All Forum Posts by: Daniel Dietz

I would agree that the LLC is probably the best way to do this deal on the structure side of things. I have done several of these, with me being on the 'no cash input' side of things.

In our case, there is NOT a big value add play though. It is more buy and hold rentals with very little fix up needed. What I do is find the deal, take care of the entire buying process, get tenants in and all ongoing PM and business management. 

What my partner does provide the funds for the down payment and sign the LLC documents :-) .

The last one we just did was in December 2019 and we were able to get a loan @ 5.125% fixed for 10 years, amortized for 25, 20% down, and a max rate increase of 1% per year after the 10 years and a max rate of 11.125% over the 25 year life of the loan. 

For us, we never really even considered doing it any other way. My understanding is that there *can* be tax advantages in buying the shares of an LLC vs real property if one wants to buy out the other also.

Dan Dietz

@Trever Good, 

Other ways to do this could be; use non recourse funding when it is time to refinance, but you would need about 50% equity by then; borrow from someone else's SDIRA for the fix up funds; Partner with a non disqualified party in some way to do this. 

I did one deal like what you mentioned about with the strict percentages to the SDIRA and disqualified party. It CAN be done, but a LOT of work and paper work and extra things to be aware of. I would not recommend it, especially for your first one. 

Dan Dietz

I have used NASB as well thanks to @Dmitriy Fomichenko list and had great results. It was in my SOLO401K, but process would be pretty much the same with a SDIRA I would think. 

One thing to note is that I think most of these companies don't allow any kind of 'owner finance' second mortgage or HELOC on properties where they hold their loan.

I have also had good luck using a private lender on a home I held in my SDIRA free and clear to do 50% LTV 5 year loan @ 6% interest that I then used as a down payment on an ADDITIONAL property that I used a non recourse lender on.

Normally you cant 'borrow' the down payment, but since it was tied to a totally separate property it is allowed. The payments on that private loan WERE fairly high, but since the first property had NO mortgage payment and the property I used it for the down payment on was only leveraged at 50% LTV it was manageable. It essentially ate up all of the cash flow from both for 5 years, but in the LONG run I will be able to build equity in TWO properties instead of just one.

Dan Dietz

@Kurt Granroth thanks for the update. I am mostly studying up on syndications for when I want to start possibly exiting my own rentals in 5-10 years. I figure that should give me enough time to figure it our ;-) .

If I can ask, what is the range of projected returns on the ones you are in right now? 

Thanks, Dan Dietz

If I am following right it might look roughly like this.

10M dollar project where there is a 2M equity raise. You put in 100K or 5% of the raise. This would be considered 80% LTV.

Say over 5 years returned to you is 200K - 100K your investment and 100K return after all expenses other than depreciation. So 80K of your return is subject to UDFI. 

But you also get to take 80% of your 5% ownership portion of depreciation - lets call it 1.5M depreciation over 5 years * your 5% ownership = 75K * 80% financed = 60K. 

So I *think* you would owe UDFI on 80% of your 100K gain = 80K MINUS the 60K of depreciation = 20K taxable. So if the trust rate is 30% (not sure) that would be 6K of tax on your 100K gain.

I am NOT clear on how much recapture tax would be on this scenario though. I *think* in would be on the 60K of depreciation taken relative to the financed portion, and I assume at the trust rates. So *maybe* 60K * 30% = 18K? 

If so, that would be 24K of taxes on a 100K gain, leaving you 76K over 5 years or a annual return of 15.2% or a compounded annual rate of return of 11.97%. Still not too bad!

It seems similar to leveraging on your *own* properties in a SDIRA - even AFTER accounting for the UDFI you are almost always STILL farther ahead when looking at overall returns. 

Dan Dietz

@Kurt Granroth, any update on if you have progressed with your plan, or ran different 'what ifs'? 

Dan Dietz

@Brian Eastman, 

Am I understanding you right? 

If I invest say 100K from my SDIRA into a syndication, and *overall* that syndication is leveraged at say 80% LTV, then *my* 100K is also considered to be 'leveraged 80%' too?

If so, then 80% of my gains would be taxed, and at the 'trust tax rates'?

I also assume that this would not apply if using a SOLO401K instead since they are not (to my knowledge) subject to UDFI taxes?

Thanks, Dan Dietz

One way of looking at it is this - Lets say you had 10K of profit/cash flow after all expenses not including depreciation. Now you have 20K of depreciation also, so you are now at -10K as far as taxable income from rentals goes.

Now hop over to your 'other income'. My *understanding* is that you would carry over $0 of losses to your return. This is NOT a bad thing, as you DIDN'T have to count the 10K of cash flow as 'taxable', AND you get to carry the 10K 'loss' over to future years. So you made 10K 'tax free' and get a 'future credit' for income deductions. 

There is another thread here on BP where the idea was float of one spouse 'taking a year sabbatical' from work to lower their taxable income down for a year where they can 'harvest' some of those accumulate losses. 

I agree with @Natalie Kolodij, your tax person should be more helpful in making sure you understand it. 

Dan Dietz

I just wanted to throw out there that many people, both 'experts' and people who have SDRIAs or SOLO401Ks, would argue that you CAN do the 'management' yourself. My layman's interpretation is that 'managing your property (investment) is not different than managing a stock or mutual fund buy' or the like. There is also the argument that you are not 'improving' (adding value to it, like re roofing or the like) you are simply 'maintaining' it. 

Just food for thought. 

Dan Dietz

@Greg Junge, 

We just did a deal similar to this and are working on a couple more. 

The main difference is that we (myself and two existing investing partners who have a 3 way LLC, but no reason it could not be just one person) do the finding of deals, all paperwork, AND ongoing PM ourselves. We were already doing the PM on our existing 25 units, so had the structure set up that way.

The private investor in our case, and in the ones we are working on too are individuals that have cash to invest and either dont have the time to or the desire to find properties and do all the work involved with finding properties, financing, a PM, managing the PM, etc.... They tend to have these funds as part of the 'conservative part of their portfolio' too, so are happy to find a stable investment with less perceived risk than the securities markets. 

We have the experience and connections with service providers to run things efficiently and profitably. For example our vacancy rates are below 2% and we typically get about a 10% value add in the first year or so also. We also do a good job of finding quality off market deals as almost NOTHING come on the MLS for multifmaily in our area.

We split all cash flow 50-50 and all equity growth 50-50. This structure gives the investor a 10-14% return on equity and us the same amount. So lets say that the investor put down 100K on a 400K property. The investor might make 12.5Kper year and us 12.5K per year. If we were hiring our the PM, that would cost about 8% - 10% of revenue, which might be about 5K. I would *think* that should come out of *our* half of the split if we hired it out. 

Summary is this; they had cash for down payments, we had experience of how to find and run properties so it is a win-win situation. 

Dan Dietz