All Forum Posts by: Daniel Dietz

@Alexander Knox Rentec Direct, the PM version will do that no problem. You should have them do a demo for you. We love it with involving 4 people across 7 entities we are doing almost exactly what you are looking for.

For example if  I own 100% of A, 33% of B, and 20% of C, I can run a report on just *my* overall financials.

Dan Dietz

My three partners and I use both our SDIRAs and SOLO401Ks to invest in buy-n-hold rentals. Each of our self directed accounts are 1/3 owners of an LLC. It is actually that LLC that holds the properties, and our respective accounts are own a share of the LLC.

One of the reasons that we choose to do real estate in our retirement accounts is because that is where 80%+ of each of our assets ALREADY were sitting, so we each did 'roll overs'.

We also own rentals outside of our self directed accounts. Within those accounts, we look at it as 'what can make us the best returns (meaning stocks, bonds, REITs, real estate etc... ) and keep volatility low? For us, that is real estate.

The reason we do both SDIRAs and SOLO401Ks is that when we rolled funds over, ROTH IRAs are about the ONLY kind of account you can not roll into the new SOLO401K.... but you ARE allowed to roll them into a Self Directed IRA.... stupidist law I have ever seen ;-)

I have always heard to 'think of it like a stock'....meaning if you sold a stock in that IRA, you would have the same tax consequences, as outlined above. The one exception is IF you used leverage to buy it, and IF that leverage is still in place when you sell. I will let the Pros explain more on that if needed.

We use Rentec Direct for all of out tenant management, payment taking, service calls, AND accounting. I would recommend taking a look and they can do a presentation on ho wit can fit what you need. 

We hold 30 portieres in 7 different entities made up of 5 different people and it is seamless (we use the 'property management version). 

Dan Dietz

@Toks Fifo, it is definitely a bit hard to wrap your head around the differences at first. I think you need to compared apples to apples through to the end to see the comparison.

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Lets say you buy a 100K house and put 20K down. 20K is YOUR investment, NOT 100K. Lets say you rent it for 1K per month and after interest, taxes, repairs and cap ex you have $300 month, and then take off $100 for principal and are left with $200 month in 'cash flow' (what SEEMS like money in your pocket). You THEN get to take about $350 depreciation so for CURRENT taxes you 'lose' $150 per month or about 2K per year. So let's say you get a 'current tax savings' of about $650 per year off of your W2 or other regular income. That comes up to 20K in 'tax savings' over 30 years

So we have $200 per month 'cash flow' per month so let's call that $2500 per year in tax free income or 75K over 30 years. This is typically not taxed 'currently' thanks to the benefit of the depreciation (which WILL be taxed at some point if no 1031 exchange). So that cash flow will make you around 75K over 30 years that is currently 'tax free'. When you sell at the end of that 30 years, you will have taken 80K in depreciation that is 'recaptured', at a tax rate of UP TO 25% (could be less), so the tax due will be 20K at the end of that 30 years. So it is more or less 'a wash' in the end. 

We then have another $222 per month in 'loan paydown' (when averaged over that 30 years) or about $2500 per year. This is not taxed until you sell and then taxed as capital gains. At the end of 30 years your 80K loan will be paid off, meaning reducing your 'basis' as mentioned above, and that will be taxed as capital gains rate, most likely 15% or about 12K, so you have 68K of gain left.

But you ALSO had appreciation in most cases. Let's say that is a modest 3% per year over that 30 years (our average in small rural Midwest area has been 3.9% of the last 50 years). So your 100K investment is now worth about 250K. That 150K of gain in value will also be taxed as capital gains. Let's call that 15% or 22K, so you have a gain of 128K left after taxes.

When you add that all up, your 20K down payment brought you: 75K in tax free cash flow, 20K in 'depreciation tax savings that is 'offset' be 20K in 'depreciation recapture' so $0, 80K in 'loan paydown' -12K in CG tax = 68K, and 150K in appreciation - CG tax of 22K = 128K. That all adds up to $270K After Tax Earnings. That is an After Tax Earnings of about 9.5% annually. If you changed the appreciation up to 3.5% that changes the After Tax Earnings to about 10% annually.

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Now let's look at stock or equities. Lets say you took that 20K down payment and invested it for 30 years at a generous 10% yearly return you would have about 400K. Take away capital gains tax of 15% and you are left with about 340K. This is ALSO an After Tax Return of about 10% thanks to the beauty of compound interest
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But, what the first scenario does NOT take into consideration is that rents RISE over that 30 years. If they rise at say 3% annually instead of collecting 360K over 30 years you would collect about 560K over that time. So if you take the extra 200K in income - taxes might be about 150K after tax. That puts the TOTAL After Tax Return for real estate at about 420K or an annual After Tax Rate of Return at about 11%.

