All Forum Posts by: Adam Hershman

I'm with you on this, I don't see the logic, but from what I understand about those that do buy non-performing notes, the idea is that you price the note according to the worst case scenario. For example imagine you were buying a SFR, sight unseen, with no information other than Sq ft, room count, age, and location. For you to make an offer on that property it would have to price in all of the risks that you could think of. That may mean you make an offer at $10k because the house may be trashed with a cracked foundation and black mold, where you would be paying $10k for the land in your mind. Essentially people buy these at pennies on the dollar hoping to either renegotiate a new loan with the distressed borrower, or foreclose and try to rehab or resell the property.

I could be completely wrong thought, as I really don't have any interest in getting involved with these types of transactions. 

 Hey Andrew,

Good news, when it comes to SD IRAs the world is kind of your oyster. As long as it isn't a collectible, life insurance, or an S corporation, you can really do most anything. There are some additional rules regarding with whom you do business that you should be aware of as well. You can look into real property i.e buy a house or small multi-family, you could look at tax liens/deeds, you can lend the money directly to someone developing a project, you can even purchase undeveloped land in a speculative investment if you think that the land will need to be developed in the future. You can buy land with timber on it and sell the rights same with oil, you can even purchase earth moving gear and lease it out. Some of those will be more complex to accomplish, and some are riskier than others, but all of them are options. 

My best advice, do what you know. Most people open SD IRAs because they believe that they know what they are investing in better than their broker knows the stock market. Is that true? Sometimes, othertimes its hopelessly false. If you stick to something you know well, chances are you will come out ahead because you understand the variables and pitfalls involved. The last thing you should do is be sold something....This is where most SD IRA owners get into trouble. They get hooked up with a company promising 15% liens and charge fees for giving you access to their "exclusive listings" and what not. Some of these companies are helpful, and some are just looking for a quick payday. Be sure you do your own research before taking other peoples information as gospel truth.

Adam

 Hey Joel, 

All of the activities you suggested are fine, as long as you won't be materially improving the property yourself. For example inspecting to see if brush removal is needed would be fine, hiring a company to remove the brush would be fine (using IRA funds of course), but actually removing the brush yourself would not be. You are free to follow your gardener around, telling him exactly where to mow, so long as you aren't pushing the mower.

Adam

 Hey Steven,

Best is kind of subjective, do you mean cheapest? Do you mean fastest? etc. The one thing I really caution you against is going with a company that has a sliding fee scale. Horizon for example charges based on your account value, which is great now if you are only investing $20,000 but if you want to add money to the account, or if that account grows (which it hopefully will) you could find your fees double someday because your account balance crossed one of their fee bracket threshholds. 

I would recommend finding a custodian that has a flat fee structure so you know your account fees won't double in a few years. 

Additionally make sure you find an actual custodian rather than a facilitator. Custodians generally have set up and annual fees, but those will generally be inflated by a facilitator to make their cut. 

I would also consider going with a company that deals in more than just self directed accounts. Generally a self directed trust company will only be audited by the state financial division, where as a company that deals with S&L and traditional accounts will be subjected to much more rigorous auditing. Additionally the self directed marketplace is somewhat rife with fraud, and a larger more established company will likely be more reputable.

I would suggest checking with Provident Trust Group or Northern Trust. I used to work for Provident so I know their fee schedule is flat, and Northern Trust is a well established trust co that deals in all different types of accounts, not just self directed. 

 Hey Tanner,

Well, your accountant is right on the first count. You can't mix personal and IRA funds, so essentially, if your IRA puts money in, it needs to own the whole investment. I.E If you wanted to use the 13K to rehab a property, the IRA would need to own that property that you want to rehab first.

On the second count, I think it may just be a misunderstanding. There is no cap, or rule, or extra tax for posting a large gain in your IRA. In this scenario, it sounds like the rehab property would not be owned by the IRA "(let's say property was purchased with another loan)". This is only an issue if you, or one of your family members, or another prohibited party owned the property. If, for example, a good friend of yours owned a property, and he needed $13k to rehab it, you can absolutely lend him the money to rehab the property and structure the terms and repayment however you like (subject to local and federal law of course). On the other hand if you owned the property to be rehabed, you would not be allowed to use your SD IRA to fund the rehab, as you are a prohibited person to your IRA, and therefore can't do business together.

The best thing to do is think of your SD IRA as another person that you don't have any relation to, and should never do any business with. So if you have a house that you want to rehab, Mr. IRA can't give you any money to do it. Conversely, if Mr. IRA has money to do a rehab, he can rehab any house he owns, or lend the money to anyone he wants, except you and your prohibited persons.

Hopefully that makes sense...

 Hey Jim,

IRA LLC arrangements are bound by the same rules as a SD IRA, the benefit being that you dont have to rely on a custodian to do any paperwork. And believe me, having worked for a SD IRA custodian, you don't want them doing the paperwork.

Essentially your LLC could loan money to anyone it wants, at any terms it wants, for whatever reason it wants (obviously subject to local and federal law). So it is really up to you if you want to go the lending route. Tax Liens/Deeds are another way to go for a low dollar investment, but be wary, just because tax liens/deeds have statutory interest rates doesn't mean they don't have any risk, or that you will be guaranteed a certain return. People could refuse to pay and leave you with the complicated task of trying to evict them, or they could pay their taxes a week after you purchase the deed. Every state has different rules and procedures, so make sure you do your homework.

 Ok, seeing this false claim once was just another day on BP.

