All Forum Posts by: David Beard

Are you saying your investors would prefer to just hold a note secured by the property, and you pay them at a stated interest rate.... or do they actually want a share of the actual property results, as well as capital gains from reselling at some point. It sounds like the latter, since you talk of them wanting an inflation hedge and some asset diversification.

A multi-member LLC where you're the designated manager could do this, I'd think. You can specify in the operating agreement how the profits are to be split. It doesn't have to be based on the respective financial contributions to the LLC, though it does need to be reasonable. You'll have to agree how much of an additional profit share your time contributions are worth.

With investors and disproportionate profit sharing, you definitely want to consult with a real estate attorney.

A little more from another site:

"I emailed one of Entrust's business competitors and here's the answer I received:

Yes, it is legal to do flips and rehabs in a SDIRA.

The IRS often views flipping houses as "running a business" in your IRA and whereas they do not say how many flips equals running a business, common practice seems to be three. If you fix and flip more than 3 houses per year in your IRA you may be seen as running a business.

Running a business is not prohibited but it leads to a tax called UBIT. You can read about this at http://www.IRS.gov if you will look up Pub 598. UBIT is reported on a Form 990t.

Rehabs in an IRA are perfectly fine except you cannot do any of the work. You are not allowed to provide goods, services or facilities to your IRA. You may screen tenants, collect rents and hire contractors but you cannot do the work yourself. If you do the rehab work yourself they call it an "over contribution of sweat equity" and that's viewed to be the same as making a cash contribution to your IRA. Best to keep rehab work arms-length by hiring a third prty."

Ebere -- what is the value of being a RE professional, other than not having to worry about passive loss limits. Are there other deductions you're entitled to, or other perks??

The following is in Lasser's "Real Estate Investors Tax Edge", as an example of something you can do in your SDIRA:

"Caitlin is engaged in the business of buying properties, fixing them up, and selling them on a short-term basis (she holds them for less than one year). She is paying many thousands of dollars every year in taxes because these sales are short term and thus do not qualify for the favorable long-term capital gains rates. She is also labeled a RE dealer and thus has self-employment tax issues as well. Rather than owning all these properties in her own name, she decides to utilize a SDIRA to make all the purchases and sales. By doing so, Caitlin defers all capital gains taxes (if done in a regular IRA) or her capital gains are tax free (if done in a Roth IRA). She thus has more funds available for real estate investing because she is now saving 25 to 35% in taxes every year."

It only cites the UBIT as an issue when you have debt-financed property within an IRA.

http://www.amazon.com/J-K-Lassers-Real-Estate-Investors/dp/0470443472/ref=sr_1_1?ie=UTF8&s=books&qid=1300221369&sr=1-1

Paul broght up the age-old SFR vs MFR (2-4 unit properties in this context) earlier in this thread. Personally, I'm initially buying mainly MFR because I want to lock in 30-year fixed rate loans, and the entire building is one financeable unit. The $25K house is hard to finance conventionally due to the small loan size, ane the closing costs eat you alive as a % of your deal. The 10 property Fannie limit can also be best exploited with MFRs.

Traditional MFR advantage:

* Efficient to manage in one place.
* Loan closing costs efficiencies.
* Can finance more units conventionally under the Fannie 10-property limit.
* Economies of scale on roof/mechanicals.
* One vacancy doesn't create the crime target that the vacant $25K SFR does.
* Some tenants don't want yard work, so there is always demand.
* Generally have higher gross rent yields (admittedly expenses can be higher due to common utilities and common area mainatenance, offset by economies of scale over time)

Once I have 7 or 8 conventionally financed multis (mostly 2 and 3 BR units to avoid transients as much as possible, and to capture large Section 8 allotments), I plan to focus on SFRs for buy-and-hold, using local bank financing.

Advantages of SFRs:

* Greater rental demand, quicker tenant placement
* Longer tenancies typically
* Better resale options, including O/O buyers
* Tenants pay all utilities, maintains yard
* Can rent under lease-option if desired
* Less concentration, more diversification
* More liquid; if cash needed can sell one house

Does this seem like a reasonable approach? The MFR's I'm finding have leveraged ROIs of 40-60% in decent areas, many already with tenants (I know, not necessarily a positive), though if turnover is higher than what I've built in (assuming one turn and one down mth per year per unit), that could squeeze my projected results.

I was wondering how long it would take during the selection show for someone to refer to a team's "body of work". About 3 seconds....

You should have an attorney draw up the documents to provide an air of credibility. When a plaintiff's attorney look at your LLC in a lawsuit scenario, they're more likely to go after you if you've created your LLC with a do-it-yourself kit. They will assume that you've taken shortcuts, didn't set it up right, etc.

Protecting your personal assets from a premises lawsuit related to your rental portfolio is very worthwhile. Of course, you're always exposed if they prove fraud or negligence on your part, but the LLC along with adequate liability coverage presents the best firewall, I think.

You might want to look up the use of a land trust with beneficial interest held by your LLC. This technique seems to help avoid due-on-sale transfer issues and creates more opaqueness and anonymity around your real estate holdings, which helps ward off plaintiff's attorneys (makes you a more "hardened" target).

Keeping debt on your property is also a lawsuit deterrent.

Great point, and I defer utterly, having flipped exactly zero houses to date (but can't wait to start). In fact, your words are encouraging because in some of the areas I'm evaluating for potential flips, that is exactly the case.

So to paraphrase (I think), as long as there is "sufficient" good-condition inventory selling in the immediate area and fairly recently (to provide accurate comps and permit an appraisal to come back where you need it on resell) -- even if these sales are as little as 20% of the market, then you have viable flipping conditions.

And intuitively I'd think that the greater the ratio of good-condition retail sales in your flip's area, then the better the odds of achieving success with your distressed flip. Is this also in agreement with your thoughts, Will, or would you say that there is a "sweet spot" where you like to see distressed sales actually predominating in an area?

Hope that's clear?!

I disagree that the tax benefits are over-hyped. They are very tangible and substantial. If I'm in the 36% marginal federal+state tax bracket, then I'm getting cash equal to 36% of my depreciations writeoffs every year. If you counter-argue that this writeoff is limited by passive loss rules, then I'd say that if you're buying property these days that will generate tax losses, then those are indeed poor purchases.

Deprecation recapture, if it occurs due to a sale, is at a lower rate of 25%, so even if you sell you'll pay at a lower rate and will of course have attained the time-value benefits of having received the tax writeoffs in earlier periods. And through 1031 exchanges and techniques, many just plan to hold a property portfolio forever and pass to heirs.

But my property screening worksheet doesn't even look at the tax benefits, since they can indeed reverse if forced to sell, and in the interest of conservatism. So I agree wholeheartedly that a bad deal shouldn't morph into a good deal because of the tax benefits.

I also agree with Jon that it is rather obvious thet #3 is a savings account via deleveraging. In a perfect world, the loans would be interest-only and you would deleverage only as you saw fit consistent with your financial goals. (An LOC can accomplish this, but rates on these float unfortunately.)

I agree that Florida would appear to look very good longer term, from these depressed levels. It'll remain a vacation and retiree destination, with strong future demand from the tidal wave of retiring baby boomers.