All Forum Posts by: Daniel Dietz

Amanda, 

I am in the same boat right now more or less. I talked to a couple of lenders who I plan on doing my primary residnece through (I now rent this home from a family member and will be buying it in the near future from them - GREAT location). I was cautioned to wait because it would be harder to conform to 'normal standards' for 30 year fixed loan products with the rental debts figured in. Partially, it is due to the fact that it is harder to count the full rental income to offset the rental debt, at least when underwriting for a Secondary Market fixed rate loan. 

I want to stretch out my primary as much as possible to free up cash flow for more real estate investments. If you were looking at a 'local lender' for a shorter term primary loan, they have more flexibility in regards to this.

Dan Dietz

I agree with some others that have mentioned the Private Lenders above. There is a LOT of information here, and elsewhere too, on this topic. I have not really looked into what I would call the Hard Money side of things too much as the rates seem to high for what I want to do - build a portfolio of buy-and-hold rentals. 

In my own case, I bought my first unit as a 'fix and flip' that turned into my own house as I really like the location and was ready to downsize too. It was from a Professional Flipper that had too many on his hands at once who I do work for (I am in the cabinet and counter top business full time) so we had a prior relationship. He sold is on a 6 month Land Contract @ 6% interest and a balloon at the end. For the fix up money, I approached my first Private Lender - someone that I knew personally and knew them well enough to know that had a lot of cash in CDs. I proposed 6% for a year, they counter offered 3% for 3 years in case I wanted to rent it for a while. He felt he was still getting a good deal. 

I have started putting out 'feelers' and making a list of other potential Private Lenders and have several that are interested in at least hearing about what I am doing. These are all people I know personally - some friends, past customers, etc..... 

Dan Dietz

Hello,

Just want to put a plug in for UDirect mentioned above. My two partners and myself all used them to set up our SDIRAs and were more than happy with the service. Not sure on the electronic features the OP was asking about as we do the checkbook IRA method.

As far as annual contributions..... I asked specifically about this in our 3 way LLC WITH disqualified parties and my understanding is that we each CAN make whatever annual contributions (or rollovers) to our individual SDIRA accounts. Where it gets tricky is that no matter the amount of assets or contributions in our SDIRAs, we must keep any transfers INTO our 3 way LLC in the EXACT proportions that we started with, which was 33.33% in our case.

So if we want to buy another property for say 90K, we each need to but in 30K. One of us might have 5K left in our SDIRA, one 50K etc... but what is put into the LLC is what is important. Just wanted to clarify that for any readers thinking how this all works.

Dan Dietz

I think Ellis has a good recommendation of consulting a CPA or Estate Planning person. To my understanding, the Estate Tax does not kick until the Net Worth of the Estate is over 5 Million. Most Estates (like less that 98% of them I think) do not need to worry about this. Simplifying the transfer/probate process would be one of my main focuses if the Estate is under that 5M value.

Just and FYI..... one thing the potential seller could do also is Gift up to 14K to as many people as he wants per year while he is alive. I know of one couple that does this for 10 kids/grand kids each year. That is 280K per year transferred completely tax free (each of them can do it). In their case, it is not for the 5M threshold, but more so it is money that they will never need, and they are just looking to help the family with college cost, retirement planning, etc.....

Dan Dietz

Jim,

I am interested to here what the 'experts' here say on this. My guess is 'no, it is not OK'. I am in the same boat as you but only have one rental so far.

With that said, on both here and other websites, there has been a LOT of spirited talk about what constitutes 'sweat equity' in a property. I have read quite a few good arguments for 'maintenance' not being sweat equity. One poster's there, and if I remember he sighted some specific rulings, is that for it to be 'sweat equity' of the kind that would be prohibited under SDIRA rules it would have to *improve the value* of the property. What the IRS is try to prevent is owners getting 'paid' by putting 'sweat equity' into property and not paying tax on it (my understanding of it). 

So then, the question comes down to what 'improves' a property? Fixing a screen or picking up trash or the like? I would say no. Putting in new windows, siding, flooring, etc....? Yes I would say.

