All Forum Posts by: David Beard

@Doreen Chaisson -

Regarding your comment: "I've seen people suggest you can have a Solo(k) by doing something as simple as setting up an LLC for selling items on CraigsList or Amazon. While this may be true, the salary deferral you would be eligible to put into that Solo(k) would be tied to the income you earn in that LLC - you can't take earnings from another fulltime job and claim them as salary deferrals into your Solo(k)."

Yes, I've suggested setting up a "micro" business, and this is perfectly acceptable. The vast vast (did I say vast) majority of folks I come across have old 401k's from prior employers and they want to roll that money over into a self-directed vehicle, and the SD401k is the best way to do this. Yes of course they can't use salary income from an unrelated job to contribute to this SD401k. How does that make the SD401k inferior to an SDIRA?? (It doesn't).

And this: "The only true difference between using a Self-directed IRA and a Solo(k) when it comes to investing in real estate is that leveraged real estate held in a Solo(k) is not subject to UBIT tax on any income earned. Otherwise, the process and the prohibited transactions are the same across the board."

Two huge points you are not mentioning: the up-to-$50k loan that can be taken from the SD401k for any purpose, and the fact that the SDIRA requires an LLC to enable checkbook control (which is the only way I'd invest due to convenience, speed, and lower custodial costs), whereas the SD401k does not need an LLC. LLC's can be quite expensive in some states. And I've read multiple times that IRA/LLC's have a certain taint as regards potential future IRS scrutiny, whereas this doesn't seem to be the case for SD401k's.

You make many good points and know your stuff (naturally since you work in the business)!

@Joe Haas Joe, keep in mind that a profit-sharing situation will create active business income for your investor on which he'll be subject to self employment taxes. And if he's using a self directed IRA account, then there is a UBIT tax that is outrageously high.

It may be best for him to just make a straight loan involving interest and points, such as a flat 12-14%, or 10-11% + 2 points, something like that. A straight loan is less entangling as well, which has its advantages.

Just making sure that you and your investor are aware of tax implications.

Best of luck with a successful partnership. At least no one has yet said that "the only ship that doesn't sail is a partnership". I'm sick of hearing that worn out expression.

It's certainly a very viable strategy, particularly if you're in an area where it's difficult to find good cash-flowing rental property.

Especially early on (and probably even later on), do not lend to those with little or no experience. Stick with more seasoned investors, and always ask for at least a 5% contribution from the borrower (preferably 10%), to help keep them honest, regardless of how strong the ARV (after rehab value) will be on the property. You should be able to earn 12-20%.

You can also place your funds with a professional hard money lending company for around 10%, not a bad way to learn the business.

As you gain more experience, you can look into 50/50 profit-sharing arrangements or other riskier structures, with the potential to earn 25-30%.

@Mark S. - if you want to own rental property in the area where you live, sometimes it's very difficult to hit the returns that some investors are achieving in their own neck of the woods. That said, as you get going, you'll make more contacts and may start surfacing some off-market and pre-market deals. If drug dealing is pretty rampant, I'd stay away, but you definitely should research that further.

You say the house has been "rehabbed", which can mean almost anything. You need to be specific. What is the condition/age of the roof and mechanicals?

The PM's fees SOUND very good (10% of collected rent w/ no lease up cost, plus no markup on maintenance), just make sure to talk to at least two of their existing clients. Try to call owners of properties that he currently has advertised for rent, they might be lease likely to be satisfied. Find out how long it's taking to fill units.

How long has the house been on the market?

I actually laid out exactly where my 1,800 came from, have done loans with US Bank at these levels. $5,000 on such a small loan is ridiculous.

I agree, don't use the terminology "second home". Call it "investment property".

Does the house need any work at all? Are the roof or any of the mechanicals over 12 years of age? What is the class of the neighborhood (B-, C+, C, C-)? Is it a rental-dominated neighborhood? Is it a reasonably safe area?

$600 rent for a 3/2 sounds pretty weak, is there upside? Have you researched rent comps on Craigslist and calling signs in the area?

Closings costs shouldn't be more than $2,000, and hopefully $1,800 ($400 appraisal, $400 title search/closing fee, $600 lender fee, $150 misc, $250 owners title insurance which is optional).

If you use a PM, will probably be more like 14% (8-10% base fee plus 50-100% of one months rent for leasing fee)

Deal seems very marginal. If house won't need anything for at least a few years, and the neighborhood isn't too bad, and your market doesn't have anything better, then it may be MINIMALLY acceptable.

@Caleb Zuniga - yes it's state specific as regards to whether LC's require foreclosure or just simple forfeiture proceedings. In OH and MI, for example, forfeiture applies unless the LC is < 5 yrs or the borrower has 20% equity in the property, in which case foreclosure applies. If it's just a simple forfeiture, in OH it would take about 60 days to get your house back (30 days delinquent on the note, and then 30 days to eject the borrower).

Using an escrowed QCD as a foreclosure circumvention tool is really a different issue that could come into play with either a LC or a regular mortgage. As Bill has posted many times, this seems to be a bad idea and likely never enforceable, ESPECIALLY if the borrower is an owner-occupant.

I haven't looked through all of this, but I'd be real interested to know who out there can actually speak from a position of considerable successful experience on this topic. In other words, who has met these criteria?:

• Owned these types of properties for 5+ years, at least at moderate scale (say at least 5+ of these houses).
• Netted 50%+ of the gross potential rent over this 5+ year period, after compensating yourself at least $20/hr for the time you've spent AND covering ALL maintenance that was incurred beyond your initial rehab (even if you capitalized it on your taxes)
• No regrets and has enjoyed managing these properties (or at least hasn't regularly wanted to bludgeon yourself)

Color me just a tad skeptical, it sounds GREAT on paper, but the long term reality? Does anyone on this thread meet the above criteria? And has anyone done this successfully over time, long distance using a property manager (can't even imagine)?

I'm positive that @Rob K. qualifies (though not sure about point #3??), but he is also a hands-on management pro and admits that property mgrs have been a bust when he's tried them. Anyone else?

There is a rigid sense of looking at the IRS "tracing rules" which suggests that you can't deduct the interest against that particular property. However, I'd suggest a few things:

1) 99% of investors would deduct it and not worry about it, as long as there is a mortgage against that property. I find it difficult to believe that an IRS auditor would look deeper.

2) A refi done very shortly after purchase can be viewed as a "delayed financing" situation. In fact, Fannie Mae makes a loan just for this purpose in cases where the refi is done within 6 mths of purchase.

3) Will you be using the proceeds to purchase another property? If so, then it can arguably be "traced" as the funding source for the new property.