All Forum Posts by: Daniel Dietz

We have done several loans with NASB and had great service/experience. Very on top of things with this being one of their specialties.
Also, I have done a couple of non recourse loans with Private Lenders on a shorter term basis. One was a 5 year
HELOC that we did on a house we owned free and clear for I think 50% LTV. We then used that to buy a 4 plex and put all of the 'cash flow' towards paying that note off within the 5 years and now have both properties cash flowing nicely for no more input from our SOLO401Ks.
Right now I am working with a seller that is looking to sell a portfolio of about 10 units with seller financing and he is open to doing it non recourse. It helps that we have known each other for 30 years in a business to business capacity.

@John Cohen, I forgot to mention that IF a person has a choice that is one HUGE advantage to SOLO401Ks. There is no taxes related to financing. I have known people that start a 'side hustle' (think commercial carpenter who does 5K in side work per year) just so they can qualify and roll their 401s or IRAs into one, more than make the larger allowed contributions.

The taxes that are involved when leveraging an SDIRA to my estimation are not as bad as they are made out to be at times. Say if you buy a 100K house and leverage it with a 50K loan and rent it out from 1K per month. After taking off expenses including 50% of allowed depreciation you might be down to a cash flow of say 3K per year. From there I *think* there is a 1K deduction (kind of like a standard deduction on personal taxes) which leaves you 2K taxed at about 35%, so you still have $1400 cash on cash or about 3%. BUT, at the same time you had equity growth of say 5K per year from loan paydown and modest appreciation, so another 10% ROI.

So STILL a solid return all things considered.

What @Brian Eastman said :-)

One of the main reasons I started investing with retirement accounts is that is where the majority of my investable  assets were. I had about 10 times as much in IRAs as liquid cash.

I looked at it exactly as Brian mentioned in that 'how can I make the best return for this account'? If I can make 8-10% long term in stocks/mutual funds with a LOT of ups and downs and not a lot of control, or make returns of 10-20% with VERY steady returns and LOTS of control which is better?

While it IS true that if you are younger than 59.5 you cant easily access the cash flow currently, that is not my goal with the rentals I purchase in those accounts. You CAN get 'tax benefits' such as depreciation and interest write offs IF you are leveraged in a SDIRA.

You can also get the benefit of tax FREE lifetime income if using a ROTH to invest in rentals (also true of buying stocks/mutual funds outside of a self directed account. One example of a deal I  am working right now is buying a set  8-12 of seller financed units using my ROTH as a down payment and the owner carrying a non recourse seller financed note. For around 100K I will be able to buy about 1M in rentals that will be paid off in 20 years and turn out about 150K of tax free income PER YEAR with NO depletion of asset base.

I would need to average about 16% per year in the stock market to do that and then hope that a 5% withdrawl rate would sustain me with no major dips in the markets. One of the main reasons this works in due to being able to LEVERAGE my retirement funds, which to my knowledge is almost impossible to do outside of a self directed type of plan.

Thanks to @Ashish Acharya for the direction and I found this from the IRS that will be helpful for anyone wanting to 'stay in compliance'.

https://apps.irs.gov/app/pickl...

Dan Dietz

@Ashish Acharya,  Is there a 'practical minimum' that a seller needs to charge for interest? I was just talking to a property owner this morning about buying so/all of his 10 units that he only wants to sell with seller financing. We talked a bit about price and rates meaning 10-20% down and for example 300K @ 5% or 375K @ 2.5%. If I was bank financing it I would probably be willing to pay 325K or so.

Would the IRS see 2.5% as a 'legitimate rate'? It is obviously something he needs to talk to his accountant about, and I need to run numbers to see how the different interest amount would affect my profits/taxes over the years.

Thanks, Dan Dietz

@Dale Byram this is only my second one, so I am not real experienced, but just dipping my toes in :-)

My first was the house I am living in for about 6 years now. I bought it from a Flipper that I did work for (I am in construction) who had 2 for sale, working on two, and but in bids on 3 more and got all three! Too much for him to do at once. There was lots of trust there so he wholesaled it to me. He paid 75K, sold it to me for 85K and the ARV was about 140K but needed about 25K in work. He carried the note for 1 year at 6% interest only. He borrows his fund at 3% so he made a spread and 10K.

