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4 Myths About Using an IRA to Buy an Investment Property

February 12, 2015

Buying a single-family investment property is an effective way toward long-term profits, but some assume this type of investment is only for the big Wall Street firms or those who have a lot of cash on hand. However, leveraging funds in an Individual Retirement Account (IRA) can put purchasing an investment property within reach for many investors. Tinley Park, Ill.-based MACK Investments, which owns and manages nearly 1,500 single-family rental properties in the Chicago area, debunks the myths about buying an investment property through an IRA, and explains the truth about how it is actually one the most effective ways to boost retirement income.

Myth #1: It’s not legal
Leveraging an IRA to purchase an investment property is legal in all 50 states. However, many IRA investors do not have enough cash in their accounts to make a full purchase, so purchasing an investment property through an IRA is achieved through a non-recourse loan, not a traditional mortgage. Simply put, a non-recourse loan means that, in the case of a default, the bank can only be compensated by repossessing the property, and may not pursue any funds from the IRA account or the investor’s other assets.

“Because the single-family rental market has exploded over the past couple of years, more banks are recognizing the earnings potential and providing non-recourse loans,” said John Gutman, vice president of Sales & Acquisitions at MACK Investments. The firm delivers turn-key single-family investment properties, providing a fully redeveloped, tenanted and managed property. MACK Investments partners with Bridge Capital, a regional financing provider for single-family rental properties, which has provided non-recourse mortgage loans on more than 350 properties since 2010. “When an investor selects a MACK Investments property for purchase, and needs to borrow a portion of the purchase price, we can refer them to a trusted provider like Bridge to explore non-recourse loan options. For us, it’s rewarding to be able to explain this option, because for some investors, leveraging their IRA allows them to invest in a long-term asset that otherwise may have been unattainable.”

Non-recourse loans are required because the purpose of the investment property is to earn long-term income and, therefore, only allows the purchase of revenue-generating real estate. Property types that do not qualify for a non-recourse loan include vacation homes, business properties, or homes rented out to family members.

A custodial account must be established to manage ownership of the investment property through a third-party custodian. “Most lenders have relationships with a number of custodians that the investor can choose from, or they can opt to select their own custodian,” said Gutman.

Myth #2: It’s too complicated for the average investor
Purchasing and owning an investment property through an IRA is actually quite simple. All rental income will be deposited into the IRA account and all payments will come out of the account. “Once purchased, the mortgage, taxes and other expenses on the home will come from the IRA,” said Gutman. “But the profits are also going back into the IRA, making it a self-sufficient way to save for retirement without impact on the investor’s other finances.”

To establish a custodial account, money is transferred from the IRA through the help of a custodian. Investors can typically borrow up to 50 percent of the property’s value, and the account owner does not have to personally qualify for a loan since the property being purchase is evaluated to make the loan.

When using IRA funds to purchase an investment property, the investor is required to engage third-party providers for any repairs or modifications to the home. “Buying a turn-key property through a provider like MACK Investments, which delivers a fully redeveloped, tenanted and managed property, meets that requirement while lessening the burden on the investor.”

Myth #3: It will end up lowering your retirement savings
“It may seem counter-intuitive in some ways, but using an IRA to buy an investment property not only provides the means to purchase the home, but the money earned on the property, like monthly rent, will grow tax-deferred within the IRA,” said Gutman. After the initial withdrawal of funds to purchase the home, income such as rent can be immediately deposited back into the account. “Considering the value of the asset after purchase, it is a significant increase to the retirement account.”

Gutman added, “It’s common to believe that you shouldn’t touch your retirement funds, but it pays off when you use it to buy an appreciating asset like this. An IRA account isn’t about earning money today, its focus is on long-term earnings 10, 20, 30 years down the road. Real estate fits perfectly into that investment philosophy.”

MACK Investments has delivered thousands of single-family turn-key investment properties to investors over the past 17 years, and provides a one-year guarantee on rental income. “Our guarantee is unmatched in the industry. Our investors typically enjoy a leveraged return of 20 percent or more in the first year,” said Gutman.

Myth #4: Your retirement savings will be put at risk
According to Gutman, many investors are encouraged by the fact that, since it’s managed through a non-recourse loan, there is no risk to their other assets in the event of a default. “Bridge Capital is one of very few banks specializing in this space, as many banks don’t want the risk associated with a non-recourse loan. However, understanding the opportunities these types of investments provide to average investors, Bridge has committed to making this option available,” he said.

“Leveraging an IRA to buy an investment property is drawing more and more investors, particularly as the demand for rental properties remains strong,” said Gutman. “This option provides a unique opportunity to leverage existing retirement funds, while growing them at the same time.”

To learn more about how to leverage an IRA to buy real estate, please contact a lending, tax or financial planning professional. For information on single-family investment property opportunities, please contact MACK Investments at (888) 449-0632.

About MACK Investments
MACK Investments, a division of MACK Companies, is a premier provider of turn-key residential real estate investments for individual and institutional clients across the globe. MACK Companies is a redevelopment firm offering investment, construction, residential, commercial, landscape and brokerage services. Founded in 1998 by Chicago-native father-and-son duo James and Jim McClelland, MACK Companies was built out of a shared passion for real estate. Today, MACK Companies is one of the largest providers of turn-key real estate with a portfolio of more than 1,500 properties in the Chicago area. Leveraging a team of professionals in various disciplines, MACK Companies is able to function at the highest levels of expertise in all specialized sectors of real estate.

MACK Investments owns and manages more than 1,500 rental properties in the Chicago area.

MACK Investments owns and manages more than 1,500 rental properties in the Chicago area.