How to Invest in Real Estate with Non-Recourse Loans

Estimated reading time: 6 minutes

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.

How to Hold AirBnbs in your Self-Directed IRA the RIGHT Way!

Estimated reading time: 4 minutes

Have you ever imagined sleeping in a railroad container or a renovated school bus? These are just some of the quirky, unique stays that you can find on AirBnb! Offering more than 5 million listings, each with their own flare, AirBnb and other short-term rentals are growing into one of the most well-known (and well-producing) investments on the market. It’s no shock that self-directed IRA holders have taken notice.

With these short term rentals, hosts can rent out their properties, whether it be an apartment, house or even a yurt, all while adding their own personal touches and structures.  With all of the freedom to make it your own, non-traditional investors are flocking to these assets. And, since the IRS does allow investors to hold real estate in their IRAs, Airbnbs continue to grow as the next great alternative investment for self-directed IRA holders, too. 

Holding Real Estate and AirBnb in SDIRAs

Of course by now, many know that it’s possible to hold real estate in an IRA, but it’s important to understand the rules surrounding assets in your SDIRA. Because your IRA holds this assets, it is the one who will need to receive the benefit – all of the benefits. So, what does that mean for you? Rules are put in place that say you, a disqualified person, cannot benefit from the investment. These rules also apply to any disqualified person to your IRA, including your spouse, your lineal ascendants and descendants, and any companies these people own, control, or manage.

What this means is that you could not go live in the property personally, nor would you be allowed to go and vacation at the property your IRA owned. On top of this, you would not be allowed to rent it out to any disqualified person or hire those persons to work on or manage the property, either. The IRS has made it very clear that if you plan to hold an Airbnb or short-term rental in your self-directed IRA, it needs to strictly be for investment purposes only. 

Let’s Talk About UBIT

Now that you’re fully aware what you can and cannot do with this investment property, you may think you’re absolutely ready! But let’s make sure you understand one other important factor that surround Airbnbs. Sometimes it can incur a tax – Unrelated Business Income Tax, or UBIT. As the IRS works to catch up with the increasing popularity of Airbnb investments, thankfully the rules surrounding them become more apparent and clearer to understand, which can be found at Treasury Reg. § 1,469-1T(e)(3)(ii)

For short-term rentals, UBIT could apply in some situations. Typically, a UBIT tax will come into play for short-term rentals when the average rental period is 1) seven days or less, or 2) thirty days or less and significant personal services are provided with the rental. Long-term rentals are specifically excluded from this type of tax, in most cases, but in some cases short-term rentals can avoid tax trigger, too. By extending stays for over the 7 day limit and not offering “personal services”, like maid or breakfast services during someone’s stay, UBIT can sometimes be avoided.

 “Personal Services” and Running a Trade or Business

Understanding what a “personal service” is can better help you prepare for potential UBIT taxes. It was mentioned that maid services during someone’s stay would be considered a personal service, but more general needs like cleaning in between residences between guests would not be. The same goes for other basic necessities. Providing the basics such as heat, water, and electricity would not be deemed a personal service. Personal services typically come into play when more convenience items and services are provided. When a services could be looked at as more than just a short-term rental (and more like a hotel or motel, for example), UBIT could be triggered. 

In some cases, if income generated by a property held by a self-directed IRA is deemed trade or business income, it will be subject to UBIT. What does this mean? IRAs do not have to file a return if the gross income received from the property is less than $1,000, but if it is more than that, the IRA will file a tax return (IRA Form 990-T) and pay tax on the income generated. That is why it’s important to consult with a tax attorney about the potential for UBIT. With most short-term rentals offering more and more personal touches and experiences, like food and laundry services, UBIT could be something you’ll need to factor into your investment plans. 

So, Does it Make Sense to Invest in Airbnbs?

Deciding whether or not purchasing an Airbnb or short-term rental in your self-directed IRA is a good idea will ultimately come down to each individual and their understanding of this type of investments. Being able to hold an income-producing asset that is easy to market could be a great opportunity for SDIRA investors – but it’s imperative that you’re familiar with all the rules and potential taxes that come along.  

There’s no doubt that gains received from the income your short-term rental have the potential to grow in your SDIRA to create tax-free distributions, but always make sure you’re investing the right way so that you remain safe and compliant! For more information about how to invest into Airbnbs with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

How to Submit a Real Estate Investment with the QTC Investment Hub

Estimated reading time: 3 minutes

Change the way you submit an investment with the new, online QTC Investment Hub in the Client Portal! You now have the ability to submit new real estate investments and much more in the portal – and you can talk to a live representative at the same time. This means your investments are taken care of faster than ever before, because in just a few easy steps, you can have your new investments uploaded in a matter of minutes. 

