All Forum Posts by: Adam Hershman

 Hey Nicholas,

I am not a RE expert, but I have been in sales (one capacity or another) for most of my adult life. This sounds like the stupid rule to me, and is very common in car sales. Essentially 99% of people purchasing a car (and a lower % for RE buyers) are going to negotiate the price, in one way or another. The stupid rule is what keeps salesmen asking for full price, there are 1% of people out there who are, for lack of a better term, stupid and won't negotiate the price at all and pay full retail. Sure it only happens every so often, but it is also the most lucrative deal you can make, hence no one comes out and offers an immediate discount (aside from advertised specials etc) because they don't want to eliminate the 1% of deals that are the most lucrative. Can a bank finance someone with a 590 credit score at 125% advance? Of course not, but if they're willing to pay it, I'm sure I can find a salesman willing to figure out how to sell it to them. 

It's an aim for the stars land on the moon approach, the good news is those properties have a good chance of coming down in price, because a very small percentage of people fall into the stupid rule category.

Adam

 Hey Nick,

How I would look at it is treating one side as your residence. You should look at it in terms of splitting the property instead of paying a mortgage/renting a free and clear property. If you think of it this way, your paying $500 for each unit, so on one hand you have a $500 mortgage for your personal residence, and expenses and maintenance will be paid for by you as the homeowner. The other unit you expect to rent for $1600, 50% rule $800, but a mtg of $500 would be +$300 monthly cash flow.

Again, not saying its a good deal, I'm just telling you how I would use the 50% rule in that scenario.

Adam

 Well, this actually intrigued me so I decided to read the bill. Apparently it has very little to do with water (the only mention is when one public utility provides water to a property that another public utility provides solid waste/wastewater/storm water drainage). It looks more targeted at sewer and possibly garbage, although that point is a little fuzzy (purposely I believe). Also I read the March 4th version submitted in the senate, but I don't see any mention of exemptions for property owners of tenants with unpaid bills. I would take a read through it yourself if it is that concerning to you as an investor in OK.

http://www.oklegislature.gov/BillInfo.aspx?Bill=sb...

Adam

 Larry,

I would think it would be based on a few different factors, mostly what your RE investment objectives and style are. For example if you are completely hands off investing, hiring a PM, and renting out the properties, I would think it wouldn't make a whole lot of sense to sell a property that's underwater. That of course assumes a few things like, the rent is covering expenses, the neighborhood isn't rapidly deteriorating, basically you believe things aren't in permanent decline. To an investor like that, a good return is worth annoying tenants because the investor pays someone to handle the tenants. On the other hand if you manage your own properties having to deal with an under-performing property as well as the headaches of maintaining the property, it would be very frustrating. By the same token, a lot of landlords who manage their own properties would chose a stable tenant, who pays on time, and is planning on staying long term, where the passive investor is much more likely to seek better returns. 

I guess my point is, it's easy to say you would sell your "problem property", maybe the question should be what constitutes a problem property (threshold for selling) to you?

Adam

 Hey Stanley,

Anytime you are using money that isn't your own to purchase something (a.k.a debt) it is considered leverage. The term is more traditionally used in an investment setting, and isn't  usually used when referring to a 30 year mtg etc.

That being said, I stand by my original post. The only logical way to approach this is from the perspective of financial analysis. You need to look at each situation individually and analyze it like you would any other financial transaction. What are the income/capital appreciation opportunities, what are the risks? Paying cash for something means that you have money tied up. It's much easier to get a loan on a piece of property than it is a personal loan. Is there inflation risk to using your own money, what does the time table look like?

As you can see there is no simple checklist that makes these decisions black and white. A lot of the future risk and reward is going to be somewhat speculative itself, so you can see why there are hundreds of thousands of finance professionals who do this every day for a living. Another way to think if it is every time you want to purchase something, be the loan officer for your personal bank account. Put emotion aside, look at the facts, and make a decision based on the financial analysis you've conducted. 

