All Forum Posts by: Daniel Dietz

While we are talking about partners and taxes, I wonder if the experts have any tips on specifically 'entity set up'.

We are going to be using a lawyer to  set things up, but wanted to get some feedback here too. 

My 'silent partners' will be bringing the down payments of 20-25% in either cash or SDIRA or SOLO401K funds. We will for some kind of partnership, most likely a LLC. I or my own LLC will do all of the finding, purcashing, PM etc.... and we will split all profits, both cash flow and equity build up, 50-50.

Are there things to be aware of when one partner brings NO 'equity' to the deal and how does that affect 'owners basis' down the road? We are going to also be talking to a lawyer that specializes in Retirement Account Law to make sure how to do things in that case. 

There is a VERY good chance that we would be wanting to add more properties to the partnership/LLC in the future, or that they might want to sell their LLC interest at some point vs selling off properties to 'cash out'.

Thanks, Dan Dietz

@Colby Mulry I am working on the same things as far as having partners come on board, and some of their main desires besides strong long term gains are the current benefits tax wise.

 To my limited knowledge, they NEED to be an 'owner' to gain the 'tax benefits'. I am getting with my tax guy in about a month to discuss in more detail, but essentially I *think* the main 'tax benefits' come from being able to write of interest and the big one depreciation. Those are typically what give you a 'tax loss', even though you are cash flow neutral or positive. 

In our case they will be a 'silent partner' by putting up the down payments, I will be doing ALL of the other work. This way, I can still manage to a large degree how I have been doing my own units and they can benefit finaancially. 

It will be interesting to see what those more experienced have to say.

Dan Dietz

@James Schiro it seems like that is pretty generous for the down payment partner to me, but obviously have not run the numbers. In your plan, are you compensated for PM, or the running of the partnership in general? It seems to me you should be if they want to be 'compensated' with interest on their portion? 

For contrast to your plan, we have several private money partners lined up for buy and hold rentals and are now actively looking for properties that fit our criteria. The terms we have agreed to are this

• Private Money Partner bring the 20-25% down payment, does NO active management other than voting to approve the purchase, and occasionally voting on major items such as time to make large cap-ex purchases, time to sell etc....
• We do ALL of the work of finding, funding, rehabbing if needed, placing tenants, all ongoing PM and business management. 
• Free cash flow will be split 50-50 once a year
• If additional funds are needed for cap ex, we each put in 50-50
• All equity build up will be shared 50-50, including; loan pay down, appreciation at time of eventual sale, and any 'cash out refinances' as we go
• PMPs original capital investment down payment will be returned to them WITHOUT interest at time of eventual sale or buying out of one partner or the other. 

The summary is that they get to make an 8-14% return over the long run in a very stable real estate market without having to do ANY active management and get the benefits of top notch management over their investment.

We get to make the same return in dollars which will come in at about $80-120 per hour based on the current units we own/manage.

Dan Dietz

Great summary @Andy Mirza! 

I am of the camp that this would be a GREAT change to things. There are so many different ways of looking at it, as you point out. 

I am quite a ways off from the current definition of Accredited, but easily meet the intent of Sophisticated. I have built houses, flipped houses, and have over 25 rentals that I invested in with a combination of traditional loans, portfolio loans, SDIRAs and SOLO401Ks while using leverage. I have used private money and partners on deals also. I do literally hundreds and hundreds of hours of studying every year on all thing real estate and investing.

I would venture to say that with that back-round, I am as well or better qualified than many people who DO meet the current condition. Is the person who has never invested in investment real estate but just sold their primary house or farm or small business better equipped than me to analyze if a syndication deal on a 50 unit apartment deal is 'safe' or not? What about the couple who just got an inheritance? Or the doctor who makes 500K but has never invested in real estate before? 

The other  issues I have with the rules are that I can go out and buy an Individual Note, which is highly risky, but not invest in many Note Funds that help spread out risk?

Or what about the fact that I can go and buy almost any stock, stock option, high risk bonds, or other similar investments which are HIGHLY RISKY if one does not understand them, but not with a Real Estate Syndication that has a 5+ year track record of paying out preferred returns without fail and has a long list of satisfied investors?

I dont have the answer of what the 'rules' should be, but I know they are not very logical the way they are now. 

Dan Dietz

To the Pros out there, 

As far as 'related party' goes, would an Aunt, Uncle or Cousin or Brother be 'far enough' away to pass that test? I know that for SDIRAs none of those fall into the 'prohibited transaction' zone.