How to Submit a New Investment 

The days of emailing back and forth or picking up the phone are over! When you’re ready to submit a new real estate, simply log in to your Client Portal.  With the QTC Investment Hub, all you need to do is fill in the step-by-step investment information and funding details, then your investment is ready to be reviewed for funding. 

5 simple steps! 

  1. Log in to your client portal and under the “Investment” tab, click the green button that says “Submit New Investment” 
  2. Select the type of asset you want to purchase and what account you’d like to use 
  3. Share the investment details with us and how you’d like us to send the funds 
  4. Confirm the information and special instructions, then upload your supporting documents 
  5. Final review and last confirmation section, and hit submit! 

* Real estate investments will come with a series of specific questions and requests for supporting documentation.*

Once your document has been reviewed, you will receive an email confirmation notification letting you know your documents are ready for your “read and approved” signature. This status will also update under the pending investment client portal submission section. The last thing you will need to do is confirm the information and pay any associated fees, and you’re finished! Understand that at this point, your investment is placed in a queue for final review with our Quality Control team, but once everything has been cleared, the funds are released. 

If you have a more complicated investment, like a split asset or an additional funding, no need to worry. You can still take care of this in the QTC Investment Hub. Split investments will require information for all involved parties, which will add an additional field during the first part of the submission process. Additional investments will work the same way as regular new investments, but will allow you the option to select if the request is tied to a current investment. 

Checking the Status of an Investment 

If you want to stay up-to-date with your new investment, you can! To check the status of your investment, we’ve given you online access to your very own investment tracker in your Client Portal. Once your new investment is submitted in the portal, you can track the funding status by click on the pending investment in the “Investments” tab. 

If you haven’t logged in to your Client Portal, now is the perfect time. With all the new features, investing into real estate with your SDIRA at Quest will never be the same. If you have more questions about how to submit a real estate investment through the QTC Investment Hub, reach out to a representative today at 281.492.3434 and let us help you get started!

Analyzing Different Real Estate Strategies for Self-Directed IRAs with Guest Speaker: Shenoah Grove

Estimated reading time: 12 minutes

Self-Directed IRAs are perfect vehicles for creating tax-advantaged buckets of wealth for the future, and they also let investors save for their retirement by investing into assets that they are familiar with and enjoy. Today, Shenoah Grove of the Texas Real Estate Investor Association joins me to share some strategies that have worked for her and her team as she has grown up in the investing world. 

Sarah: Thank you for joining me today. We’re going to talk a little bit about Self-Directed IRA real estate strategies. We’ll also discuss some of the strategies that you are personally using and teaching in your practices. Before we jump in, can you tell me a little bit about yourself?

Shenoah: Yeah, so Shenoah Grove here, founder, owner and operator of Texas REIAs, Texas’ largest association of real estate investor groups with over 87,000 members. I’ve been investing since 2003, but I’m a fourth generation Texas real estate investor. My great-grandparents owned a rental property. They owned about 18. And my grandparents own rental property. My parents still own about 12 doors to this day. So, it’s a little bit in my blood. I love what I get to do every day, both as an investor, as well as the owner and founder of Texas REIAs. I also coach many clients who are looking to either get started in real estate and/or tweak what they’ve already been doing in order to scale their business. So, that’s a little bit about me.

Sarah: It’s really neat that real estate investing has been in your blood for so long. It sounds like it’s something you’ve been passionate about for quite a while. What really got you started? What kick-started your time investing?

Shenoah: Well, I think we have all been socialized, probably over the last 50 years, just to go to college and we’re told that will be how we excel. That’s how we succeed. And even with real estate investing and with generations of real estate investors in my blood, I was also socialized that way. So, I got my undergraduate degree at University of Texas. Then, I got my MBA at Rice and I thought, “This is how I’m going to make it in the world, and how I’m going to make it in corporate America”. As I was doing that, I was working my butt off and I was watching my income grow, but I was also watching my parent’s income. It was double. Their wealth would double just from real estate investing. It became obvious at some point that I needed to reevaluate what I was doing and look at real estate investing in more detail.

Sarah: I love that background. Any specifics that stick out to you?

