All Forum Posts by: Daniel Dietz

@Chase, I think you are getting some good advice hear. What I would say is 'If you have thought about somethinig long enough to ask if it is wrong or unethical, you already have your answer to your question. 

More your point of 'trying to get a deal'..... I know several people who have been on both the buying and selling end of owner financed deals. To my knowledge, they have ALL either had a specific clause as to 'no penalty for early refinance' (he got no discount, but was buying a hard to sell property that did not qualify for traditional financing 'as is') or more typically they DO include a prepayment penatly for "__________ " number of years to make up for a discounted price. 

In your case, it would take the seller about 3 years of interest payments just to break even on the price discount he would be giving you. A reasonable clause *might* be 'no refinancing for 3 years'. 

Dan Dietz

It will be interesting to see what happens. I personally don't like the deal AT ALL, and hope things change to some degree. I would not want to be 'betting' my investments on a somewhat shaky sketchy plan.

Just think if us small private US and Wisconsin based businesses would get even a FRACTION of what this is costing per job? And, it sounds like a majority of the workers are likely to be foreign or from Illinois also, so why is just WI funding this?

Study after study shows that the smaller the business to a degree that gets incentives the better the economic benefit is. This is costing up to almost $1,00,000,000 before jobs are even created, and somewhere between $300,000 and $800,000 PER JOB if things 'go good'!?!?!

In my 'day job' of Remodeling, if I got a $100,000 incentive, I could easily create at least one job that paid at least 50K per year, if not 2-3 jobs that paid that. 

I guess the rest of the state is a little miffed at why WE are each paying 3-4K per household for jobs for Illinois and China?

Dan Dietz

Brian Spring my personal theory after picking out a provider for both a SDIRA and a couple of years later for a SOLO401K is to take a HARD look at the providers here on BP who participate in these forums.

As @Carl Fischer pointed out above, the fees are fairly comparable. To me, the service, guidance, and responsiveness are what count the most. 

I found HANDS DOWN that the ones here like Carl, @Dmitriy Fomichenko, @Brian Eastman, and other who are likely to chime in are more responsive to questions, helping you understand the benefits and rules and the like. At least that was my experience when I contacted them, compared to some of the 'big firms' out there. 

They have worked out good for us (myself and three investing partners) so far. The biggest things to be aware of are 'prohibited transactions', the fact that you can not work on properties yourself, and if borrowing you need more like 40-50% down payments. We hold 9 of our 25 units this way. 

Dan Dietz

@Rahul Sunkavalli you are getting some good advice here. It is a LOT of work figuring out how much to save in tax deferred vs tax free accounts for 30 years down the road!

If you search my posts from the last week,I have been mentioning the idea of taking money OUT of my ROTH to invest 'in cash' instead. 

How that pertains to your situation, say you had 50K to put into a ROTH SOLO401K over a couple of years, or keep it 'in cash' to invest with.

The BENEFIT of the ROTH is your earning/growth is tax free when taken. The downfalls are that you can not 'use' those funds until retirement, and a BIG one to me, is that you need typically 40% down if buying rentals with non-recourse loans, compared to 20% down if buying 'cash'. So essentially you can buy twice as much property in 'cash' compared to 'retirement funds'.  They BOTH have their place, just a matter of figuring it out. 

In my case, rental income in 'cash' is mostly non taxed (deferred) for the first 10 years or so of a property when depreciation is figured in. At that point, you can either refinance and buy more or sell via 1031 and 'move up' and remain tax free. 

Dan Dietz

I am sure @Dave Foster will chime in at some point and let you know exactly how to most efficiently do it. :-)

Dan Dietz

@Raj G. , @Dmitriy Fomichenko , @Justin Windham covered what the 'benefits' are pretty good of the benefits of a SOLO401K. 

From the 'consumer' side of things I would add that you can 'borrow from' your account which you cant do with a Self Directed IRA. Another BIG one me over a SDIRA is that when borrowing money there is virtually no paperwork and no taxes due on the profits made with that borrowed money. That does NOT mean one should NOT borrow funds in a SDIRA IF that is your only option available - just that if you DO qualify for a SOLO401K, I can not imagine why a person would use a SDIRA instead.

The taxes at time of eventually withdrawing funds depends on each persons situation. I *think* if a held in a Traditional account, meaning non ROTH, those would be at your ordinary income tax rate. If in a ROTH account, there would be NO tax due. 

One of the DISadvantages of using ANY kind of retirement fund, be it Traditional or ROTH, compared to just invest with the cash without investing through the retirement account, is that you need a LOT more down payment with the retirement accounts for rental properties. 

Looking at my example above, with that 50K, if I just bought a place withOUT putting it in a retirement account I would be able to buy 250K or more of property since I can borrow all day long at 20% or less down  and 5% interest all day long. Once I put it INTO a retirement account I now am likely to need at LEAST 40% down, so can only buy about 125K of property, or half as much. 

The complicated part comes in figuring out if that outweighs the tax deferred or tax free growth of the retirement accounts. 

One thing to remember is that it 'seems' like you would have to pay taxes as you go when invested outside of a retirement account, but from my experience for the first 10-12 years you *might* actually have a 'paper loss'. Meaning that with the benefit of depreciation, your taxable income from rentals remains 'negative'. During that time, you are also building equity tax deferred through appreciation and loan paydown. 

