All Forum Posts by: Daniel Dietz

Sam,

I think you are on the right track for the most part. 

Actually in our case, we CANT ever change the percentages, as we are 'disqualified parties' which I believe spouses are too. When dealing with disqualified parties, my understanding is that things need to stay EXACTLY the same FOREVER at least within that PARTICULAR LLC or venture. This also means say that you could not buy it with your SDIRA, and then have her SDIRA buy in 50% down the road....

As to your example property, your right on with your thinking that you could run into trouble with that scenario. What I would do in that case is to only put in say maybe 85K apiece, or a total of 255K and find a property(s) that would work with that amount. Of that 255K, personally I would only spend maybe 240K maximum on a property and keep 15K in reserves for taxes, minor repairs, etc.... and each of you could still fund up to the remaining 15K each left in the smaller account for a total of 45K more in the case of a major catastrophe (out town recently flooded and there was a lot NOT covered by insurances). Summary of that is you need to keep more in reserves.

My real life example is we had a duplex in mind for our first purchase that we new we could get for about 75K that did not need any repairs. We each rolled 30K -50K apiece into our individual SDIRAs (that amount does NOT need to be the same) and then each individual SDIRA 'bought into' the LLC for 30K apiece for a total of 90K in the LLC. We felt we had plenty of reserves with 15K left over. (we also each have plenty more in our regular IRAs that we could roll into the SDIRAs if needed).

The LLC can then invest the 15K of reserves however we all agree too, in our case about 5K in the checking account and 10K in EFT Stock Funds to get a better return on it. As rents come in trough the year, say maybe quarterly, we can invest that into the ETF Funds (r whatever you wanted).

Hope that makes sense :). Again, the summary is you do NOT want to push it as close as your example as you can run into a MAJOR pain in the butt in that scenario. One other note is that in your example for two 'lesser investors' (smaller accounts) could make their yearly contributions to bump up their available funds for repairs too (if they had not made their yearly contribution yet). 

Hope that helps. I did a LOT of reading on this before jumping it. I am NOT saying I know it all by any means, but I did think through a LOT of different scenarios! So ask away and I and all the others here will do the best we can to help.

Dan Dietz

Sam,

@Dmitriy Fomichenko  covered a lot of it pretty good, but I'll add a bit.

First off, I use a SDIRA, not a Solo401K, but I THINK the rule would be similar. In my case, I invested into a 3-way LLC with my brother and father, each 1/3 ownership. Each of our SDIRAs has it's own account just like regular IRAs. Each of those SDIRA accounts (which hold minimal cash - maybe $500 each) invested into the LLC as 1/3 owners of it. The LLC purchased a rental and had say 30K left over (10K from each of us). The LLC can invest that into stocks, cds, etc.... until we find another rental.

Where it is a bit tricky is that within THIS particular LLC, each of our SDIRAs must contribute the EXACT same ratio if we want to put more $$$ in. One way around this is say if my brother and I wanted to do a 50-50 partnership WITHOUT our father, we would need to start ANOTHER LLC with just the two of us. I am not sure how that would differ if done without an LLC structure.

I hope that make some sense.

Dan Dietz

Ron,

I have not used Dmitriy Fomichenko, but his advice on here seems spot on. I think from what I have read here from him, I would have definitely looked into using his company when I set mine up if I was aware of him at the time.

Who I did use was UDirect IRA Services out of California, who I was also very happy with and would recommend highly.

Dan Dietz

@Barrett Dunigan

Good point...... I meant to write in more depth before but was in a rush. 

You are completely correct that the Non-recourse lending is out there - just a bit hard to find and lots of 'conditions' from what I found.

In our case, many of the rentals that have great pricing and return ratios are; converted house into duplexes or triplexes, are pre 1950 or so in age, and under 80K-100K in price - ALL of which seem to be issues for most Non-recourse lenders, so it rules that route out in most of the properties in our area, which is a city of 12K or so.

With that said, I have been looking into a few larger (4-8 unit) and newer units with the leveraging in mind that a Non-recourse could bring, along with working on finding Private Lending for the other, older homes.