Just food for thought,

Dan Dietz

David,

I am in a three way LLC with my brother and father, all using our individual SDIRAs (two traditional, one ROTH). We are each 33.33% owners and hold one property. We ARE looking for more properties and I too specifically asked ahead of time if we could add more IRA funds in the future.

In our case, being a '3 way LLC', we CAN from everything we have been told, but we MUST keep each of our contributions into the LLC in the exact same proportions of 33.33% each. I am not sure if this is always true, or if it is because we are 'disqualified parties' and that is why it must stay that way. I think it is the latter of the two. We CAN each roll however much we want into each of our individual SDIRAs, but the amount we 'transfer' over to the LLC must remain in that ratio.

An example for anyone in a multi member LLC is that in our case of 33.33% ownership each is that within THAT particular LLC we must keep the same 'ratio', but say if any of us wanted to buy a property on our own, we could use the same SDIRA to do that OUTSIDE of the 3 way LLC.

Hope that helps. If there is one thing I have learned out there is that there is a LOT of mis-information even from the 'experts' on occasion. See my earlier posting for info on who we use and are very happy with if interested.

Dan Dietz

You will get many different opinions on this one :)

I only have one duplex right now, bought in a partnership with two other SDIRAs. So it is an 'all cash' purchase since it did not qualify for most Non-Recourse Loans.

I/We are looking at more rentals. We are considering both going the non-recourse loan route and making sure the next property(s) would qualify, and also looking at a couple of 'owner financing options. In the second scenario, we would just be paying a fixed interest rate to the owner for a set number of years. Part of how we could make that work is our reputation in business dealing in the smallish town we live in.

So I guess my question is; why not just borrow the funds from your potential partner? This would put (theoretically) all of the 'profit' into your pocket, and still give them a decent return too.

I think Patrick hit it on the head otherwise in general with 'why would the investor not want almost all the income if he is taking ALL the risk'? I have looked at partnering like you are talking, and if you can find the lending in your situation, it is almost always financially better for you to borrow and keep the profits.

Good Luck, DKC

Good discussion going on about the 'right' way to do this.

I do have a comment though.... I took Eric's comment about (maybe rightly or wrongly?) about the 'few dollars of tax savings' as meaning 'it is worth it to dedcut these things'. How I look at it is that I pay roughly a 40% tax rate overall; both halves of SSI, federal & state income tax, medicare, etc... If the cost of a meal was say $100, I would need to 'earn' about $160 pretax to pay for that. If you do that say 6 times a year, that is $360 out of pocket to me.

So I guess my personal thought is deduct everything you legitimately can, but just make darn sure you know the rules of how to do it.

Dan Dietz

I agree with the above that all of your scenarios above are likely to be prohibited.

I AM in a 3 way LLC (all SDIRAs) with my brother (no problem there) and our father (possible issues for both my brother and I). We all used UDirect IRA out of California to set things up, and they directed us to kkoslawyers.com/ (Mark Kohler has quite a few youtube videos in SDIRAs) for legal advice. Got great service from both.

A summary as I understand it is this; IF prohibited parties (which you and your son would be) do join there SDIRAs, it MUST be set up that way from the very start, and the percentage of ownership can never change as long as that entity is in existence.

In our case, our 3 way LLC bought a NEW property at 33.3% each. Neither my brother or I can ever buy our dad's 1/3, although an outside party could. We could NOT have bought a property from any of us that we owned before, nor can we ever sell it to any of us as individuals if we decide to sell it at some point.

There are LOTS of 'catches' to doing this, so make sure to do LOTS of homework and get good legal advice.

Dan Dietz

Having taken a bit more time to read over this thread, I wanted to clarify my main question.

That questions is; What are the 'Pros & Cons' of assigning the cash value of the Life Insurance vs doing the HELOC on my primary home?

I have done HELOCs before for non real-estate uses and understand them well. I have NOT done an assignment before, so that is new to me. My banker makes it sound pretty cut and dried as long as I dont default ;-).

Dan Dietz