Shenoah: The first investment deal that I did was actually when I was in college. Now, don’t think that I’m bragging here, but at the time I was making $4.75 an hour. Okay, yeah. How does a college kid with hardly any income buy a house, right? So, the way that we did it at the time – this loan product is not available anymore – but at the time we used something called a “non-qualifying assumable loan”, which is essentially like buying subject-to today. Although they don’t make non-qualifying assumable loans anymore, you can still purchase the property subject-to the existing mortgage today, which is how I got my first house when I was in college. Actually, one of the members of our real estate investors association built a house right next door to this property and sold it for over $2 million. So, that’s how you build wealth as a real estate investor. You buy in the right places and you hold in the right places. And I love what I do now as an investor.

Sarah: Oh yes, I can always see how passionate you are about it every time I’m at one of the Texas REIA events. I always see a smile on your face and it always seems like people really love being a part of the program. Now, there were a couple of terms that you threw out when you were talking. You mentioned subject-to and buy and hold. Those are obviously a couple of real estate strategies that people can utilize whenever they want to invest in real estate. What are some real estate strategies that you’re using right now as you invest?

Shenoah: For me, I want to make money every time the phone rings and we are what we call ourselves, “strategy agnostic”. I don’t care what strategy it is. If there’s an opportunity to make money, then I’m going to employ that strategy. I want to make money whenever the phone rings. I see a lot of investors get caught in the trap of, “I want to do fix and flips”, or “I want to do buy and holds”, or “I want to do wholesaling.” Well, that may work, but it may not work on the next call you’re about to get. So, I don’t care if it’s commercial, single family, a duplex, three-plex, four-plex, or raw land. If there’s an opportunity, I’m going to do my due diligence and try and figure it out.

Sarah: That’s such an important point. There are so many opportunities. 

Shenoah: Right. And you spend a lot of money as a real estate investor on marketing, right? So, if you’re trying to fit every single lead that you get into one specific square, if you will, that’s not going to always work. You’re not going to be able to scale your business and/or reach the amount of income and wealth knowledge that you want as a real estate investor. For me, I love all the strategies. We love to buy, fix and flip. We love to build new. We love to buy and hold. We joke that we have the Blue Bell Ice Cream investing philosophy, being from Texas. Most people know Blue Bell slogans, which is “We eat all we can and we sell the rest.” So, for me, I want to keep all that I can, and I want to sell the rest, meaning sell enough just to fund my lifestyle.

Sarah: And one strategy I know you utilize is the power of the Self-Directed IRA.

Shenoah: Of course, you know, being able to do that in a self-directed IRA, being able to do that in our Roth IRA really increases and even doubles the power of your investing. So, and there’s so many different strategies you can use. In our self-directed IRAs, we loan money to other investors. We also buy properties that we keep as rental properties. We have shares in apartment complexes, multifamily, and other commercial investments. We even buy subject-to the existing loans in our self-directed IRA. And when you think about buying subject-to in your self-directed IRA, for example, that really compounds it. Einstein says the most powerful force in the universe is compound interest or appreciation, right? Combine that with some of the tax-free savings that you can get using a self-directed IRA, specifically a Roth IRA, and there you go.  The self-directed IRA knowledge [is] critical in order to build that tax-free wealth.

Sarah: That’s great. Everyone is a little different. I like to use my Roth to be passive and do private lending, and I always love hearing about the creative ways other’s use their IRAs. 

Shenoah: We also partner with homeowners to do equity partnering. We like auctions and options, wraps, and all sorts of different things. And again, when I see a deal, I don’t look at the deal and say, “I want to fit in my strategy on that deal,” But instead I say, “What does this deal tell me?” It will tell me the strategy that I need to use. That’s a little bit about some of the different strategies that we use, at least in our self-directed IRA. 


Sarah: Absolutely. You talked about a lot of great strategies there and using a self-directed IRA to do so. Before we move on, for those that may not know, can you briefly define what a sub-to is/what a wrap is?

