grow and to expand. I looked at this as a stepping stone. Instead of just buying it out right personally or through an LLC, you can actually use an IRA - any type of IRAs. It’s just different rules and regulations when the IRS is involved, and it’s about being able to help investors know this knowledge and navigate the SDIRA when doing these real estate investments. It's been a journey, but it's been an uphill journey and I've learned so much.

Sarah: I loved one thing you just said there. You said “navigating” and operating real estate investments when it works with an IRA. I love that you mentioned that, because it really is different when you're doing things with your personal money and when you're doing things with self-directed IRA funds. It leads me right into what I want to talk about in this article. What I wanted to talk about today is non-recourse loans. We’re going to cover a bit about what they are, when they come into play, and how they're different from regular types of loans, etc. So, let’s jump right in. For those that might be wondering what a non-recourse loan is, can you explain non-recourse loans?

Courtney: A non-recourse loan is actually the only type of loan that an IRA can get for financing. And with that, it pretty much takes the liability off of the IRA account or the client personally, and any other assets or money in their IRA. With the non-recourse language, it's detailing just that in so many words. Of course, we can't tell people how to structure that language, nor can we give tax or investment advice; but as long as it mentions that the loan is without recourse, we can move forward with the investment. Essentially, in the event of default, all the lender would be able to do is take the asset that the loan is tied to.

Sarah: Now, with a loan like that, I would imagine you're probably not going to see normal interest rates, right? What do those look like?

Courtney: Those are going to be extremely higher than what a normal loan would be, because there’s no extra security involved. You can see interest rates starting anywhere from 30% to 60% (not always the case). It all just depends, and there are different lenders out there that offer different things. You have to do your own due diligence, shop around, and figure out what works best for you in that aspect.

Sarah: I’m sure that if it's the difference between getting to do a deal and not getting to do a deal, I bet people will go ahead and do it. You also mentioned due diligence. When getting a non-recourse loan, you want to make sure you're doing due diligence. What type of due diligence should a client do? 

Courtney: You really want to shop around. When clients call in asking about non-recourse loans, we share an email that first details what a non-recourse loan is. Then, we may share some lenders that we see a lot of our clients work with, just meaning that they have worked with IRAs before. But, from here, the client really needs to do their own research for what is best for them. There are always more companies out there that are willing to work with you. We cannot recommend specific non-recourse lenders, so put in that research if that property is really something that you want.

Sarah: When clients are shopping around, do they just ask if they will offer non-recourse loans? It sounds like not everyone can do these types of loans. Do all companies do these?

Courtney: No. So, it really just depends. It's all about whether they're willing to work with the IRA holder.

Sarah: That’s important to know, thank you. What does the lifespan of a non-recourse loan look like?

Courtney: The terms of those loans can be as long as the client works them out to be. We’ve processed some that are 20 years up to 75 years or something. It's all about what the client can do. As long as the IRA is good and paperwork on our end looks good, they can pretty much come up with any type of terms they want.

Sarah: And for paying back the loan. How does that work? Are there ways that they can pay that loan back during the deal? If I have a self-directed IRA and I get a non-recourse loan, can I just pay that back with my outside money – my own money? Can you maybe touch on that a little bit?

Courtney: Good one, yes. So, the funds have to come from the IRA, because the IRA has title to the asset and it's tied to the loan. Let's just say there’s an event where you don't have enough funds in the IRA to pay the loan back. Unfortunately, the client cannot personally pay that loan back. They cannot get someone else to pay the loan back for them. What we see at that point is that it would just have to be distributed out. They would lose that asset, unfortunately, but since its non-recourse, the lender can't go after them personally to get the funds.

Sarah: Thanks for answering that. Well, I think you’ve done a great job of helping explain what non-recourse loans are and when you might need them. What’s one final piece of advice that you'd give someone who is considering getting a non-recourse loan?

Courtney: I would say, just take a step back and do your due diligence. Make sure you’re really seeing what works for you, and what you're trying to do with the IRA and also the property. It’s not as hard as a lot of people think it is, especially since we know what needs to be processed these types of deals. It’s also important that they know we're dealing with certain compliance rules within the IRS, and that there specific documents and language that’s needed. We’re always here to help and they’re really not as hard as you think. There are a lot of resources out there; you’re not alone through this!

That’s right! If you’re ever looking for more educational material, Quest is always putting out new content via blogs and videos to help give you the tools for success. Check out our Education Center for more resources! If you have questions about starting your Self-Directed IRA to invest in real estate or just want more information about non-recourse loans, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.