Dan Dietz

Hello, 

Dmitriy is right as usual, but a couple things to be aware of.

This person cannot be a 'disqualified party' (close relation) to you or anyone else (if any) involved in your venture. Also, if the owner is only offering financing for short time and expecting you to refinance say once you have a couple of year rent history, and YOU are also buying it with a SDIRA, it will likely be VERY hard to get traditional financing for your SDIRA. 

Otherwise, that is exactly the kind of deals I am looking for too.....few and far between, but if we dont look, we wont find them!

Dan Dietz

Good conversation so far everyone.

One of the aspects I need to do a little more looking into also is how things like depreciation, basis, etc.... works in regards to Regular vs ROTH. I am in a 3 way partnership that consists of my own ROTH SDIRA, and my brother and fathers Regular SDIRAs. We just started this about a year ago, mainly for buy and hold rentals. 

What I am wondering in regards to the depreciation aspect is say 20 years down the road when we decide to sell, I am wondering if they will be able to each count depreciation of their 1/3 interests against their income (since taxes will be due on gains in their SDIRAs) and I am thinking the depreciation on 1/3 interest won't matter to me, since there will (hopefully) be no taxes due in my ROTH SDIRA. Does that make sense?

There is also the issue of how taxes would work within the SDIRAs if we ever chose to borrow (leverage) on a Non-recourse basis - the question being would the Regular and ROTH SDIRA's be treated the same way in regards to UBIT etc.... and being able to take depreciation before those taxes would be applied?

The reason we have the different types is I choose to convert when ROTHs first came out, and if I remember right they let people pay the taxes due over 3 to 5 years or something like that. My brother and Dad did not at that time. 

Looking forward to what others have to say too.

Dan Dietz

Joel,

That is right: my brother, father and I each have our own SDIRA. As a side note, mine is a ROTH, theirs are Traditionals. If I remember right, being that we are all 'disqualified parties', the 3 way LLC was the only way for us to invest together. In other words, we could not (or at least not recommend) just do a 3-way Partnership. We also like the extra protection of the LLC, although that is no substitute for good insurance obviously.

To elaborate on the three accounts; for our first property, we (the 3-way LLC) needed about 75K all together. Each of us transferred somewhere between 30-35K to our individual SDIRAs at UDirect (that is still who we use). The important part is that no matter how much each SDIRA has (could be 500K - doesn't matter) the amount that each SDIRA INVESTS INTO THE LLC is what must remain constant - 33.33% in our case (could be any ratio deired- just needs to stay the same). Part of what this means is that for each additional property we each need to have 33.33% of that amount in our SDIRA to make that work (we each need to roll more over into our SDIRA).

If my brother and I wanted to do an additional property and dad didn't (he is getting older) we (brother and I) would need to make a NEW LLC that we could each be 50% owners in. Our SAME SDIRAs could then invest into that new LLC.

As a side note, each of our SDIRAs can use our 'extra funds' that we rolled to invest in whatever want; stocks, CDs, etc... or we could all roll 'extra funds' into the LLC in the 33.33% ratio and do that within the LLC. We like to keep a bit extra for future properties in the LLC for 'earnest money'. In our area we are most likely to but at estate auctions which means we need 10% down the day of sale.

And yes, you are on the right path as far as checkbook control and no transaction fees. It sounds to good to be true to some, but it works great. Just be up to date on the Prohibited Transaction rules and you'll be fine, in my opinion.

Dan Dietz

Joel,

Im sure you will get a lot of other replies too, but here is my opinion.

I did a LOT of reading both here and elsewhere on SDIRAs and LLCs. This IS the method we use. We do have 'local checkbook control' which is GREAT as we have rentals, so lots of little misc. bills etc... 'We' consists of my brother and father, all using our SDIRAs in a 3 way partnership (33.333% each) that is formed as an LLC with each of our SDIRAs (NOT us as individuals) each owning a third of the LLC. Hope that makes sense.

