Using a Self-Directed IRA to Buy Real Estate: How the Financing Works

Most investors do not realize their IRA can hold real estate — including investment properties with financing. A self-directed IRA (SDIRA) allows a much broader range of investments than a standard brokerage IRA, and real property is one of the most popular alternative assets.

Note: SDIRA investing is a specialized area with strict IRS rules. Always work with a qualified SDIRA custodian and tax advisor for your specific situation. This article is educational, not legal or tax advice.

How an SDIRA Holds Real Estate

The IRA — not you personally — owns the property. The IRA custodian holds title, rental income flows back into the IRA, and expenses are paid from IRA funds. You cannot personally benefit from the property during the IRA's ownership — no personal use, no personal management fees, and no transactions with disqualified persons including yourself, your spouse, lineal descendants, or entities you control more than 50%.

Financing an SDIRA Property: Non-Recourse Loans

When an SDIRA borrows to purchase real estate, it must use a non-recourse loan — a loan where the lender can only look to the property itself for repayment, not the IRA owner or any other guarantor.

Non-recourse DSCR loans and non-recourse hard money products are the most common financing vehicles for SDIRA real estate acquisitions. They typically require 30 to 40% down from the IRA and carry rates above standard investment property loans.

UDFI: Unrelated Debt Financed Income

When an IRA uses leverage, the leveraged portion of income may be subject to Unrelated Debt Financed Income tax — UDFI. This is a nuance most investors discover too late. Consult your tax advisor before using leverage inside an SDIRA.

At East Coast Mortgage, we work with non-recourse lenders for SDIRA real estate acquisitions. Submit your scenario and we will identify the programs available for your situation.