All Forum Posts by: Matthew Drouin

Hi BP Family!

I was wondering what were the best options for business lines of credit.  I would like to establish one so that I can use the line of credit to fund rehab projects on our properties and then pay them off with refinance proceeds after we complete our business plan on a deal.

I swore I would never fund my business with credit cards again, because of the very high interest rates, etc.  So I got to researching some options for business lines.  Ideally I would be looking for a line with a $100k-$500k limit.

Here are some of my details.

I have been in real estate investing for 15 years.  I have multiple LLCs that have been formed many of those years.  My annual revenue is about $1,000,000.  I have near perfect personal credit.

Anyone with experience here?

@Jorge Ydlibi just as a rule of thumb, I do my “back of the envelope” analysis by assuming a 50% expense ratio on prospective acquisitions, meaning I will assume that 50% of current rent revenue will be my operating expenses. These expenses assume 10% maintenance and repair, 5% property management fee, 5% vacancy and collection loss just to name a few. If the deal makes sense from our return on investment requirement of 11% cash on cash rate if return based upon those numbers we will take a further look into the deal. Are current rents below market based upon their current condition? Is there minimal deferred maintenance? Are there any smart value add tactics to push rents? We will take these into consideration in sharpening our pencil to come up with our maximum allowable price.

@Mike Dymski please elaborate on what you just said!

@Patrick J. I’ve traveled a lot and I’ve seen this. People who finally got the chance to live out their dreams. That’s why I’m not a fan of retirement accounts. I saw my parents die in my 20s. Even if you were to make it to retirement, God willing, try and travel to Positano when you’re 60 years old and see how fun it is. There’s no ADA outside of the states. I want to go to places where the bathroom is in the basement and not think twice as to how I’m going to get there.

@Patrick J. Thank you! I’ve been getting my *** kicked here! Haha

@Patrick J. Thank you! I’ve been getting my *** kicked here! Haha

@Dmitriy Fomichenko @Daniel Dietz @John Underwood @Eamonn McElroy perhaps my use of the word "stupid" was heavy handed.  I meant to spark rigorous discussion on this topic.  By the way, I had no idea that there were so many non recourse lenders on smaller deals.  Whenever I have sought non recourse financing it's only applied to larger commercial deals and larger multifamily, so I stand corrected.

However, in defense of my position I have 3 further arguments against buying real estate with your IRA.

1.) I had a colleague who owned a property in his SIDRA. He had everything done rehab wise on the front end with this property. Everything seemed to be going well and then... the water main burst at the property. He was responsible for replacing the water line. The expense was $3000 of which he didn't have in cash in his SIDRA. His hands were tied and he ended up having to use cash outside of his IRA, which I believe would have been flagged as a prohibited transaction, but he couldn't just stand idly by while his tenants had no running water, etc. Unforeseen repairs can pop up much higher in cost than this incident. I understand that it might be smart to have a good balance of cash in the SIDRA in preparation of something like this, but that cash sits un invested. Which is not good (at least in my book) when it comes to long term investing.

2.) It's going to be very unlikely that an investor will have exactly the amount that he or she needs when an opportunity comes up. For instance, if average investment grade properties are priced at $250k in their subject market and they only have $30k in their SIDRA, they will have to wait to fund their IRA enough to put that money to work, which could take years. Meanwhile that capital is not put to work, unless they park it in stocks, bonds, mutual funds, etc which are subject to market volatilities and shouldn't be used for shorter term investment horizons. Extrapolate this over the long term, that un invested capital, waiting patiently for an opportunity in real estate and earns a lower compound rate. Where if they were using those funds to dollar cost average in marketable securities, they could keep 100% of that capital deployed and be asset allocated optimally based upon their retirement horizon. Regarding investing in real estate outside of my IRA, I can use a multitude of creative tactics to put deals together if I do not have the cash. I don't like to be restricted.

3.)  You still cannot benefit from pass through depreciation and carry forward losses to offset tax liabilities from their active source of income.  I am a firm believer in time value of money.  I would rather take a savings in cash today, and reinvest it today rather than part with money now from the one of the highest form of taxed income; earned income.

Thank you all for contributing here.  You are all smarter than I.  I'm the idiot.  That's why I'm in the Idiot's Business: real estate haha.