This is true, but you're also taking on an outsized amount debt. If you don't have tons of income this could make other transactions in your life more difficult, buying a new car, credit cards, etc. Additionally, there were plenty of investors who were heavily leverages in their RE investments in 2007 thinking life was grand, and a year later the sky was falling. Again you can't look at it from the perspective of one rule "never put money down because X reason" because it's not realistic. If one way was the best way to do it hands down, every time, then there wouldn't be a discussion, that would just be THE WAY you did things. Don't get caught up in the "programs" as I call them, and think that one solution would be the best solution to every problem, life just doesn't work that way.

Adam

 Hey Kyle,

I think there may be two pieces of your question, the first being using your retirement funds to invest in RE, and how that process works. There really isn't a custodian out there who will give you advice, but a good SD IRA custodian can absolutely explain how the whole process works. NuWireInvestor.com has a list of custodians by assets under custody and TPAs noted as such. http://selfdirectedira.nuwireinvestor.com/list-of-...

You can call pretty much anyone on that list and they can give you a step by step as to how the process of making an offer and signing paperwork works.

If you are looking at using retirement funds to invest in RE, but you are not 100% comfortable with the process (after speaking to a custodian), I would suggest taking a loan from your current 401k to use for RE investing. It gives you a 5 year timeline to repay the loan to yourself, and there is no chance you would run afoul of any prohibited transactions as the money is a personal loan.

Adam

Full disclosure I work for a self directed IRA custodian, Provident Trust Group.

Hey Stanley,

You will undoubtedly get responses saying NEVER use your own money. I always look at this from the perspective of interest and return. I won't every pay cash for something if the interest rate is lower than what the returns of investing the principal would be. For example, I never advocate paying cash for a car, actually I never advocate buying a car you should lease, because the interest rate your paying for the loan is almost certainly going to be less than what the same money would earn if you invested it. 

If an item is $100k and the interest rate is 5%, I would much rather take the loan save and invest the cash, and earn an 8% return while paying 5% interest on the money.

If those numbers start to favor buying cash, either from higher interest rates, or lower probable returns, then look at paying cash for it.

Adam

NuWireInvestor.com complied a list broken down by assets under custody and which firms are custodians vs third party administrators.

http://selfdirectedira.nuwireinvestor.com/list-of-...

Adam

Common misconception, FHA loans are supposed to make home-ownership more attainable. Because of the widely held belief for much of the 20th century that RE would appreciate in perpetuity, and for most of the 20th century it did, the program was almost always advertised for first time buyers, as they were the most common to not have sufficient cash down payments.

Adam

 Hey Betty,

If you mean home as in a primary residence for yourself, the best option for using retirement funds is to leave them in your 401k and take advantage of the loan provision (most plans have one), You can take up to $50k or 50% of your vested balance as a personal loan, usually at prime +1-2% for a 5 year term, and you can use those funds for whatever you like, including purchasing a primary residence. If you work for a large company you may have a more complex 401k plan which allows you to take a longer term loan for a primary residence purchase. Bottom line is call your plan administrator and get some information from them on whats available to you.

If you mean home as in an investment property, then you can open a self-directed IRA with a custodian that specializes in alternative assets. Including myself about 75% of posts in this thread were written by someone who works for one of these custodians =) so you have some pretty good advice already. Do your due diligence and find the custodian that fits you best.

Hopefully this isn't considered advertising, I don't have any interest in NuWireInvestor.com other than they're a great resource. Full disclosure, my company, as well as many other self directed custodians advertise on this site. Like I said, just don't want anyone thinking I have questionable intentions. Having said that, they compiled a list of SD IRA custodians that breaks them down by large, medium, and small based on assets under custody, as well as notes which are custodians and which are TPA (third party administrators).

http://selfdirectedira.nuwireinvestor.com/list-of-...

Hope that helps!

Adam