SD IRAs are allowed to purchase real estate in a variety of ways, either using all cash, leveraging, or partnering with another investor, trust, or partnership to purchase property. Loans provided to IRAs are often non-recourse, which means that in the event of a default or foreclosure, the investor’s personal assets are off-limits to the lender. Essentially a SD IRA can invest as a person would, but the funds are protected by the trust. The stability of real estate in relation to stocks mean a steadier appreciation, which is then added to by cash flow. As an asset, the cash flow from the property will go directly into the SD IRA, increasing the return on the asset and increasing the appreciated value.
Because the property is owned by the IRA and not the investor all funds (rent) must pass through the SD IRA. The SD IRA trust receives any revenues and pays any expenses. The custodian is in charge of collections and distributions which are subject to IRA rules and taxation as defined by the IRS.
This strategy is primarily meant for a long term buy and hold investor. Typically lenders won’t finance more than 70% (50-60% for multifamily) and will require a certain debt service ratio, usually above 1.25. (ratio of the NOI net operating income and the principal and interest payments) The lender of a non recourse loan typically charges a percentage point more in interest on the loan and will require the IRA to have 10-20% of the value of the loan in cash reserves dependant on the property.
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