This set of properties I am going to talk over terms with him today. I think he will definitely want something down. I would not want to do more than 20%, and am hoping to negotiate more like 10%. I think he would only want as much as he needs to cover his 'depreciation recapture tax', which he is going to talk to his accountant about. That way he does not need to come up with cash out of pocket but can also stretch his capital gains out as much as possible.

To make this work in my SOLO401K I need him to do at LEAST a 10 year ballon, and would prefer if he just want to carry it 20-30 years.

We have not talked about Earnest Money yet. Some other properties that we bought directly but NOT seller financed we put down $1000 per property once the offer was accepted with the condition that we get financing and an acceptable inspection. We had 30 days to get those done.

I understand what you are thinking, but in the long run it does not make much difference in the 'real world', on average.

My example I *think* is more what the range might be on what you are thinking. Right now I am dealing on buying some rentals that the owner ONLY wants to sell with 'seller financing' to spread out capital gains tax and to have an ongoing stream on income. He owns them free and clear. I will give an example of what we have been talking about so far.

4 Plex worth about 320K. I presented 3 options;

1) 300K @ 5.7% /30 Years with 10 year ballon if desired by him. $1556 month.
2) 320K @ 5% /30 years ...........same...............
3) 350K @ 4.15% /30 years ........... same.............

It comes down to what his cap ex tax rate is vs in ordinary income tax rate. He needs to talk to his accountant. I am *guessing* that in his case it will be only a few thousand different in taxes over 30 years IF he kept it that long. Where this *could* come into play in a bigger way is with someone that does NOT have much taxable income and they *might* be able to stay in the 0% capital tax bracket. For *most* sellers it is close to a wash, I think.

Originally posted by @Reggie Maggard:

@Daniel Dietz

Hey thanks for the insight.

I have a couple of questions...

1. In the partnership are they limited and your general? I know you said 50/50 but how are the decisions made?

In this type we need to make unanimous decisions to change from the operating agreement, so it better be spelled out pretty well! ;-) We do have an 'opt out' if one side or the other REALLY needs to get out early. In my other partnerships where me and primarily two others all ponied up equal equity for some things we have a simple 2/3 majority, and for major things like buying or selling proprieties, borrowing funds or doing an eviction we need unanimous consent.

2. How did you get away with a 20% down payment (instead of 25%)?

These are with Portfolio/Commercial Loans held at a local Credit Union. That is there policy as long as the numbers make sense cash flow wise. They require a 1.1 DSCR, we choose to not buy anything with under a 1.2 DSCR to give us some cushion.

3. In your partnership, the partner understands it may be 12 years before they get their cash? I would think the partners would have a fit if they need their cash day in 3 years or something.

We DO have an early opt out for either of us, but if we sell early we all take a hit because of realtor fees eating up appreciation and debt paydown. They do know going in that we are planning on at least 10 years. We also let it be know IF there is enough equity growth before that in which we could cash them out we would be happy to do so. We intentionally look for Private Money Partners that we know with 95% certainty WONT need thier principal back before then. Think folks with large net worth, people with large retirement accounts where our partnership is say less than 25% of it and the like. There is quarterly cash flow, but it is relatively small to the equity build over time.

That is a good questions and something I need to work on figuring out. I plan on checking with with both the Lawyer who set up the LLC for us and my provide, Sense Financial too.

And yes, it does seem like it could work very well :-) Kind of like a 'prefect storm' of finding places to buy (hard in our area lately) finding someone that happens to WANT to do seller financing instead of trying to talk them into it and having enough cash built up our retirement accounts to pull it off :-)

Dan Dietz

@Reggie Maggard how we have done deals like that is a bit different that what you are thinking.

We DO use an LLC, but the Private Money Partner becomes a PARTNER, not a LENDER. They provide ALL of the down payment plus a small reserve of 20 -30% (example is 60K on our most recent purchase of a 260K 4-Plex with a 55K down payment and closing costs) and we do ALL of the finding, purchasing, rehab management if needed and ongoing PM and business management.

We are 50-50 partners in the LLC and split all cash flow and equity growth. When we do a cash out refi (if at all) they would have the option to be 'cashed out' by getting ALL of their investment back and then splitting things 50-50, or leaving ALL of their investment in and we would split things 50-50 from the refi and they would get their investment back at time of eventual sale.

The point where we could refi and pay them off on equity growth would likely be 10-12 years from our projections.

We DO have to 'give up' 50% of a deal this way, but we also make a great return for our time and essentially have people  'lined up' to partner up with us on these as fast as we can find deals that fit the method and numbers.

Dan Dietz