All Forum Posts by: Daniel Dietz

Hello,

I think I am making headway understanding things in this realm of SDIRAs, but still have a bit of confusing.

I read in different places that a person 'Can partner with your own SDIRA' to do real estate deals. I am under the impression that this 'has to be done from the beginning' and 'cannot be undone'. Those two concepts I fully understand as my father, brother and I formed a three way partnership (LLC actually) that our three independent SDIRAs each own a third of. Started that way and has to stay that way.

I also am starting to understand, thanks to lot of help from here on BP, that I can NOT do a deal where my (or any other prohibited party's) SDIRA makes the 'down payment' (say 25%) towards a loan that I would then take out in my own name outside of the SDIRA.

Sooooo, how CAN these deals work then? Let's use a 125K property that I could get for 100K as an example.

• 1) Could my SDIRA be a 20% owner with 'cash' from the SDIRA (no loan), and then I put down 25% (20K) on a loan for the balance of the 80% (80K)? (my down would be the collateral for the traditional financing, NOT the value of the SDIRA portion)
• 2) Could my SDIRA be a 20% owner, and use 'owner financing' for the remaining 80% with what ever terms we agreed to (25% down on that portion)?
• 3) IF #1 or #2 could work, assume I went to refinance after seasoning for 2 years, and the property appraised at 125K. At that time, the SDIRA would still own 20% (25K) leaving 80% (100K with a loan balance of 55K) as non - SDIRA for conventional financing. If I could borrow 75% of the 'non - SDIRA' portion (75K), could I essentially 'cash out' by paying off the 55K loan on the non - SDIRA portion and recapturing my initial 20K down payment so that I could re-invest it into another property?

Thanks for any feedback,

Dan Dietz

@Steven Hamilton II or others,

I would assume if my brother and I lent to each other, the 'lending brother' could have NO interest in the property on a personal basis? Meaning if I lent him 100K from my SDIRA so he could personally buy 50% of a property, that I could not own the other 50% either with my own personal funds or from his SDIRA lending me personally the funds.

Dan Dietz

Shaun,

The partners ARE my brother and dad. When you partner with 'dis-qualified' parties it must be done from inception, and can never change percentages etc...

I was under the impression that the 3 of us as a partnership can not lend to any of us outside of the SDIRAs. If I am hearing what you are saying right, my brother and I, OUTSIDE out the partnership (individually from each of our SDIRAs) could lend to each other and say I borrow from him to buy a unit and he borrow from me? Had not thought along those lines to be honest, but it is intriguing. I would love to hear you or others give a bit more detail of how that has worked.

I am working on lining up some non-family private lenders that may or may not be using their SDIRAs to lend to us, either within our outside our SDIRAs.

Thanks for the thought.

Dan Dietz

Walt,

I have not had to deal with the whole UBIT in my SDIRA yet as we paid all cash for our first one, but plan to leverage upcoming ones. My understanding, which is just an understanding not experience, is that you CAN depreciate IF it is leveraged and you have the taxable gain from that leveraging. Again, I am not sure on that.

Dan Dietz

Marcus,

I am not sure if you have had college aged kids go through the FA process, but I will try to explain my thinking. Also, schools vary on how they do things, but for Federal and State Aid the formulas are pretty set.

This is going to long, but hopefully it might help a few folks out there.

I forget the exact formulas, but essentially when a student applies, both their own income and assets are counted (NEVER save in the students name above the exempted amounts) as well as their parents income and assets. The students are counted at a much higher rate than the parents. The parents rate, in my case, was about 6% of assets and 33% of income. From all this info a families EFC, Expected Family Contribution is calculated which is a 'guideline' as to what they 'should' be able to afford towards college expenses. The loans and grants they are eligible for are largely based of the EFC. For example if a school costs 40K, and the EFC is 15K, there is what is called 'unmet need' - the amount of college cost - EFC - 25K worth of loan or grants they are eligible for. Many grants are also based on the family's AGI off of there Federal Tax Return.

The gift my wife got was about 150K. Let's say we did NOT put this into an Insurance Contract and instead just a a 'stock market index ETF' or similar, and assume a 10% return. This means it might have earned 15K per year before taxes. This would change our EFC by about $7500 per year, going from about 5K to 12.5K. If in an Insurance Contract, it is NOT counted toward the EFC, the same way that Retirement Accounts are not counted. It also would also have raised our income enough that our kids would not have been eligible for the Pell Grant program - which they only qualified for about 1K in Pell Grants each, but it had HUGE affects otherwise too, which I'll get to in a minute.

So, what meant in terms of actual FA that my kids got is several fold; 1)With the lower EFC, they were able to get 'deferred Staford Loans' meaning no interest while in school saving about 2K each over 4 years 2) They were able to get a small amount of Pell Grant each year for 4K each over 4 years 3) Both of my kids schools also gave Scholarships somewhat base on the amount of 'unmet need' along with GPA. They averaged about 3K per year each on that. If we had had the higher 12.5K EFC they would not be eligible for that 4) At one kids school, since she was "Pell Eligible" (meaning just qualified, whether she used it or not) and in a certain major, along with our income being in the bottom quarter of students (<80K) she was eligible for School Grants of about 15K over the 4 years. If we had the higher EFC, she would have not been eligible.