*** Disclaimer: I am not an accountant, lawyer, or financial advisor! You should consult with a qualified professional before acting on any of the opinions shared in this post!!! ***

Self directed IRAs have become very hot among investors with the rise in popularity in alternative investments such as real estate, gold, and cryptocurrency. They allow retirement account owners to invest money in assets that your traditional IRA or 401k would not. Typically they have been restricted to Wall Street type products like stocks, bonds, and mutual funds. Typically around this time of year, investors are looking at maximize their retirement account contributions before the April 15th tax filing deadline.

Something really stupid I have seen people doing is buying real estate using their Self Directed IRA. It's stupid for a multitude of reasons, here's why:

1.) Real estate is illiquid. Retirement accounts are illiquid (at least until you reach an age to start taking distributions.) Why would you want to double down on the biggest risk involved with real estate, liquidity risk? Besides, I am not even a fan of tax advantaged accounts like IRAs and 401ks because you cannot do what you want with your OWN money. I value being nimble and having options. This scenario is very restrictive.

2.) Lack of leveragability. One of the best parts of the real estate asset class is that it is a hard asset. Banks love hard assets as collateral and therefore allow you to leverage them. Which means you can buy and control a $100k for $20k essentially or whatever your bank will allow you to do. This allows you to scale multiples on your net worth over time. For example. Let's say you buy a property for $100,000, all cash, no leverage. Let's say that property appreciates 3%, pretty average for Rochester, NY in good locations. Let's say you sell that property for $103,000. That $3000 return on investment yielded you 3% return on your money. Now, lets say you buy that same building and put bank financing on it. So you put $20,000 down and have your bank put a $80,000 mortgage on it. The property appreciates 3% or by $3,000. $3,000/$20,000 = 15% return on investment. Plus you can buy 5 properties using that same type of leverage; much better for building your long term wealth! With Self Directed IRAs (SIDRA), you cannot use bank financing in this way. Why not? Because most bank financing requires personal guarantees, something strictly prohibited by the IRS in Internal Revenue Code Section 4975, therefore precluding you from using leverage. There might be come convoluted ways in which to get around this but at the end of the day usually doesn't make sense.

3.) Lack of tax benefits. Yes, SIDRAs and other tax advantaged retirement vehicles have tax advantages in their own right but it ends up stripping out one of the greatest part of owning investment real estate, depreciation! Depreciation is an expense that you take "on paper" each year you own a piece of investment property. When you own desirable real estate assets in great locations, you pay for it. You usually have a higher cost basis when you buy great property. You can take a certain portion of that basis as an expense each year. Often times that expense synthetically wipes out positive cash flow while you own the property. Assuming a dollar today is worth more than a dollar tomorrow (it's a fact, look up "Time Value Of Money"), the less you pay in tax today, reinvest those tax savings, it's quite simply explosive to building your net worth over time.

So now that I've thoroughly trashed buying real estate with your SIDRA, you should know some tactics on how to use your SIDRA to grow your real estate business. One tactic that is my favorite is making loans out of my SIDRA. Loans that are backed by real estate. You can make loans out of your SIDRA with interest rates and terms more attractive than typical private or hard money. Why would you do this?

Relationship building.

If you have a reciprocal relationship with another investor with a SIDRA, you can loan them money to help them grow their real estate business and they can lend you money to help you grow yours, without the crushingly brutal rates of some hard money lenders.

Another way to invest is by investing in an LLC or special purpose vehicle as a limited partner (silent partner) and partnering with the managing person of that LLC in exchange for an equity stake. Again, it would still be best to do this not using your retirement accounts for reasons stated above, but if it's the only way for you, it's the only way! The only caveat is to make sure that whatever bank financing that investor is using will allow your IRA to own membership interest in that deal without having to sign a personal guarantee. Usually you can avoid personal guarantees by having your IRAs membership interest at 19% or less in that LLC. What are your thoughts on this? Do you invest in real estate with your SIDRA?

@Gregory Pitts welcome to rochester! Congrats on your new home purchase! North Winton is a great area. Bidding wars are a rite of passage over there so I doubt you hurt yourself in what you paid. I still think it’s a great value.

In regard to non paying tenants, it’s very rare, even in the current environment for tenants to be delinquent in the desirable areas of the city like south wedge, park ave, upper Monroe etc

So unless the proverbial crap really hits the fan I don’t see property owners in those areas needing to dump their assets.

In regard to networking, check out FFREIA.

@Katherine Fusco any reason why you are choosing Rochester? Have you ruled out your own area? If so, why?