What do you mean without recourse?
There is a little known loan option out there called Non-Recourse lending and it can greatly increase your retirement income. In fact a majority of people holding retirement accounts have never heard of this concept. For those who are not sure what this even means, it is defined by Investopedia as:
Non–Recourse Debt – A type of loan that is secured by collateral, which is usually property. If the borrower defaults, the issuer can seize the collateral, but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount.
I don’t know about you but that sounds pretty intriguing! Lender loans you the money, but if everything doesn’t work out they take the collateral and leave you alone. This may seem to good to be true, but with the relationships we have built at Diverse Retirement Solutions we can extend these resources directly to you.
How could this increase my retirement income?
For those seeking to increase their retirement income we suggest using these types of loans to purchase secure assets, often real estate, to provide you with additional revenue each month in the form of interest or rental payments. The key here with these types of loans is that it is based on the performance of the asset and not on you as an individual. Basically this means that they are more concerned about the value of the asset vs. your ability to repay. So for those who do not have the income to qualify for most traditional lending, but have a retirement account like a traditional IRA, self-directed IRA, Roth IRA, solo 401(k) or a qualified retirement plan then you could use non-recourse loans to help you gain more retirement income!
Here’s how it works!
When banks loan money their biggest concern is to know that it is safe, and with traditional loans they feel safe by qualifying your income and credit as the buyer. When banks offer non-recourse financing the banks need to know that if they have to take back the asset that they could certainly resell it without a loss. Let’s take a look at this example:
You have your good friend John approach you asking to loan him $5,000 for a home, and he also provides you with an appraisal showing that the home in it’s current condition is worth $40,000. He would allow you to place a first lien against his home to secure his payment to you, and if he stops paying you get to take the home away.
With the above example I would have to feel that most people would feel comfortable knowing that if John didn’t pay back the loan that you would likely be able to sell the home for more than $5,000 right? It’s pretty much the same scenario with the banks. If the bank knows the home is worth $100,000 and they only need to loan you $65,000, do you feel it is safe to say the bank would feel pretty comfortable?
We have found a number of national lenders across the United States that will loan 60% to 65% of the LTV, or more commonly known as the appraised value of the home. What this means to you is that you don’t have to have the income you would generally need to qualify for a loan. Now I know you may be thinking “what about the other 35-40%?”. Well this is where your retirement account comes into play. You can use your retirement account, like a traditional IRA, self-directed IRA, Roth IRA, solo 401(k) or a qualified retirement plan to supply the other 35-40% down. Let’s take a look at how this can increase your income.
Now let’s take a look at the numbers to see how we can get great returns!
Here is a quick scenario or how you could use increase your retirement funds and make far more than any treasury bond, CD, or mutual fund that your current retirement fund is invested in. Example:
Scenario 1 – All Cash
You have the ability to purchase a Building with Four Units, also known as a FourPlex, for $160,000. Each unit rents for $595 a month meaning you get $2,380 a month for all four units. Add that up over the course of 12 months and your annual gross potential rental income is $28,560. Now of course not all units will stay occupied 100% of the time so we will put in an annual vacancy factor of $1,714. Next, let’s account for some annual repair and maintenance expenses at 42% of the gross potential income, equaling roughly $12,080. Now if you add the vacancy factor of $1,714 to the estimated expenses of $12,080 you get a total of $13,794.
Subtract the $13,794 from the gross potential rental income of $28,560 and it leaves you making an additional $14,766 of additional retirement income every year.This final income at the end of the year is also known as Net Operating Income (NOI). In this example if you used all cash to make the purchase you have an annual return of 9.23% (NOI of $14,766 divided by your investment of $160,000). You may say that this is a pretty good return. Probably much better than you’re getting in the stock market or CDs today.
Scenario 2 – Non-Recourse Funding
Let’s take the same scenario and leverage it with a non-recourse loan. With all the numbers staying the same we will leverage this with a 65% loan-to-value. Remember that with a 65% LTV the bank will loan 65% of the appraised value of the asset. This means that you only need to have a down payment of $56,000 instead of all cash at $160,000. With $56,000 down the loan amount will only be $104,000. With simple bank terms of a 30 year fixed loan at 5.5%, you have an annual loan payment of principal and interest of $7,086. Since in the first scenario you paid all cash there wasn’t an additional loan payment to consider, and now with the loan payment your net operating income (NOI) would be $14,766 minus the loan payment of $7,086 resulting in $7,680 of additional retirement income every year. By only using a down payment of $56,000 you now have an annual return of 13.71% (NOI of $7,680 divided by your investment of $56,000)
If you used similar non-recourse funding like we described in scenario 2, and invested your $160,000 cash into three of these types of deals, this would net you over $23,000 as compared to the $14,766 you would get if you used all cash to buy one deal.
We can help you!
Many people do not have a traditional IRA to do this with. But many people have an old 401(k) that they do not realize can be transferred into a Qualified Retirement Plan which is allowed by the IRS thus giving them the full ability to purchase real estate, increase retirement income, and use a nonrecourse loan to do so. We are excellent at finding and managing these properties for you, and Diverse Retirement Solutions can assist you in creating a Qualified Retirement Plan. Mention promo code DRS624 and receive a complimentary list of prequalified nationwide non-recourse lenders!
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