Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes
15y
You can buy good paper for 18% - you just need to find a motivated seller, just like buying real property.
I always try to structure the deal where the WORST case scenario is that I get paid off with the monthly payments. If I buy right (ITV of 60% or less), the BEST case scenario is that they stop making payments.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y
That's a dang good question. Two of my friends and a I have been debating this. Livestock wouldn't be on my list, though. I'm concerned about putting the money back into hard money loans, since I'm not confident values are stabilized. Gold is a little tempting, but its too hard to hold in an SDIRA.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y
I looked into that a while back and wasn't comfortable with proceeding. I've had to deal with one defaulted note on a property I made a loan on, and it was a pain. The borrower did a deed in lieu, but we spent a bunch of money correcting code issues and then selling the house. I just don't feel like I understand that business well enough to get involved, nor do I have the contacts to find such notes.
Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes
15y
I think Jon Holdman answered with regards to defaulted notes, while Jon Klaus was asking about discounted notes. 2 different products.
As to Jon Klaus' original question, for 18%+ yields, I would buy mobile home paper. You can certainly find very good mobile home paper at 18% yields all day long. Just buy the stuff with plenty of equity & seasoning.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
15y
Then there are also discounted defaulted notes that have been rehabbed into performing status again (via loan mod). A local (in PA) guy (also a BP member) does these nationwide in large pools, and offers the individual notes for resale.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y
Yes, Loc, you're right that I was referring to handling a default. My assumption would be that any note you buy might default. Buying a high-qualify, performing note seems unlikely to get to 18% returns. To get that sort of return you're dealing with junky notes (junk bonds, essentially) and the risk of a default seems very real. At the very least, you have to consider what could go wrong.
Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes
15y
You can buy good paper for 18% - you just need to find a motivated seller, just like buying real property.
I always try to structure the deal where the WORST case scenario is that I get paid off with the monthly payments. If I buy right (ITV of 60% or less), the BEST case scenario is that they stop making payments.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
I agree with Loc. Great advise. The other option I would consider would be to make hard money loans with reputable rehabbers and charge 12% + 2-3 points with 6 month max terms giving you 16-18%+ returns.
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
15y
What about just cashing out the IRA, paying taxes (35%) and penalties (10%) and buying real estate on leverage in an unfettered after/tax account.
Comparing 18% return in your IRA, with 30% in your property portfolio (leveraged and this is conservative), if you pay taxes/penalties and start with just 55% of your IRA balance after taxes/penalties, your after/tax account will surpass your IRA in year 6 and have accumulated 3x the wealth by year 17. If you can knock out 40% annual returns, your a/t account will be 10x your IRA.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
David's scenario would also greatly depend on the investors age and it also assumes one could get 40% annual returns which is very agressive, particularly with only $28k to start with (after tax deduction and penalty from $50k)
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
15y
Actually, I was predicating this on 30% ROI, which is very achievable and is conservative on leveraged buy and hold investments in this area of the country.
And this doesn't even consider the hit taken down the road when you pay taxes on at least some portion of your retirement accounts at ordinary income tax rates (accept for a Roth, but I don't think that is what is being contemplated here).
I agree that this would be more appropriate for those under 55.
However, if you believe tax rates will be materially higher in the future (most sentient humans think this will be true), paying the taxes now at lower rates will offset at least some of the penalty. And importanty, you'll have your funds on an after/tax basis, presumably free from the long arm of the IRS. Retirement accounts are unhedged gambles on future tax rates, and the odds looks poor.
Residential Real Estate Broker · Grand Blanc, MI · Member since 2008 · 885 posts · 316 votes
15y
Ironic timing... Just last week I funded my SDIRA but started with just $25K. It's not a whole lot to play with for doing HMLs, but it's where my comfort zone is.
To raise more capital in the IRA, I plan to make tons of offers and flip properties as-is in the name of my IRA. I've been focusing in the under $10K range, which could be sold for $15K or so. It's a good return, and definitely do-able. But it requires more effort than a HML...
Eventually when I have more money in the account I will do HMLs and be more passive about the returns.
Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
15y
Currently in a deal that required me to buy a defaulted note and negotiate a deed in lieu.
orig note 32k
paid 1500
pd 2500 finders fee
pd 6000 taxes
pd 8000 rehab
pd 800 water bill
pd 200 dep util
pd 100 title
all in for 19100,
annual taxes 900
annual ins 600
prop mgnmt 660
maint 660
vacancy 660
tot exp: 3480 rent 550-650 tot income, 6600
return on invest, 6600-3480=3120
3120/19100= 16.3% cash on cash return.
this is based on min expected rent (not rented yet), and no additional problems with rehab. (8k includes having to replace wire that was stripped )
return would increase if we can get higher estimate. estimate based on local property management company.
Investor · Surry, VA · Member since 2010 · 19 posts · 4 votes
15y
Originally posted by Will Barnard:
I agree with Loc. Great advise. The other option I would consider would be to make hard money loans with reputable rehabbers and charge 12% + 2-3 points with 6 month max terms giving you 16-18%+ returns.
Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
15y
While I am primarily a buy and hold investor in my IRA, I would consider selling this property to another investor looking for a turn key opportunity. 30K would still net more than 10% for the new investor and give me an opportunity to purchase 2 more properties and repeat the cylce. the key to this strategy is to have a reliable rehab crew and do a good inspection of the property prior to making an offer.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y
I've been considering David's alternative. I do agree that it seems very likely tax rates will be higher in the future, so paying tax now may make sense vs. waiting until later.
OTOH, paying tax now and converting to a Roth seems like an even better solution.
I'm having some difficulty with the 30% ROI on buy and hold, though. Here's how I can almost get there:
Purchase price: $25,000 assume no rehab
Rent: $600
Down payment: 30%, $7,500
Loan: $17,500, 6%, 20 year
I'm assuming this is really some sort of multi, because I don't see getting this sort of loan for a small amount like this
Payment: $125.38
NOI: $300 (50% rule, sorry, if this assumes some lower ratio I just won't believe it)
Cash flow: $174.2/month, $2,095.49 a year
Cash on cash return: 28%
This seems like a really good deal, and I'm not sure how achievable it really is.
Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
15y
Jon : i have considered pulling some of my capital out of my IRA to buy realstate and use leverage but i have found that you need to purchase a more expensive property to get competitive intersest rates. More expensive realestate in upper income neighorhoods have not produced the income that lower income neigborhoods generate and generally are hard to find using the guidelines of 50% for expenses and 2% for rental income.
.
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
15y
John -- thanks for the suppport :) I've recently purchased two 4-unit buildings.
#1 - paid 75K, with 1,900 of mthly gross rents (tenants in place), in good condition, and tenants paying all utilities except water/sewer
#2 - paid 77.5K, with 2,500 of mthly potential gross (bankruptcy sale, 2 units vacant at the moment), also in good condition, w/ landlord paying for common boiler heat, as well as water/sewer. Boiler heat has averaged $275/mth in the last year.
#3 - I'm evaluating this 3-unit bldg, asking price is $55k (I believe could be had for less than $50k), w/ 1,625 of gross rents (tenants in place), landlord paying only water/sewer, building rehabbed to very nice condition.
Taxes are around 2% of assessed value on these.
These deals are readily available in average areas with solid rental demand, and are not in war zones. All have at least 30% gross rent, 15% net rent (some more), including professional prop mgr who doesn't charge extra for unit lease-up (10% flat fee).
On 15% cap rate, borrowing 75% at 6% equates to an ROI of 42% (15% + (9% loan spread * 3.0 leverage factor)). Of course, cash ROI a bit lower depending on amort. term.
I literally have an entire page of prospect properties that will generate 40% ROIs under the 50% rule. In some cases, there is even more upside when I'm able to get the taxes appealed lower, as purchase prices are usually half of assessed value or less. And this factors in zero future appreciation on the property, zero rent appreciation, and doesn't take into account the tremendous tax shield from aggressive depreciation.
So I'd characterize 30% as a slam dunk, 40% as very reasonable, and 50% as doable with intensified effort. And in an area with unemployment below the national average, with a diversified economic base.
Real Estate Professional · Anchorage Area & Vancouver WA · Member since 2010 · 72 posts · 37 votes
15y
I know some investors are taking their money out and doing loans like a bank. Propser..Misfortunes and so forth.
I did it a few years back and made 10-13% return and the loss ratio was low because I only went to B C and sometimes D credits. Never A because there isn't enough of a return and F you chance not being paid back.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Originally posted by Mark Yuschak:
To raise more capital in the IRA, I plan to make tons of offers and flip properties as-is in the name of my IRA. I've been focusing in the under $10K range, which could be sold for $15K or so. It's a good return, and definitely do-able. But it requires more effort than a HML...
Be careful, flipping is an "active business" and as such, would subject your IRA to UBIT (Unrelated Business Income Tax) which is a very complicated form of tax for IRA's. Speak with your tax attorney before pursuing such investments in your IRA.
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
15y
I agree that flipping in an IRA makes for a more complicated tax return. It may work out well, but you will want a good tax adviser to help you along the way.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Originally posted by Charles Perkins:
I agree that flipping in an IRA makes for a more complicated tax return. It may work out well, but you will want a good tax adviser to help you along the way.
It kind of defeats the prupose of investing from an IRA. The whole point is to grow tax deferred or tax free (IRA type dependent) and having to pay tax inside an IRA would not be something I would be willing to do. (Just my opinion)
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Originally posted by SolidReturns:
Will,
What would you consider a necessary "minimal" amount to start funding transactional funding deals in Southern California?
Considering the values here are usually $200k and over in many areas, I would say $200k would be minimum. You would also be hard pressed to do so as these loans would be usurious since your IRA is not a licensed lender, therefore, you would have to partner your IRA with a licensee to avoid usury violations.