Shenoah: Yes, this is the strategy that will allow your “dollar to holler”, as I like to say. The average price in Texas right now is around $350,000. Not everybody has that money just laying around to be able to do investments with, but they might have $50,000 or $100,000. Well, with $50k or $100k, you could easily reinstate a property and/or do repairs. Even though you couldn’t acquire that property on your own with your own cash or with your own credit, or even on time for example, buying subject-to allows you to cut that timeframe down to nothing versus waiting on a traditional lender that might take 30 to 45 days to give a loan. Sometimes the properties we’re investing in, you don’t have 30 t0 45 days to close it. You might have two or three, and that’s where the excitement and the opportunity comes in. So, you could easily just reinstate a homeowner’s or seller’s loan and take over their payments, right? There’s three instruments that are typically filed on a sale. There’s the general warranty deed (who owns the property), there’s the promissory note (what’s owed on the property), and then there’s the deed of trust, which helps enforce that promissory note and allows for nonjudicial foreclosure, for example, here in the state of Texas. When you’re buying a property subject-to, that original promissory note and that original deed of trust that’s held by the lender stay in place. The general warranty deed transfers to you, the investor. You are the new owner. That’s buying straight subject-to. Now, the best way to do it to make sure you not only protect yourself as an investor, but also the underlying seller, is to create a new promissory note and a new deed of trust. It kind of sits on top of, or “wraps” around, the original note and deed of trust. Then, the original note and deed of trust, (the person you’re making payments to – the person who can foreclose) is the Wells Fargo chase bank of America, et cetera. And the new note is going to be the original seller. So, if you default as an investor on that loan, then the seller can go back and foreclose on you. It gives the seller additional protections that gives the seller a sigh of relief.

Sarah: That was a great explanation. Thank you!

Shenoah: Yeah, so, buying subject-to is really just taking over payments. Creating that wrap around mortgage is where you give that seller those extra protections by creating that additional note and deed of trust. Very powerful strategy again. Then add a self-directed IRA in the mix, and the possibilities of what you can do are endless when you are strategy stacking. It just feels like you’re a Jedi!

Sarah: Oh, I love what you just said there: strategy stacking. That’s a cool term, and self-directed IRAs are obviously just one more layer that you can have as a partner or, you know, a tool in your tool belt. Let’s talk a little bit more about self-directed IRAs specifically. When did you start using self-directed IRAs as a part of your strategies?

Shenoah: When we started investing in 2003, we were in corporate America. We had a 401k and it’s like you had four options: low risk, medium risk, high risk, and international, which means we don’t even know what’s going to happen here. That was about it. So, we started investing, but we kept thinking how we wanted to be diversified. We were going to keep our 401k money in the stock market, and then we we’re going to keep our real estate money over separate. That worked for a while, but at one point we realized we weren’t watching the stock market. We weren’t being good caretakers of that. We also realized that we were probably not going to outsmart the average person who is on Wall Street. But as we started investing for a while, I started to think, “Okay, well, I can outsmart the average real estate investor. So, when we realized that we live, breathe, eat… and sleep real estate, we moved our money over into a self-directed IRA. It’s nice to be able to touch, look, see, and evaluate the investment. You don’t have to worry about some crazy worldwide disruption changing the whole value of the portfolio. 

Sarah: That is so true. 

Shenoah: The only hockey quote that I know is by Wayne Gretzky. And he says, “I don’t skate to where the puck is. I skate to where the puck is going to be.” You need to know where the values are growing and you need to invest in those locations, especially for the buy-and-hold strategy. The fix-and-flips are not going to change value in the short amount of time that you have to raise the value of that property. If you know where the value is going and growing over the course of the next several years and you’re investing there, then you’re going to win. Never is that hockey statement so true then about real estate and real estate investing, specifically when it comes to buying and holding. So, yes, this is something that we’ve loved to do and something that has benefited us, and it has really been the basis for our wealth as investors. And then double that with some of the tax-free benefits that you get, and yeah, it’s called winning!

Sarah: That’s actually exactly what I was going to say, too. Tax fee, and then also being able to invest in what you know. If you’re investing in what love, you’re probably going to get higher returns. Now, on the flip side, are there any strategies that you all try to avoid? Strategies that make you think, “We are going to avoid these at all costs. They don’t work for us.”?


Shenoah: Yeah, every area is different. So, Texas has different laws than California, than Florida, then other places. We factor that into our strategy. And also, as an entrepreneur, you always have to remember that it’s your job to be looking for disruptions, right. What’s the disruption, what is the solution, what is the workaround, and do we need to change our business and look for different strategies. 

Sarah: I love that you mentioned workarounds. I mean, one of the biggest workarounds we have is obviously the backdoor Roth IRA which we talk about in other articles, but some of those work arounds can sometimes even make a strategy you didn’t think you had possible. Those work arounds – when you understand them and do them correctly – they’re so important.