You will see a lot of reading that we are 'disallowed parties' to each other in regards to SDIRAs. This IS true in MOST situations. This is basically to avoid people from abusing the rules and trying to pass assets from one person to another. We were VERY careful to set this up right from the beginning. The point to take away is this; We started this LLC as 'one third owners each' and that can NEVER CHANGE. All income and outgo must be done in these EXACT proportions, for eternity essentially.

My understanding is that an LLC would work the same for a Single Member LLC as far as the checkbook control goes, but I'll let others chime in on that.

We used UDirect IRA Services who were recommend on here by someone and they were/are very good. They in turn recommend Mark Kholer Law Offices (not sure on spelling right off, but google them and you'll find them. They were also very good, and not too badly priced, if I remember about $1500 for the 3 way LLC which is much more than a single member one.

Make sure to read up on 'prohibited transactions' before you start. 

You will also here about Solo 401Ks, which are essentially like a SDIRA, but less rules. You do need to have self employment income though to do them. A good way to go IF it works for you.

Dan Dietz

Thanks for all the input so far. 

As to some of the questions; 1) I live in the same area now, and do feel confident on the sale price range 2) The seller and I are going to go over his numbers from almost identical houses in the same area in the next few days - I will also verify these with the subs I would be using to make sure of things. 3) I did include all utilities, dumpster, interest etc... in the holding cost - that is one area that I goofed up on the rehab of a rental while we were getting it ready - you tend to remember those things :) 

As to why would he want to sell so cheaply..... He is getting to be almost 70, and has had health issues so it looking to do more of the wholesale thing. He is getting to the point where he does not even want to manage the jobs all the way through even though there is more profit to be had. I think he would be happy doing 6-10 of these a year on the wholesale basis. Him and I have a long history of working together, a high level of trust, etc.... He also borrows the funds that he 're-loans' for only 2-3% from family members that are thrilled to get more than .5%on their CDs, so he is making some there too. I think part of his thought is if he could get a couple of guys like me to 'do the work and bring the fix up money', he could keep finding these for years and making money into his old age so to speak. 

@Will Barnard or others.... on the split - I hear what you are saying. The back story on the potential lender/partner of the fix up money is that we go back a long way too. We are looking at this as more of a partnership that lender/borrower relationship (not sure if that is the right thing to do). He has much more capital available than I do. I am local here (he is not) and I manage jobs for a living (kitchen and bath remodeling) so we each have our strength. One thing I did NOT mention is that if this deal (or future ones) went bad, I would not be on the hook for the fix it money. We were thinking of a 50-50 split of 'any and all' profits. Meaning if we only make $1000 he gets $500 return on his funds and I get $500 for my time. If we have a loss, we each pitch in 50% of it. Does that make any sense? I do have other potential lenders who would be interested in doing more of a loan type of thing at say 10% , but I would feel more comfortable pursuing that with more of a track record.

Thanks again all, 

Dan Dietz

Hello,

I have been on here for a while but as a Buy-n-Hold guy. What I think is a great opportunity for a Flip just came up. I do work for a Professional Flipper/Wholesaler (cabinets and counter tops for him) and he is willing to wholesale one to me at what seems to be a great deal

Detail are; house is about 15 year old foreclosed ranch that he just picked up from USDA. It is assessed at about 160K on the tax rolls. He will sell for about 80K (meaning he got for about 70K - he usually makes about 10K per house wholesaling). He is also willing to finance the 80K for 6 months at 6% Interest Only with a balloon. 

The house (according to him) needs about 15K materials and labor would be 10-15K if all hired. So say all in for 105K. Even though I have great credit and assets, I am trying to sell my primary home right now so so not want to do a HELOC for fix up funds. I DO have a couple of friends/investors who are willing to put up funds needed for fixing and holding until sold for a cut of profit.

I think we could easily sell this home for 150 - 155 after rehab. It looks to me like even after holding cost of say 1K per month, with me running the job and an investor putting up funds, that there should be about 30K in profit. Even if I am off a bit, and say there is 25K profit, and it was split 50-50, that would be a 50% return to the investor and about 12K to me for my work. 

This seems like a good deal for me. WHAT AM I MISSING?

Thanks, Dan Dietz