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One of the other BIG things this does not take into account is that as you grow equity in the rental from loan paydown and appreciation you can leverage that into MORE properties, with OUT adding any cash out of pocket. At roughly the 7-10 year mark you might have enough equity to do a cash out refi and buy a SECOND property. Now, the rental blows the stocks out of the water as far as After Tax Returns go. You cant do that with stocks, and there lies one of the largest differences.

Hope that helps!

We have had luck pulling county tax records and seeing who owns multiple properties where they do not live, especially when they are 2-4 units ones....meaning a few people have a house in town and maybe a country home or lake home that are SFHs.

Then, either do mailer or my preference is cold calling them if we can track down phone numbers. It IS a lot of calling, but even when THEY are not interested, you might get a lead to someone else who IS interested in selling. People who own multiples often know others in the same both.

@Steve Vaughan I have never done a TIC yet, but can see some advantages in certain cases, especially if a partner is doing a 1031.

With financing, how is that handled? As in if I own 50% and you own 50%, do we each get a separate loan on 'our portion'? It would seem odd for both to sign 'for the entire loan' when we each only own 50%? Thanks for any insight into that area.

Dan Dietz

@David White I am involved in a few different LLCs that hold rentals with various structures.

Most of them are with 2 relatives where we all put in equal capital, and are all active in some form; 1 tenant relations, 1 business relations, 1 maintenance. We all can clip into each others roles if one of us is out of town or not available. With these, we keep track of labor (using Toggl App, which can track it per ownership structure, property or task such as handyman, lease signing etc) and pay out that labor @ $25 per hour and THEN split all profits.

A newer form we have started using since we were out of 'down payment' funds is to bring on Private Money Partners - PMP, (who have also been Private Money Lenders on other deals). The PMP bring ALL of the down payment, usually 20% for commercial loans, and we do ALL of the finding, rehab management if needed, business work AND ongoing PM. We split everything 50/50. Cash flow as it happens, and when/if we decide to sell the PMP will be first to get reimbursed for their down payment amount, and THEN all built up equity will be split, whether gain or loss. We are able to EACH make a 9-15% return over the long haul. IF we were ever not able to DO the ongoing PM, the cost for that would come OUT of our half of the split.

This second method seems like a real win-win..... An investor can benefit from real estate investment with almost NO work on their part, and we can 'make money' from our knowledge and time instead of our capital.

Hope that helps, Dan Dietz

Hello All,

As my day job I am a Kitchen and Bath Designer and Remodeler. I have a showroom in a commercial area and have long planned on making a small Design Studio in about 10 years as a 'semi retirement gig' in my back yard at home.

With the recent dip in sales and shelter in place orders I have been crunching numbers and got wondering if I should do this now. It could be beneficial both from a cost savings of not maintaining a commercial space and also operating with less employees and focusing on our most profitable projects. I have checked zoning, permits and the like already. I think it could also have HUGE family benefits of more interaction etc....

My question  comes down to how I could write things off if I went that route. My brief talk with my tax man made it sound like I could definitely deduct the expense of building the studio, some right away and some depreciated.

I am wondering if any of you have done similar for a office at home or the like and how you deducted things? Upon some reading, it look like it might be able to be depreciated in 7 years IF I make it a 'portable building' (think glorified yard shed)? I also wondered about specific landscaping to that would allow access to it from the road? It looks like that could run 5-10K? Or a privacy fence so that neighbors did not 'have to have customers looking into THEIR back yards' (other home based businesses in town have done that).?

Would I run into an issue that these things *might* be considered a 'personal improvement' also, even though there is NO way I would spend that if I were NOT going to run a business from home.

Any thoughts from those who have done this?

Thanks, Dan Dietz

This is an olllddddd thread ;-)

The partner with the loan to the family member on their own property (not in the partnership) ended up refinancing that property with our local bank we use into a 30 year fixed at around 4.5 to 5% a few years ago and still hold that property.

The 'family lender' who then had the cash in hand turns around lent that to the partnership of the three of us to help purchase more rentals (it is a second position Note that is about half of the 20% down payment. If I remember right, we did 10 years @ 5% which fit the cash flow of the new property ok.

One of the reasons that we 'moved it over' to the partnership is that the opportunity for a 30 year fixed WAS available on that first singly owned property since they owned that in their own name, so it made sense to lock in a good long low rate.

On the partnership, which is an LLC, our lender allows us to bring at least half of the 20% down as a Second Note from Private Lender as long as the DSCR (cash flow essentially) stays in their criteria.

Hope that helps, Dan Dietz