Shenoah: Yes, you have to be careful. I don’t like pushing the envelope when it comes to self-directed IRA specifically from the standpoint of when what I’m doing might create a taxable event for me. I see a lot of people out there who are possibly creating taxable events, just because they don’t know or just because they got educated on what I call “YouTube University”. They’re listening to the wrong people. That’s why I love you guys.

Sarah: Thank you, and you are so right. It really is important to surround yourself with the right people when it comes to proper education, whether it’s Self-Directed IRAs or real estate investing or anything really! Well, Shenoah, I really appreciate you being here with me today and sharing some of your strategies and insights with me today. If people want to get in contact with you where can they go?

Shenoah: Our website for the TEXAS Real Estate Investor Association is https://texasreias.com/ . Thank you!

As you can see, not one strategy is better than the other, but they can all benefit you in some way. Being able to understand and utilize all sorts of different strategies will expand your investing knowledge and could be what takes your Self-Directed IRA to the next level. If you ever have questions about how to utilize certain real estate strategies in your IRA or want more information about how to get started, we encourage you to talk to an IRA Specialist! To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

Understanding How to Buy and Sell Real Estate in a Self-Directed IRA

Estimated reading time: 4 minutes

Times are changing. The way many Americans have been taught to invest just doesn’t work anymore. With the unpredictability of traditional investing, more people have been turning to tangible assets like real estate.  Real estate investing allows people to diversify their retirement portfolios without having to deal with the uncertainty of the stock market. Being able to diversify your portfolio with tangible assets is a great way give yourself some added financial security in the future, no matter what the markets may look like. 

Real Estate in an IRA

Buying real estate in a self-directed IRA only requires a few steps. Locating the investment of your choosing is the first step. Since these accounts are self-directed, you are responsible for finding the deal. As you are looking for the perfect deal, remember to do the proper due diligence on your investment. Due diligence is extremely important to ensure you are protecting your investment as much as possible.

After finding the property you would like your self-directed IRA to purchase, you will submit investment documents and work with your self-directed IRA custodian to get your deal funded. When using a self-directed IRA to invest in real estate, it is important to understand that the self-directed IRA is the one making the actual purchase.   Although you are the one directing the IRA, the IRA itself will be the purchaser. Once all documents are signed, the funds will be sent by your custodian in the name of your IRA. 

Process of Purchasing a Real Estate Asset

Real Estate purchases with funds from a self-directed IRA differ slightly from your personal funds. Self-Directed IRAs require you to draw up the offer/contract in the name of the self-directed IRA. For example, when a Quest account is the buyer, the vesting will read: Quest Trust Company FBO [CLIENT’S FULL NAME] [IRA] # [ACCOUNT NUMBER]. Making sure the vesting is correct to show that the purchaser is the IRA will help you to protect your investment. Since your Quest IRA account is the buyer, when listing the buyer’s address on any investment documents, you would use the custodian’s address as well. 

Along with drafting up required documents, many times custodians will have their own internal forms that will need to be completed to purchase the investment, too. These forms allow the client to sign off, giving their approval for funding. After all of the documents are signed, the custodian will work with the third parties to close your real estate asset. Remember: the custodian is the legal entity in administration of your IRA, so the client will not have to attend any closings. 

Holding Real Estate in your IRA

Real estate assets in a self-directed IRA come with some responsibilities. You will want to know what to do when you are faced with property taxes or maintenance. We’ve already discussed how important it is to understand that your IRA owns the investment. In the event taxes are due or a repair is needed, the self-directed IRA will be the one that will need to pay for any expenses that are incurred. When paying for an expense, the custodian will usually require a copy of the invoice/purchase order along with a Payment Authorization Form. 

Similar to the self-directed IRA expenses, all profits and earnings must go back into your IRA. These payments must be made payable to your self-directed IRA and should NOT be deposited into your personal banking accounts. Paying for any expenses with personal money or accepting earnings back to a personal checking or savings account would be a prohibited transaction. You can learn more about prohibited transactions HERE. 

Selling Your Real Estate Investment

When you are ready to sell your real estate investment, you will also make sure to work with your custodian. All required forms will need to be completed so that the self-directed IRA can sell the property. Internal forms are typically required here, as well, along with the contract, warranty deed and final settlement statement showing details of the sale. Once completed, all profits will return to the IRA account. From here, you can continue to invest and grow your self-directed IRA for years to come. 

