All Forum Posts by: Jeff S.

If you live out of state and don’t think this bill could apply to you, you’re wrong. California is often the proving ground other states use to justify unpopular laws. If this measure passes, every state will chomp at the bit for the extra revenue. You are not immune.

The American Association of Private Lenders has a great website dedicated to opposing AB 1771 HERE. There are several explanatory videos, sample letter templates you can fill out and mail, as well as an online petition which takes almost no time. They’ve made it as easy as possible to educate yourself and to express your opposition.

If nothing else, you can go HERE and voice your opposition directly to the sponsor, San Diego Assembly Member Ward.

You do not have to be a constituent of Assembly Member Ward, nor even a CA resident to oppose this measure and I encourage you to do so.

You’ll never find anything viable at 70% in Los Angeles and this has been true for years, @Michael Figueroa. In our higher dollar market, you can push the number to 75%, which is what we use to define a good deal. To be clear, the rule-of-thumb is:

Purchase Price plus Rehab Estimate <= 75% of the ARV

Under normal times, i.e. not the last few years where prices have been beyond crazy, using 75% will result in about a profit of roughly 10 to 15% of the ARV. That is, you can normally expect to earn $50k to $75k on a $500k ARV and $100k to $150k on a million-dollar ARV property. Lately, rehabbers are making 20% to 40% of the ARV on higher dollar properties. This is great but completely unsustainable and nothing you should rely on.

75% deals exist, though they‘ve always been hard to find. Once you hit 85% you will roughly break-even (and it's linear). Those paying anything over 80%-90% are either out of their minds and desperate, or they are completely overestimating the ARV, or will simply lose money.

Run the numbers in detail and you’ll see that after your purchase price, the rehab costs, hard money fees, and real estate agent commissions will comprise most of your expenses. If you pay cash and/or can minimize sales fees, then you can pay more. If not, stick with 75%.

Here's some background.

CAR recently reported that 51% of all home purchased in CA were purchased by investors. The national average is 19%. As a result, the state legislature is concerned that average homeowners are getting priced out of the market. In turn, they proposed AB 1771, the ‘California Housing Speculation Act,” which is intended to increase affordable housing.

This is not just an anti-flipping measure.  It’s much broader. AB 1771 applies to anyone or any entity who owns residential property in California with exception of active-duty military personnel and anyone deceased whose property is subsequently sold.

The bill applies to anyone who sells a property within 7 years, not 3. The maximum capital gains tax is 25% in the first 3 years and then it gradually drops to 0% after year 7. Funny how most people move within 7 years.

With very little exception (first-time homebuyers and affordable housing), if you own any residential property in California, and that means SFR thru Multifamily, even your primary residence, this new tax will apply to you.

The claim is that the money from AB 1771 will mitigate the housing shortage in CA and that the money will go into a proposed “Speculation Recapture Reinvestment Fund.” Of course, only 30% of the fund will be allocated for affordable housing, and the bill is not specific what that even means. 10% will go to administration, and the remainder will go to public transportation and school districts. These have nothing to do with affordable housing.

In sum, this is yet another money grab by the CA legislature who can’t stand that anyone makes a profit from the sale of their property.

No sales allowed at the FIBI clubs. Education only and no upsell to a future program. Whether you lend, borrow, or want to get into the business, I promise there will be something for you. It will be mostly generic, with just a few California-specific topics (namely usury & licensing).

I hope to see some of you, even if you do it online.

“The upfront fee is the insurance payment of $3,000.”

This is a pretty common scam, @Gilbert Foelscher. There is no such thing as an insurance policy that guarantees a private loan. Don’t I wish.

The unfortunately named Private Mortgage Insurance (PMI) is only available for conventional loans (Fannie, Freddy, etc.). The only insurance any legitimate private lender will ask you to buy is a lender's title policy and fire/hazard insurance (or landlord ins., etc., as appropriate). These would be purchased when you close your deal. The title insurance would be paid out of the proceeds you wire to title or to your closing attorney. The fire & hazard insurance would be paid by you directly to the insurance company.

There is never a reason to send money for insurance to a lender. There is also no reason to ever pay an upfront fee.

I commend you, @Anne Jenkins, for meeting the rehabber and personally walking every property you lend on. It’s a long shot, but you could own that property one day. It’s also important to know who you are lending to. I never heard of David Garnaco. Just make sure he’s someone you like and are comfortable with. This is exactly our process.

As important, and maybe it’s just how you wrote it, but you started off saying you are “lending” money and later changed that to “investing.” Perhaps the same thing using a different word and, if so, that’s fine. (Some of our borrowers call us their investors even though I call us their lender.) So long as you mean your name will be on the note and the mortgage at a sensible LTV, with proper lenders title, fire, and liability insurance, and so on, then you have safe and direct recourse to the property.

If by "invest" you mean a membership participation in an LLC of some sort that flips or "stabilizes" the property, then you are completely unsecured with no recourse to anything. There are flippers who try to isolate themselves and their properties like this. Unless there is a properly originated note and mortgage with your name on them, don’t even think about it.

