Real estate is where you can invest your Individual k self-direct plan funds. The real estate industry is a promising field to start your investments for a financially secure future. Establishing the Individual k retirement account is the first and convenient step to get the funds for your real estate ventures.
Real estate is a non-traditional asset that may demand a huge amount of money for your initial capital. Your retirement money could be a great help but you can leverage the purchase through a non-recourse loan. Any other loans are considered prohibited transactions.
Individual k Self-Direct Plan and Non-Recourse Loan
A non-recourse loan is defined as a type of loan that does not involves the individual as guarantor. The security and limits of the loan is to the collateral and in the case of real estate investment, the property itself. Due to the non-involvement of the account owner, this is not considered a prohibited transaction according to the rules of the IRS. Nevertheless, non-recourse loans are considered less attractive to lenders and much riskier compared to recourse loan counterpart.
Based on the outlined rules stated in IRC Section 514, non-recourse financing used with the Qualified plan 401k will not trigger Unrelated Business Taxable Income or UBTI. This tax exemption is a really huge advantage of real estate investors who want to leverage their investment using their retirement money with non-recourse loan. There are other benefits of the Individual k self-direct plan offering tax-free investments as also indicated for the Roth Solo 401k sub account.
Application Process, Eligibility and Requirements
Applicants of the non-recourse loan are required to submit a full application which will be subject to approval. Typical non-recourse lenders require 30% to 35% down payment. An appraisal of the subject property is also part of the approval process.
Here are some of the property requirements to qualify for a non-recourse loan purchase:
- The financed property must be able to generate sufficient NOI or Net Operating Income. This should be the amount of the rents minus operating expenses which must be more than 20-25% of the total debt payments.
- For the eligible rental properties, qualified properties include duplexes, multi-family homes with five or more units and PUDs. Warrantable condos, 4-plexes and single family detached properties are likewise allowed.
Using a non-recourse loan with the Individual k self-direct plan for real estate investment is a lucrative venture. Talk to your plan administrator to know more.
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