Investing in real estate with a self-directed IRA can be very lucrative when done correctly. Once you understand the steps to purchase property, starting is as simple as calling up a certified IRA specialist to get started. To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

The Best Alternative Investments That You’ve Never Heard Of

Estimated reading time: 3 minutes

After years of diminishing returns on the stock market, more and more financially savvy people are looking towards alternative investments. But what are alternative investments?

Strictly speaking, these are any investment assets which fall outside of the scope of “traditional” investments such as stocks and bonds. They benefit from being less restricted, allowing investors to choose what, when, and how they invest.

By 2023, it is estimated that the alternative investments market will hit a whopping $14 trillion in size, as more and more people seek to avoid the restraints and disappointing returns of conventional investments.

If you’re looking to invest outside the box, here is a list of alternative investments that you absolutely need to consider in 2020. 

1. Venture Capital 

One of the most popular options for alternative investment funds in 2020 is venture capital or VC. This is essentially when you use your money to invest in a growing company that has long-term potential.

By providing venture capital to a company, you stand to profit from the future growth of that company. This is why Silicon Valley is the world’s epicenter for VC funding, owing to the high number of “unicorn” startups that are based there. 

2. Real Estate

By some measures, real estate is the most popular asset class in the world. In times of market turmoil, real estate has historically proven to be a sound investment. With the right knowledge of high-growth real estate markets, you could yield considerable returns by investing in real estate.

To do so, you could switch out your traditional IRA with a Self-Directed IRA, which removes the restrictions placed on traditional IRAs to allow you to invest in real estate for your retirement. Alternative real estate investment comes in all shapes and sizes, so do your research before committing. 

3. Commodities 

The commodities market is vast and incredibly diverse. This means that you should always consult commodities experts before you consider dipping your toe into this oftentimes volatile market.

Popular commodities include oil, gold, coffee, and steel, and are usually traded on futures markets. If you play your cards right and open a commodities contract at the right time, you could make a substantial profit. 

4. Private Equity 

Private equity is a cornerstone of alternative investment management. In a nutshell, this involves investing in companies that are not publicly traded. This is usually about playing the long game, as you will have to wait for the private equity fund you have invested in to sell your holdings, either as part of an IPO or as a merger or takeover. This can easily take several years, but the returns can be substantial. 

Self-Directed IRA: A Vehicle for Alternative Investments 

No matter what kind of alternative investments appeal to you, it is important to have access to the funding vehicles that actually allow you to make those investments. One effective way to do this is with a self-directed IRA.

Traditional IRAs have strict limitations on how the money in it can be invested. However, a self-directed IRA gives you the power to control how you invest in your future. To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

Buying Real Estate in an IRA: Understanding Why and How

Estimated reading time: 5 minutes

As Americans have become more interested and involved in their retirement options, Self-Directed IRAs and the opportunity to invest in non-traditional assets have been gaining popularity. One of the more common alternative investment opportunities inside of a Self-Directed IRA are Real Estate assets. 

Many people are looking to diversify their retirement portfolios with tangible assets like Real Estate, after dealing with the often uncertain public stock market. With Self-Directed IRAs, you have the option to invest in all sorts of Real Estate assets such as single-family homes, multifamily and commercial properties, mobile homes, land, and so much more.

Real Estate in an IRA

Holding Real Estate assets in your Self-Directed IRA has many benefits. Many investors enjoy the freedom and security that comes with knowing all of your ‘nest eggs’ so to speak, are not sitting in one basket. Diversifying your portfolio with tangible and non-tangible assets is a great way to give yourself financial security, no matter what the markets may look like in the future. 

Self-Directed IRAs also allow you to hold assets with notably high returns on investments. Real Estate investments have been shown to produce results that are double and sometimes even triple the original price. When these transactions are done inside of an IRA– a tax-exempt vehicle– investors have the potential to grow their Self-Directed IRAs to the millions. 

When you’re ready to start investing in Real Estate in your IRA, it is important to read up on the structuring rules and limitations of the IRS, in order to protect yourself and your investments. For example, when doing a Real Estate investment in a Self-Directed IRA, many people assume that an LLC or other 3rd party entity is needed, in addition to the IRA. While this method makes sense for some investors, it is often not the simplest way to structure a deal. 

First, know that an IRA has the ability to purchase an investment outright– there is no need for a middle entity. Second, if an intermediary entity is created, you will need to be aware of disqualified parties to your IRA.  The term “disqualified parties” refers to those individuals that the IRS has said cannot benefit from or enter into transactions with your IRA. 