Thanks, Dan Dietz

@Melissa Barnes I like the 'checkbook contrl' or IRA LLC model for our rental business hands down. Both myself and my 2 partners all use @Dmitriy Fomichenko services and have been extremely satisfied  with his firm. 

(I tried to 'tag' the others but that feature is not working right now for me)

The people like him or others that chime in here (you can tell by their 'signature lines', as they are not supposed to 'self promote') could all be potentially good fits. My personal expericene was when I contacted several of them along with a few of the 'big companies', ALL of the smaller providers on here gave much better attention and advice. It is also supporting the BP Community which I highly believe in. 

Dan Dietz

@Jason R., @Dmitriy Fomichenko is spot on as to some ways to find them. 

I am taking a slightly different approach. I and my 2 partners already invest using SDIRAs and SOLO401Ks for buy and hold rentals. We have essentially 'used up' our funds in those accounts for buying about 10 units. 

So now we are seeking 'private money partners' to go 50-50 on more rentals. Some of those individuals are interested in using either current Traditional IRAs and converting them to 'Self Directed' IRAs or SOLO401ks, and a few we are talking to have recently left jobs or retired and have sizable 401Ks still sitting there and needing to do something with them. We are here to help :-)

How do we find them? Friends, family, neighbors, co-workers, former customers (my 'day job' is construction) who I do work for at thier 2nd, 3rd, or 4th homes on the lakes in our area that are 400K and up. Basically think of 'who might have funds to invest' (this can be in a IRA or just in 'cash/stocks' as far as I am concerned).

One thing that helps us is that we have an excellent track record of almost 30 years in our community in our construction business and in our rental business, so there is already a certain level of trust there. 

The 'model' we are working on is that they will put up the down payment, and we would do ALL the work of finding, rehabbing, finding and placing tenants and all ongoing PM and the like. Essentially they would have a completely passive investment and we would be making a return with no money out of our pockets, but by using our know;edge and time.

A side note; We use @Dmitriy Fomichenko for our accounts. I would *highly* recommenced him or one of the other providers that contribute here often. When I contacted them to pick a provider, they ALL gave much more personalized attention than the 'big players' I reached out to. 

Dan Dietz

@Ashish Acharya, first, thanks for all the time you take to share you knowledge and help us understand things. 

As for the Recapture Tax, I recently learned in another thread that is is "up to" 25%. I had previously thought it was "always" 25% before (I have not sold any properties yet, but want to fully understand it for when I do start selling some off :-) )

I am trying to understand what "order" they are applied in. For example, I (as a dingle filer) have 30K of ordinary income and pay tax @ 12% on 18K of AGI income after standard deduction. 

Now I sell a property and have say 40K of depreciation to recapture. I assume that bumps me up to 58K of 'ordinary income' and the 22% bracket since it counts as "income" and not capital gain? 

On that same property I also have say 10K of capital gains. Is the capital gains taxed at 0% based of of my normal ordinary income being in the 0% bracket, or is it 'bump up' to 15% since my ordinary income + recapture tax are all tax at the same rate and is now 58K? 

Hope that makes sense!

Thanks, Dan Dietz

@Carl Graff it is a lot to wrap your head around, isn't it? 

I just read a GREAT book dealing with IRAs called "Keep It!". It was recommended by one of the SDIRA providers here  and has AWESOME examples of when conversion *might* make sense that are not always thought of. 

I *think* what @Michael Plaks was referring to with the 'conversions' is if your passive loses are say 65K and you can offset them with 65K of ordinary income, which IRA withdrawls or conversions are, it *might* make sense to do the whole 65K, and then decide how much you 'need to use' (withdrawl) and convert the rest. That way, all future earnings on the ROTH funds would be tax free.

Dan Dietz

@Jeff Milas I am in Reedsburg, near Wisconsin Dells. We have 25 units between Reedsburg. Baraboo (each population about 10-12K, with about 20-25K per school district) and a couple of smaller towns. About 60K for our whole county. I am not familiar with your area, but here we have EXCELLENT industrial base, and each town employess at least 500 at medical facilities. 

We have next to no vacancy. We try to have mid to nicer level units and take good care of them. We also use 60 days notice to move, and usually have them re-rented 30 days out, with high quality renters. We are able to get 1% to 1.25% per month for rents. I know a few friends who have dumpy rentals 30 minutes from town that they rent cheap and do very little maintainence but have a LOT of turn over. Not my cup of tea.

Feel free to PM me if I can help  you out at all. 

Dan Dietz