Seeing it twice in 1 post was just another every other day on BP.

But 3 times and I can't sit by any longer. I didn't even look at your spreadsheet, and I can already tell how ridiculous this is.

First of all, the entire premise of your argument is flawed. You take your performance for RE and put all kinds of criteria on it, but compare it to the average performance of the S&P 500. I have done an apples to apples comparison elsewhere, where raw averages show that investing in securities (even when not in a tax advantaged account) will perform better than the RE market as a whole. And if you take the BEST RE investor you know, I highly doubt they have a 57% annualized return over the last 3 years, like Glenview Offshore does. 

It's so frustrating when people understand 1 side of an equation enough to tailor it to their needs, and then just throw averages at the other side because they don't have any expertise. The ROTH portion of my old 401k posted a 34% gain last year, that doesn't mean that is the benchmark of 401k performance. 

This made me actually LOL

• "All rental cash flow is plowed back into the business (just like reinvesting the dividends/gains received in the 401(k)) to make this an apples-to-apples comparison."

That's what constitutes an apples to apples comparison for you? A true apples to apples comparison would require some criteria on what you invested in. For example:

$50k per door in RE, so lets say you should be investing only in stocks with a P/E of 10 or lower, with generous EPS outlook. Cap rate should be 10% so lets say we should only look at investing in stocks with a 5% annualized dividend yield. 

This type of information would at least get your comparison to a somewhat similar place. Lets not forget that in most cases, you can stash tax free (ROTH) money in your 401k. When was the last time you could park money in RE (other than your primary residence), have it appreciate, and then pay 0 tax when you need the money? How sure are you that your local property taxes will stay flat over the next 10 years? And how sure are you that the neighborhood you chose wont go to **** tomorrow and leave you with a D property that you owe way to much on? 

All this not mentioning that in the RE scenario, you're carrying approximately $37,500 in debt for every $100 you plan on collecting. So lets see if you buy 1 house a year for 10 years, at the 10 year mark you still won't have paid off the first house you bought. Leaving you somewhere in the neighborhood of $300,000 worth of debt with $1000.00 a month in cash flow? That's if rents in your area hold out or appreciate. 

Also when was the last time you were able to immediately sell your RE and use the money to take advantage of another investing opportunity. I hope you plan well, since you'll have pretty high opportunity cost (that's what they call it when your money is tied up and you can't invest in something more profitable than your current asset). Oh wait, that's right, in the RE investors mind, debt is your friend. You can just take another loan to offset your opportunity cost... 

And here's my favorite part, where I go off on an insane tangent, these RE investors, who own 10 houses, with mortgages they shouldn't have, will walk away from these houses when they stop being profitable. And when they start walking away, it will drive the RE market lower, which will cause more investors to walk away, which causes people who actually live in houses around yours a considerable deal of grief. And those loans, that these RE investors walk away from, they are probably packaged into a tranche in a CMO somewhere. And when those CMOs go bad no one wants to buy them, and then they become worthless, and then those same CMOs get eaten up by a large insurance company, who sold credit default swaps on those CMOs to banks that bought them. And when enough of those CMOs go bad, banks realize it takes them 30 days or longer to structure these CMOs, so all the mortgages they bought that are still on the books to be securitized are deemed worthless, and get sold off at pennies on the dollar, leaving the owner to deal with an unscrupulous lender who wants 100% payment for a debt that they own for 20% of face value. And because these big banks and mortgage companies were planning on people paying the debt they agreed to pay, they have tons of losses, which weighs on every facet of their business. And to make things better, these banks also have to deal with the widespread economic fallout of a tanking RE market, including people wanting their deposits back.

 Hey Jim,

With a solo 401k, with a custodian that is amicable to alternative investments, your options are really unlimited. You can give personal loans to other flippers who are looking for the capital, or you can structure the loan to be secured by the property. I have had former clients even contract for a portion of the profits of a deal after recouping the loan, i.e $50,000 loan from person A to person B with payment provisions being $50,000 net of sale of 123 main street, and 10% of net profits of sale of 123 main street.

On the other hand if you aren't going to be doing business with someone you at least reasonably trust, you can still take advantage of crowd funding due to the increased limit under title 4 of the JOBS act, but it might take some time to find a RE crowdfunding company that will accept unaccredited investors. 

In terms of flipping houses, you would be subject to UBIT, but that does not mean you can not flip houses, it just means that it won't be totally tax sheltered. Many people still find RE investing and flipping is profitable in an IRA/401k, they just have to pay taxes on it.

You can also invest in tax liens/deeds, or find undeveloped land that you think will have a value demand for development. A former client loved to purchase those dirt lots next to big grocery story strip malls on the belief that sooner or later, someone would want to put something next to the grocery store. 

Heck if you want to purchase heavy equipment for construction, and lease that to someone developing land, you could do that too. It really all comes down to what you understand and can make a return on.

 Totally off topic, but I see you are from Camarillo. You might not be familiar or have any opinion, but how do you feel about property in Leisure Village? If you owned a 2 unit there would you keep it and rent? Or sell it for other opportunities? Both units are updated, wood floors, popcorn ceiling removed, etc.

Thanks for any thoughts.

 Thanks Mike, you did as well. I know a lot of my posts can come across as anti-RE, which is not my intention. I know a lot of people make very informed decisions (and subsequently a lot of money) in RE, I just really worry about those people who sign up for an RE website and see post after post about how easy/simple/better it is to invest in RE than traditional securities.