Non-Recourse Loans With Peak Asset Lending: A New Kid on the Block

Real estate is an increasingly attractive investment to build wealth for retirement and produce consistent income. Unlike stocks and bonds, real estate can provide relatively stable income over a long period of time. While the stock market could fluctuate drastically in a matter of days — with significant impacts on your retirement income — income from real estate investments is a bit more predictable. 

Many investors mistakenly believe they can only use after-tax money to invest in real estate. After all, the investment options in their 401(k) or IRA are usually limited to stocks, bonds, mutual funds, and ETFs. Therefore, real estate investments take a backburner in their retirement strategy, with many investors never getting started at all.

But with a self-directed IRA, you can use your tax-advantaged savings to purchase real estate and invest in income-producing assets to pursue a more secure retirement. What’s more, you may be able to finance your investments just as you would mortgage properties you purchase outside an IRA. To do that, you’d need to qualify for a non-recourse loan.

What Is a Non-Recourse Loan?

Unlike a recourse loan, which allows a lender to sue a borrower if they default on a loan, a non-recourse loan prohibits lenders from going after a borrower’s other assets. This means that the lender may only take back the property the loan was used to purchase, as well as any other collateral that was included in the loan agreement. If the collateral is worth less than the remaining balance on the loan, the lender must absorb the difference.

Non-recourse loans have higher interest rates than recourse loans due to the increased risk for the lender. The borrower, on the other hand, can rest assured that their other assets will be protected if they default on their payments. 

Loan-to-value ratios for non-recourse loans are typically capped at 60%. Additionally, non-recourse loans generally have long loan periods and are only available for assets that are likely to appreciate.

Who Qualifies for Non-Recourse Loans?

Because non-recourse debt is riskier for lenders, qualifying for a non-recourse loan is more involved than qualifying for a recourse loan. Only borrowers with the highest credit ratings and excellent financial standing will qualify, as they can’t be held personally liable should they default on the loan.

To qualify for a non-recourse loan, you should be prepared to put down a high amount on the property you’re purchasing. The industry standard is typically a 50% down payment. You may also need hefty cash reserves to demonstrate to the lender that you’re not likely to default. 

Non-Recourse Loans in Self-Directed Investing

For investors purchasing property through a self-directed IRA, non-recourse loans are their only option to mortgage real estate. Self-directed IRA rules prohibit investors from using recourse loans to finance their properties. This is because the IRA itself is technically named as the borrower on the loan, rather than the owner of the IRA. 

To obtain a non-recourse loan, the property you’re financing typically must be income-producing and meet the debt-service coverage ratio. That means the Lender’s underwriter determines the maximum mortgage by subtracting all property expenses from the projected annual rent, and then applies a cushion or margin-for-error. The remaining profit determines the maximum mortgage that can be placed on the property. Lenders may also require that hazard insurance on the property include a loss-payee clause in their name.

Benefits of Using Non-Recourse Debt in Your Self-Directed IRA

Non-recourse loans are a powerful tool for self-directed investors. A single real estate investment may cost a huge chunk of your total savings. If you were to spend the majority of the funds in your self-directed IRA to pay cash for one property, you would not have a diversified portfolio. Leveraging debt to purchase real estate investments is an excellent way to take advantage of real estate investing while ensuring your portfolio is properly diversified. 

Non-recourse loans can be especially useful for younger investors who are just dipping their feet into real estate. By using non-recourse debt, younger investors can start investing in real estate faster and they don’t have to save up enormous amounts of cash to get started.

Strategically using non-recourse debt can free up more cash in your IRA to further expand your investment options or cover the necessary costs associated with owning real estate. (Of course, the income from your investments should generally cover these costs. But because all costs must be paid out of the self-directed IRA, it’s always a good idea to have some cash available in the plan in case of emergency.)

Peak Asset Lending: A New Kid on the Block

Many banks — especially large banks — aren’t in the business of offering non-recourse loans. They simply don’t have the resources or know-how to specialize in the complexity and IRS requirements of non-recourse debt. 

Fortunately, there’s a new kid on the block who is revolutionizing real estate investment financing: Peak Asset Lending. Peak Asset Lending specializes solely in non-recourse loans for investors purchasing residential real estate. They are not a bank, but rather an asset-based lender committed to supporting real estate investors in their quest to build wealth. 

Unlike other non-recourse lenders, Peak Asset down payment requirements may be as little as 25% — nearly half the industry norm. They also provide turnkey programs for investors who purchase fix-and-flip properties (including repairs) and for investors purchasing vacation rental properties (i.e., AirBNB). 

Peak Asset is by no means a “one size fits all” lender. Instead, they work with their borrowers on an individual basis to design loans and programs that fit their borrowers’ needs. This customized attention makes them an excellent choice for self-directed investors.

How Chicago Trust Administration Services Can Help 

At Chicago Trust Administration Services, we help our clients use their self-directed IRA to make real estate investments that have the potential to produce reliable, predictable income for their retirement. When you choose to finance your real estate investments, we can help you make the process fast, easy, and IRS-compliant. 

We’ve helped dozens of our clients partner with Peak Asset Lending to find customized financing solutions for their investment properties. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.

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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.