For more information on how to keep your IRA working for you and protecting your retirement, visit IRS.gov, and check out the many educational resources available to you at questtrustcompany.com.  Click here for an article on IRA Prohibited Transactions.

How to Use a Self-Directed IRA to Buy a Real Estate Investment

The process of buying a Real Estate asset in your Self-Directed IRA is quite simple. Since these accounts are Self-Directed, your first step is to locate an investment of your choosing. Once you have selected the property you would like to purchase within your IRA and you have completed the due diligence on your investment, you can complete your investment documents and work with your custodian to get your deal funded. 

Unlike when you make a Real Estate purchase from your personal funds, with a Self-Directed IRA, you MUST draw up the offer/contract in the name of the IRA. For example, if the buyer is a Quest client, the buyer’s name on the offer/contract reads: Quest Trust Company FBO [CLIENT’S FULL NAME] [IRA/HSA/ESA] # [ACCOUNT NUMBER]. It is important to make sure the vesting is correct to show that the purchaser is the IRA and to protect your investment. When listing the buyer’s address, it works the same way. Since the IRA is held by the custodian, you would use the custodian’s address. 

Oftentimes, custodians will have internal forms that will need to be completed at the time of investment. These forms will require the client to sign, giving their approval on the funding. Once all the proper documents are signed, the custodian will work with the 3rd party closing agent to close your Real Estate purchase. Since the custodian is the legal entity in administration of your IRA, the client will not have to attend any closings. Click here for steps on purchasing Real Estate in your Quest Trust IRA.

Maintaining Real Estate in an IRA

Real Estate investments usually come with ongoing responsibilities, such as property taxes or maintenance, and you will want to know what to do when those situations arise. First, it is important to understand that your IRA owns the investment, and it will need to be the IRA that pays for any expenses that are incurred. You cannot pay for any expenses out of your own pocket, as this would be a prohibited transaction. When an expense needs to be paid, you can contact your IRA custodian and follow the steps that they provide to have the IRA pay that expense. 

This may seem like an extra step, but it’s extremely important to maintaining your investment security. Paying any expense out of pocket for your IRA’s Real Estate asset is a prohibited transaction. You never want to jeopardize your growth potential by engaging in a prohibited transaction, so following all of the IRS’s rules and guidelines is imperative. If there is ever a situation that you have questions about, call your custodian and they will be happy to provide you with the education to help you make the best decision for your account.

When deciding to do a Real Estate investment in your Self-Directed IRA, be sure to choose a custodian that is familiar with the investments you plan to do. Time is a crucial factor in investing, especially in Real Estate, so finding a company that works fast and has ample knowledge on your types of investments will save you from missing out on a great deal. 

If you ever have a question about purchasing Real Estate in your IRA, call a Quest Trust IRA Specialist at 855.386.4727 and we can answer any questions you may have! To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

How Real Estate Syndication Works

Estimated reading time: 2 minutes

Real estate syndication is a strategy that investors can use to pool their resources and invest in large real estate projects. 

If you’re looking to invest in large real estate projects but don’t have the funds to get a project started on your own, syndication is a great strategy that you can use to get your foot in the door. 

Here’s what you need to know about real estate syndication:

What is real estate syndication?

Syndication is the process of pooling resources with other investors to invest in a large property or real estate project, such as an apartment complex or a commercial retail development. 

Syndication is not only the process of pooling financial resources, but also intellectual resources in order to make smart decisions about the properties you invest in. In a syndicated relationship, one party invests the money, while another party invests time and labor to find the property and run the day to day operations. 

The party investing the labor in the property is called the sponsor. Sponsors still invest some money, but the amount is much lower than what the investors put in. However, they still get a fair share of the profit. Syndicated partnerships are usually structured as an LLC.

Why get involved in real estate syndication?

Syndication has become much easier in recent years, as investors and sponsors can easily connect online. Crowdfunding has made real estate syndication much more accessible for the average person, because you can contribute relatively small amounts of money to a real estate project that is interesting to you, and reap the benefits accordingly. 

If you have a property that you are interested in, syndication is one of the best ways to get the project off the ground quickly. 

Real estate is a great investment, as it can serve as an excellent source of passive income for a very long time, and doesn’t fluctuate financially the same way that many other types of investments do.

Interested in real estate investing? Talk to the expert team at Quest Trust Company. Quest offers flexible investment account options designed to meet the needs of modern investors.