I can't imagine who you are talking to about setting up your self-directed IRA but their fees shouldn't be anything close to what you quoted. Perhaps this is for an IRA LLC? You don't need that to loan retirement money. Any experienced plain vanilla self-directed IRA custodian should be able to help you. The setup and ongoing fees should be relatively minimal.

If you and/or your spouse are self-employed with no full-time employees, you can open an SD 401k plan and contribute over $60k each, compared to an SD IRA. That might be irrelevant at this point and neither has a benefit over the other with regard to lending. The lending process is the same.

The bigger problem is that $7000 is not enough to do a safe loan, @Wendy Busa. We’ve been lending out of our retirement plan for years and safe to us is first position purchase money. No gimmicks like gap or transactional funding and nothing in second position, out-of-state, or even far from home. After a few years, you might be able to build up enough to do a fractional loan (participate with others on one first position loan) if legal in your state, especially if both you and a spouse can contribute $7000 each per year for a while.  Of course, you are not limited to lending.

Start going to some local real estate clubs to learn what others are buying, borrowing, lending on, or otherwise investing in. There is almost nothing in real estate that can't be done through an SD IRA. Even if you can't lend yet, there are many safe options to enable you to grow your money tax-free or at least tax-deferred.

Not only should your family member sell these properties, with a 3.14% return on equity, he or she should have done this a long time ago. They are not being paid anything close to enough to justify the work they’ve been putting in, @Jon Gorman, nor for the risk.

We are huge believers in private lending and self-fund our loans, thus putting our hard-earned money where our mouths are. It’s not hard to learn, takes minimal time, and they should easily be able to earn at least a 10% annualized return. It’s also relatively safe if you only make first position purchase money loans (on flips, in our case).

As a retiree, I’d normally strongly recommend private lending – especially since they understand real estate. Private lending is a relationship-based business, and in our view, it should only be done locally with others you’ve personally met. This brings up a problem.

They are in New York, which is a judicial foreclosure state where it can take years to foreclose on a property if they must. Done properly, they should never have to foreclose, but this is not something you bet retirement income on. Thus, I don’t think lending like this would be safe.

Having made and lost plenty in the stock market, you probably came to the wrong place if you think many here would recommend equities. It’s not an either/or decision though. Another option would be a portfolio of real estate syndications. Here your family member could diversify among various real estate specialties and perhaps even save on taxes if they could do a 1031 exchange. No headaches, since all work is done by the operators, and even enjoy some safety from diversification.

Real estate clubs are a good way to meet the principals behind many syndicated real estate investments.

We’re on the email list of a handful of local hard money lenders and receive potential deals to loan against every day, @Robin Cornacchio. This is how some lenders find their money. We happen to find our own borrowers, but we could certainly call these brokers if they offered anything that interested us. They would also know if any of their investors wanted to sell loans they made.

In either case, with your authorization, the broker would work with you, the property owner/borrower or note seller, and also with your SDIRA custodian to arrange funding and transfer of the appropriate paperwork.

Atlanta is a big city and there should be plenty of deals for you to choose from. That is, always do this locally. First position purchase money only. You’ll always want to check out the borrower and the property. Real estate clubs are the best way to find brokers who work like this. Alternately, you can go to the Scotsman Guide and the American Association of Private Lender websites to find resources.

I don’t know if it’s legal in GA, but some states allow fractionalized loans. Here, several investors (including SDIRA’s) can lend on one first position loan at the same time by sharing their pro-rata (fractional) interest. This is worth finding out about as well.

Last, depending upon the amount of money you have and your accreditation status, your SDIRA can invest in a syndicated mortgage pool. In this case, you are not investing in any one loan but have an interest in a pool of notes. Many of the larger hard money lenders run mortgage pools and accept SDIRA money.

Good luck to you, Robin.

There is no right or wrong answer, @Andy Acosta. Traditionally, when someone is paying all the costs, i.e. purchase and rehab, and you are doing all the labor (acq., rehab, selling, etc.) then you would split the profit 50/50 as a partnership.

Your friend would buy the property outright using an entity he controls 100%, and there would be a partnership agreement between you and that entity. Don’t forget, he’s taking all the financial risk. If you are not able to perform, per your partnership agreement, he could “fire” you and perhaps pay you a finder fee of some sort (or nothing since you’d likely be leaving him with a mess).

If the deal goes as planned, you would evenly split any profit from the sale after all of his costs were subtracted.

On the other hand, your friend could fund the purchase and even rehab costs to you as a private loan, using professionally prepared loan documents. You would do all the work. In this case, you would own the property 100% but with a first position lien from your friend.

You could make monthly payments to him or pay everything to him when you sell, as negotiated into your loan docs. Here, he would be entitled to his interest (and points if he’s sophisticated enough to require them) and you would keep the remaining profits.

Only about 1347 variations on this, but those are the basics of an equity interest and a debt interest in a flip. (I'm assuming a flip since you weren't clear.)

Just so you know, it typically works out that hard money lenders will end up with about 25% to 33% of the profit in a flip, for relatively little risk. In a 50/50 partnership, your partner will obviously get 50% but incurs all the risk. That is, even at the confiscatory rates most HML's charge, financially you're almost always better off borrowing the money.