Credit Crunch Killed the Banks and They are Not Lending. But You Can! Learn How Private Trust Deed Investors are Using Their IRAs to Make Home Loans By Joel Barth; In the midst of this nasty housing slump/credit crunch/recession/depression some investors are actually quite excited about the increasing foreclosure rate! These are private trust deed investors who are using their Self-Directed IRAs to make trust deed investments or mortgage loans to homeowners. The fact that the banks are no longer lending has helped these investors fill a valuable niche while the once flowing credit spigot has turned off the need for money still remains. By using a self-directed individual retirement account, investors can pursue a wide variety of investments including such things as real estate, trust deeds, commercial paper, annuities, tax certificates, receivables, stocks, bonds, mutual funds, options, currency, futures, etc. The first step is to roll over an existing account or open a new retirement account at a trust administration company that specializes in this type of account. Such companies include firms like Pensco Trust (http://www. penscotrust. com ) and Equity Trust (http://www. trustetc. com ) among others. Generally, trust deed IRA investors don’t make the traditional 30-year fixed loan but instead make loans ranging in term from a few months to a couple of years. The loans are usually structured like a hard money loan with points paid upfront and interest-only payments in the range of 12%. Typically, the average loan to value is 50% or less. Investors generally find borrowers through an informal network of real-estate agents, mortgage brokers and other investors. The liens are usually made in first-lien position; which means it is first in line to get the money back from the borrower. Foreclosure is generally rare even in this environment, even though some trust deed investors do not worry about default. What is the worst that can happen? You get a property at 70% of market value or less? Investors must tread carefully however. It is recommended that investors work closely with a real estate attorney and other competent real estate professionals as there are numerous rules, regulations, and laws that must be carefully considered and observed or an investor can quite quickly and innocently find him or herself on the wrong side of the law. There are also a number of taxation and financing issues to take into consideration when using your self-directed individual retirement account. For instance, your real estate investments must generally be funded by the liquidity in your IRA and not with a mortgage. Trust Deed Investors generally don’t have this problem since they are acting as a lender but if you are using your IRA to purchase real estate yourself pay close attention. Using debt financing can trigger taxes such as UBI and UDTI. Pursuant to IRS regulations your retirement account cannot guarantee the mortgage debt nor can you personally. This makes obtaining a mortgage from a lender very difficult. However, there are a handful of lenders that do provide non-recourse loans to IRAs but it is a niche market. These loans very often require at least 30% down payment on average. IRS publication 598 states the income from debt-financed property within an IRA is considered unrelated business income (”UBI”). UBI is defined as “the income from a trade or business that is regularly carried on by an exempt organization and that is not substantially related to the performance by the organization of its exempt purpose or function, except that the organization used the profits derived from this activity. “ If the IRA receives more than $1,000 of UBI during a tax year, it is subject to taxation and an additional tax form must be filed (If there is less than $1,000 of UBI, no filing is required). Some advisors recommend using the excess UBI to make principal reductions on the mortgage each year since once the debt is paid off, the income is no longer considered UBI. In this regard, it is best to consult with a real estate professional, tax advisor, attorney, and trust administrator prior to making any investment decision. However, there are “riches in niches”, and using a sophisticated trust deed investment strategy might be just what you need to make attractive stable low-risk returns at a time when most other investments are crumbling. Disclaimer: Information is provided for educational purposes only. Please consult with you legal, tax, financial, real estate, and other advisors prior to acting upon any information contained herein.