Mistakes Real Estate IRA Investors Make

Estimated reading time: 3 minutesFor investors who have the means, the time, and a custodian willing to handle one, real estate investments can be a great way to secure and grow funds for retirement. Most IRA accounts allow investors to choose from a variety of investments for where to place their retirement funds. Most choose to spread their wealth over a few options. Some are riskier with potential for a big pay-off, while others are safer with small growth potential. Real estate investments need a lot of time and attention afforded to them, so usually experienced investors who have extensive knowledge surrounding rental, flip, and/or new-build properties are the best candidates for investing in real estate.

Since real estate investments require more paperwork and detailed management than a typical investment, many investment groups don’t offer this option, or charge higher fees for their administration. Besides forgetting about additional fees that come with real estate investments, here are a few more mistakes real estate investors make:

  1. Renting to disqualified people. Many investors wonder if they can purchase a property with their IRA and use it for personal use or rent it to family. The answer is no on both accounts. Strict IRA Real Estate rules prohibit you or immediate family benefitting from or using the property in any way. This includes space to run a business, primary residence, or having connections to the rental company who operates on the property (such as an apartment complex).
  1. Putting personal equity into the property. Again, you must not benefit from the property in any way, other than at retirement. If you use personal funds for maintenance costs, the value will increase, and your investment will increase without any deductions. The same goes for “sweat equity”, or time you devote to repairing projects yourself. All maintenance costs, bills, taxes, and other fees must be paid for with your IRA money.
  1. Personally benefitting from profits. Just like you can’t put personal equity into the property, you can’t directly profit from the property either. For instance, you can’t take personal checks for rent payable to you. All generated income must be paid to the IRA itself. All profits and gains from the property are assessed when you take a deduction on your IRA or when you decide to transfer funds into another investment.
  1. Improperly filling out paperwork. Like other investments, real estate investments are made in the name of your IRA, not you. When filling out paperwork involving the property, transferring money, and accepting profits, you must always list actions as performed by your IRA.

Liquidating upon retirement. You won’t be required to sell any of your IRA investments upon retirement. Even traditional IRAs, which require minimum distributions once you reach 72, don’t force you to sell all of your investments in fulfilling this obligation. If the real estate market is in a down swing, you may want to wait until the value increases again before using the profits for your retirement. Remember to discuss all transactions with your financial planner before taking action.

Selecting Your First Real Estate Investment For Your Self-Directed IRA

Estimated reading time: 3 minutesLet’s say that like many individuals who are setting up their first self-directed IRA, perhaps drawn to the offerings of custodians such as Quest Trust Company because of the investment flexibility that such an account gives, you’re interested in using your new account to invest in real estate.

What are the next steps? How do you go about choosing your first real estate investment for your self-directed IRA?
What’s Your Prior Experience? When it comes to any new investment, there’s always some degree of learning as you go. But if you have very little or no experience with owning or managing real estate, then you may want to consider a more straightforward property for your first self-directed IRA investment.

What’s Your Investment Budget? Another key consideration is going to be the size of the investment budget for your first property. The more money you have available, the more options you’ll have.

As you formulate your budget, be sure to take into account the fact that any expenses for maintaining the property you buy must also come from within your self-directed IRA. This might be new contributions you are able to make each tax year, but these are subject to the annual contribution limits. Plan to either have your real estate generate enough income to pay for these expenses, or to incorporate other assets into your account in order to cover the real estate carrying costs.

What’s Your Current Portfolio Composition? Regardless of your preferred investment type, you always need to take care to avoid having too much of your portfolio committed to a single asset class. If you already have exposure to real estate in your portfolio (perhaps through banking stocks or REITs), then you want to factor that into your new investment considerations.

What’s the Purpose of the Real Estate Investment? Are you considering this real estate investment solely for potential gains, or do you have other goals in mind? For example, some people use their self-directed IRAs to purchase vacation or other properties that they intend to use themselves once they reach retirement age.

As you consider these types of investments, remember that the IRS regulations prohibiting self-dealing, meaning that you cannot use (nor can anyone in your family use) the property you buy until you take a distribution of it from your account during retirement (or face significant penalties if you take that distribution prior to retirement).

Start Small. Many first-time investors find that the best way to become more familiar with investing in real estate is to start small. This might be a single-family home, or even a condominium. Having a small investment in real estate can give you the opportunity to learn more first-hand, without over-committing your retirement portfolio to this type of asset.

Even though real estate is a fairly unique investment asset, it’s still subject to traditional financial analysis. Make sure you familiarize yourself with the local and broader real estate environment before making your first investment with your self-directed IRA.