So, that adds up to 51K in Financial Aid they would NOT have got with the higher EFC we would have had if we had not invested in the Life Insurance instead of keeping it in a taxable type of product.

Of course, everyone's situation is different. In my case, this is what happened. If someone had an income of say 300K and countable assets of 500K, a 150K gift would NOT make a difference as there EFC is so high they would likley be expected to pay for the entire cost of almost any school out there EITHER way.

Hope that helps.

Dan Dietz

Dmitriy,

I guess it all depends on the policy etc.... I put about 150K in, and AFTER providing about 800K in Insurance (paid internally from the returns) it has grown to about 195K. So not outstanding, but around 5.5%+ on average, AND I can borrow on if, it helps when qualifying for financial aid for college Saving of at least 50K, and if I drop dead today, my family will get 800K. And, this is a guaranteed rate also. Stocks MIGHT be able to do that, but statistics would say probably not.

I think the thing we all need to remember is that every situation is different, and every product is different.so we all need to look at it on an individual basis.

Dan Dietz

Hi,

Great question, but I am not sure of the answer either. I also own a SDIRA that owns my LLC that holds the property. I too do the checkbook control thing. We just put it into the SDIRA/LLC checkbook. We do have a balance of many times the deposit amount, so didn't even give it much thought.

I'll be interested to here the input from those more experience than us :)

Dan Dietz

Just to throw one more little tidbit to what I wrote above........ If you have kids approaching college age PAY ATTENTION!

When applying for Financial Aid, Parental Assets are looked at and factored in, along with income, and quite heavily. Almost every asset you might have; stocks, bonds, property, business, etc... are counted EXCEPT FOR CASH VALUE OF LIFE INSURANCE, and Retirement Accounts in most cases.

When my oldest was about 16, my wife was Gifted a large lump by a relative that was still living but elderly, like in the 100K+ range. Nice to get, but VERY bad for Financial Aid, and my wife did not want to 'use it up' in case the relative might be in a situation to need some help in their remaining years.

When I studied up on the college FA, I came across the info on Cash Value LI, and am glad I did. We stuck the whole lump into my policy, got 800K in coverage, and AFTER all cost still got a 7% return (cds were 1.5 - 2% during this time).

IF I had not done that, it would have made a difference of AT LEAST 50K in Financial Aid for 2 kids over 4 years. So in reality, my returns were MUCH higher than just the stated rate.

Just an FYI of one of the side benefits to Cash Value Life Insurance.

Dan Dietz

You are getting good feedback above as to the difference between *owning* the Real Estate vs *Making a Loan* to someone else for Real Estate.

I happen to disagree with the sentiment of some that a SDIRA is a 'bad place to hold real estate'. But, take that with a grain of salt as many of them have WAY more exerience than I and am probably much wiser.

My situation is that my SDIRA assets are at about a 20 to 1 ratio over my liquid cash on hand, and my 2 partners are in the same boat. So for US, it makes sense to make the most of what you have, and that is SDIRA funds in our case. I am not familiar with lending, but am with owning, so there is more comfort there for me/us.

I think Jared made some good points just above here too.

This is a response I posted a few weeks ago as to the idea that the UBIT and related taxes would 'eat up the profits'.

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I know this topic has been covered here in detail before, so you might want to do some searching too.

I also use a SDIRA, but have not borrowed yet as the properties I am targeting are not 'eligible' in most Non-recourse lenders opinion, since they are houses converted to duplexes, pre 1940 construction, and under 100K purchase price. This is also my first year, so have yet to do the actual book keeping of what I am going to say below, so take it with a grain of salt! It is what I understand things to be from what I have learned here on BP.

As far as the whether to leverage or not..... to me it is a no brainier if you can. With that said, I look mainly at 'return on my investment'. Save you have 100K to invest and you can buy one property for 100K, or leverage it into 3 100K properties.

For rough numbers, let's say you make an 8% return with out appreciation, or 11% with appreciation, on the all cash unit. This might give you a NOI of about 8K, which is also your cash flow since there is no interest or principal payments. Hence your 8% return on the 100K.

If you leverage your money and get those 3 100K properties, looking at your return on your investment/equity, you might be at about 14% without appreciation or 24% with appreciation. This might give you a NOI of about 25K, but you then deduct interest of say 11K for a cash flow of 14K (hence your 14% return) and you also get depreciation of about 11K, leaving you a taxable income of 3K. It the UDFI is 33% in rough numbers, you only owe a tax of 1K.

This means by leveraging within your SDIRA, even AFTER you pay the UDIF, you have raised your return from 8% to 13% or almost 60% better. If you factor in appreciation, the return might go from 11% to 22%, or 100% better (doubling your return).

Again, these are just my THOUGHTS. Maybe @Steven Hamilton II could chime in and give his input on this line of thinking too.

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Dan Dietz

Steven,

Would that same idea work IF the SDIRA Holder (for the down payment) and the person taking and personally signing for the loan were NOT 'dis-qualified' parties - say just two friends, associates, etc...? IF that would work, would it matter if it was done as a LLC, Joint Venture, Partnership, etc...

Thanks for sharing the knowledge and your fast reply too!

Dan Dietz