Options at that point would be to refinance and buy more property or sell via a 1031 exchange and buy a larger property that will be in a 'tax free' range for about the next 10 years. 

Many ways to get there, just need to find the one that fits you best. 

Dan Dietz

@Stephen Aki, I am not sure if what you are wanting to do has a benefit of moving it out of the ROTH and into a SOLO401K? What do you see as the benefit there?

With that being said, I have been thinking about taking the remaining Basis (contributions) out of my ROTH (currently in moderately aggressive index funds) to invest them in more rental housing. Yes, I have been vigorously 'chastised' here on the BP Forums for that, and probably rightly so ;-). I am getting together with my tax guy in a week or two to talk it over. 

.................................................

The thought is this; In the ROTH Index funds (relatively safe and easy) I might average say 8% over the next 15 years. Lets say 50K for 15 years is 165K. That will give me about $1000 per month tax free income for 20 years at 5% return, and the I am out of money. 

OR.................

Now lets say I take that 50K and take it out tax and penalty free since it is all 'basis'. I use that to buy a 4 plex for 250K (20% down) That unit cash flows about 5K per year that I will save up. It also appreciates and has loan pay-down each year - lets call that 5% of value total. After 15 years, according to BP's Rental Property Calculator

https://www.biggerpockets.com/calculators/shared/6...

that original investment of 50K is now worth about 400K with all cash flow being held (not spent as it comes in). That 400K would be producing about 1K per month of cash flow, AND gaining about 18K per year in equity! You could sell at that point and use that 400K @ 5% to make about $2600 per month pre-tax or say $2000 after tax. OR, if held the property and had the 1K per month cash flow, that would jump up to about 3K per month 10 years into retirement when the loan is paid off. And you would still be getting about 1K per month appreciation at that point too. If you continue to hold until 20 years into retirement, your cash flow is not about $4000 per-tax or $3000 after tax (3 times what the ROTH in the market would  be doing) AND you have not 'used up' your funds! You STILL have an asset worth about 600K to pass on to your heirs, or whatever your heart desires :-).

It does not *SEEM* logical to take funds out of a ROTH, *BUT* these figures sure make it look like it. 

Feel free to shoot holes in the idea :-)

Dan Dietz

@Stephen Aki I ran into almost the EXACT same problem as you a few years ago. Most of my assets were in IRAs, mostly ROTH and some Traditional, and just a small part in 'cash'. I too wanted to put my funds to work. I soon learned about the same bottleneck with the ROTH. 

So I started by moving about half of my ROTH IRA funds to SDIRA that was a ROTH and then I could invest 100% of that into real estate. I then rolled my Traditional IRA into a Traditional SOLO401K (which can THEN be 'rolled within the SOLO plan to a ROTH component). both of these types of plans can also borrow non-recourse loans at about 50-60% LTV to further leverage if desired.

One 'work around' IF you have a lot of basis (contributions) in your ROTH is that *that portion* (contribution) CAN be withdrawn without tax or penalty after they are in for 5 years if memory serves me correctly. So then THAT portion that you just withdrew tax free can be contributed into a SDIRA or SOLO401 as long as you have the 'earned income'. You need to realize that you are giving up tax free income in retirement from the ROTH though in exchange for whatever benefit you see by moving it. 

Dan Dietz

@Christian Nachtrieb, hopefully some of the 'Pros' on here will chime in too. I personally use @Dmitriy Fomichenko at Sense Financial, and there are several other good providers here on BP too like @Brian Eastman and other that will chime in here. 

In short, you can not to my knowledge do these at 'the big firms' - you need to use a specialized provider. I intentionally picked on from those who participate here on BP as I figured if they take the time to participate here, they will give *me* the time I need when I contact then too. 

Co-mingling funds can get VARY complicated and I would NOT recommend it. Did it once and was releived to get out of it. You  CAN borrow non-recourse funds (there is a list that float around here of providers for those) that typically require 35-50% down payment. We currently have loans on three properties (8 units). 

One of the other restrictions is that you can not provide labor, like in the case of doing the work on a flip property yourself. 

I think tonights BP Webinar is actually on Self Directed Accounts, might be worth a listen!

Dan Dietz

@Christian Nachtrieb, if I am following you correctly you qualify for a SOLO401K and are looking at using that for real estate investing? 

Did you know that you can use that and/or a Self Directed IRA to invest DIRECTLY in real estate? I do both currently. There are some limitations compared to 'borrowing' from a SOLO401K, but it does let you put 100% (or close) of your funds to work.

One of the benefits to the SDIRA is that almost ANYONE can do it, regardless of self employment, etc.... The drawbacks of the SDIRA are the contribution limits and that IF you want to borrow non-recourse money there is paperwork and a small tax that apply. 

The  benefits of the SOLO401K are the much higher contribution limits, and the fact that you can be your own 'administrator' (not sure if that is the correct term) and that IF you want to borrow non-recourse money there is next to no paperwork, or tax, involved compared to the SDIRA. 

Both of them carry the liability of making sure that you avoid 'prohibited transactions' and dealing with 'disqualified individuals'. I dont *think* those things pertain if you 'borrow' from your SOLO401K, but I'll let others clarify that. 

Dan Dietz