I had a really great question come in from yesterday’s blog post, "The 2nd Smartest Investment I Ever Made". 

The question comes from someone who currently has a regular IRA with $25,000 in the account. 

For starters, if you want to use IRA for real estate investing, the first step is moving your IRA to a recognized custodial company that specializes in handling self-directed IRAs.  The one I’ve used for years (and recommend to others) is Equity Trust Company.  There web site is http://www.trustetc.com.  To get started with them, you need one of there redirection of investment forms. 

That company doesn’t have anything do with selecting an investment.  They merely act as a 3^rd part trust to handle the money. 

It turns out that this person already has there account with Equity Trust Company.  They were going to invest the money in real estate but then found out that they had to have non-recorse financing.  On a non-recourse loan, the bank required 40% down and 8,000 left in the bank to cover the investment. 

Let me explain non-recourse financing.  It means that the borrower is not on the hook for the investment personally.  Usually when you go to bank they require you to personally sign for the loan.  But you can’t sign personally for the financing when it involves an investment from your personal IRA because it is a retirement account.  That’s the way the laws have been written about about personal retirement accounts.  You can loose the money in that investment, but your losses can’t go beyond that. 

The way I see it, you have one of three possible choices:

1) You could just accept the banks terms.  That means you could buy a property for up to $62,500.  You would put $37,500 down.  The bank would also require you to keep $8,000 in your account just for safety sake.  As I said in the other article, you would probably not want to keep this as a rental property due to the lack of tax advantages from this type of investment. 

2) You could buy a property for less than $25,000 in total price so you could avoid the bank altogether.  You could do a wholesale flip or buy a property to finance out to another buyer. 

3) You could invoke some type of seller financing.  Just like with the bank, you must set up a non-recourse loan.  With this type of loan, you have no restrictions on how much of a down payment you MUST make.  In other words, you could buy a $100,000 or $200,000 property as long as the seller was OK with your down payment amount. 

4) You could loan money out of your IRA to someone else in the form of a secured mortgage.  Just remember that you can lend that money to pretty much anyone except yourself, your wife, or your kids. 

What other ideas do have for investing this money?  Write a comment if you can come up another option.