All Forum Posts by: Rodney Marcantel

Thanks @Adam Hershman. I am aware of the limitations. We are starting our RE business very soon and as I'm in agreement that the management fee of $45 per quarter seems overkill, I don't agree that we can't borrow the other funds that have been taxed already and not subject to taxes if used but the interest earned off of it is. We've already discussed with the portfolio manager on this. He's going to let us know what payback schedule and cost (interest if any) is required if borrowed.

I suspect the the Self Directed IRA will be a better deal if the borrowed funds from the other account doesn't impact interest earned from it since we will be paying back on a payment schedule.

We have 2 options now that we're selling our home and cashing out enough money to pay our daugher's college fund. We have a 403B account in my wife's dad's name that is over $300K that is only drawing 3.5% interest. So we are moving it to either his existing retirement account (that is already taxed so borrowing funds from that won't penalize us) or to a self directed IRA.

Is it better to move the money to his existing retirement account and let the additional $300K grow at 6 - 7% (which is what they can achieve) where we could then borrow the other pre-taxed $600K at anytime to purchase real estate for flipping OR move the $300K to a self directed IRA account.

Self Directed IRA would require setting up an LLC for it $1,495 plus a $45 per quarter management fee and we would not be drawing any interest off of it but would then be able to self direct investing the money in real estate and at closing the funds (profit) would be written to the LLC and deposited back in the fund account to prevent taxing.

We could then take money out as needed (taxed) under his name (without penalty) and only pay ordinary income tax on his tax form. This could grow the money faster than 6% and the fund management company is on board with us doing it either way although they don't provide the self directed IRA account and we'd have to go elsewhere to get.

Any thoughts?

@Adam Hershman, thanks for the feedback. What if the money taken out (since it's in her dad's name) is used? He's 80. So the 10% tax penalty wouldn't apply since it would be reported on his taxes. Profit would be taken out for us so that's where it's confusing to me.

That's why we're meeting with our investment adviser tomorrow. The money is in her dad's retirement account which she is POA and he has severe Alzheimer's. I know you can use Self Directed IRA's to fund real estate as it's an investment tool to growing retirement income. Only question is what tax hit is there if profits from that are taken out versus putting back in the IRA.

Ok. Spoke with our CPA and he suggests that we move the $311K from the annuity that's earning 3.5% to her dad's retirement fund accounts and set it up as a Self Directed IRA that we can use for house flipping. That will avoid taxes if we roll it over which could save us over $60K in taxes (taxed at 33%) if we were to instead take the money out.

With the Self Directed IRA, we can draw from it for flipping and pay back on monthly schedule. Profit would be taxable unless put back in the IRA. So we're meeting with our fund manager on Wednesday and he will let us know what we can and can't do to roll this over to a Self Directed IRA.

On the House Front, our RE agent is wanting to list for $460K and the home we purchase will be around $380K. So minus $20K (our RE agent is giving us a break on her fees) will leave us about $60K to cover our daughter's college. One other option is to take the $440K (minus the RE commissions) and only put down on the new house 45% would give us a mortgage $209K (over $200K to get below 4% interest rate) and have $269K to use for investing (not including tax implications which is another area to explore).

Bite the bullet and do the tapering roof as you'll recoup it when you sell down the road as long as homes in that area appreciate. Also, you'll be protecting your investment by doing it right. If you were flipping it, I'd probably swing the other way and leave it flat.

We currently use the $311K that we get $15K annually around November to pay the taxes and insurance on both our home ($450K value) and our rental ($225K value) that my father in law lives in and is on the Title with us so he can get homestead exemption and over 65 exemption on property taxes. So selling his home (our rental to the care home organization) is not an option.

One other choice is to go ahead and sell our $450K home, get the new $355K home (brand new) and use the balance to pay for our daughter's college. Maybe we can have better luck securing a new mortgage on that home than trying to get a cash out refi that we were only asking for 50% LTV on. We would then pay cash for 50% of the new home and try to finance the rest which would give us $270K - RE fees on existing home ($26K). The trick is to find a lending institution that will give us a 4 - 5% mortgage.

I do like the idea of cashing out the $311K from his annuity and banking it minus the tax hit but we do use that $15k we get annually to cover our tax and insurance burden on both houses. If we sell our house, the tax burden on the new house will be about $4,000 less. Although we could put the $311K to work in our RE business and likely turn higher profits than the $15K we get and still be able to pay our taxes and insurance which would lower to $11K annually.

Banks have turned us down because our Debt to Income ratio isn't good relative to our self employment income which is about $1,600 monthly plus $2,000 monthly on our one rental we own now. However, the banks use a formula that limits the income on a rental to $2,000 *0.75 - $350 (taxes and insurance). Or $1,150 in income from the rental. That puts us at $2,750 in monthly income. But we get an additional $5,000 monthly from her dad's retirement funds valued at just over $1,000,000. However, we can' touch that without paying taxes on it until he passes away.

With that said, we think the best thing to do is sell the house and use what's left to fund real estate with the help of a private lender or hard money. But that $2,750 that banks count as income would require us to have a debt of under $1,000 to hit their 35% debt to income ratio for qualification on a loan against our new home.

The $2,000 - $2,400 is after taxes and insurance to hold the home. If we sell, we will have to pay about $26,000 in RE fees. @Greg H. our home is personal residence. We own outright. My wife and I are looking at both angles between selling and leasing so we're on the same page.

The home we want is new construction in an area we really want to move to that's not far from where we currently live and not far from our other rental where her father lives. Price on the new home to be built is $355K with extras to customize for us.

So $450K sell price (if we get that) - $26K - $355K for new house = $69K left over give or take $3K - $5K. 

Leasing home would put us tax and insurance wise for 2 rentals and our new home would be $1,850 monthly. Bringing in $3,000 monthly on our lease would leave $1,150 in profit monthly. We could use that to pay monthly for our daughter's college.

We're at a crossroads of what to do and seek advise from experts both in the investing and financial areas. Here's our situation...

Our Home is worth $450K (according to comps provided by our RE agent). We own the house free and clear. Taxes are out of this world where we live at $9,000 per year. We want to take out a loan to cash out some of our equity (say 50%) but we can't get qualified with the incredibly tight lending laws these days due to our self employment income not being high enough even though we get over $4,000 monthly on top of our self employment from my wife's dad's retirement fund but can't be used in Texas as income because she's POA and POA money can't be used (Power of Attorney).

So we decided that maybe (with our daughter graduating HS in May) that we should instead sell our house and downsize from 3750 sq.ft. home to 2200 - 2800 sq.ft. home out of our city and cut taxes in half and cash out to fund our RE investments.

Then we thought that maybe we can cash out instead one of her dad's annuities (valued $311,000) and buy a new home with that and instead lease our home (high lease area due to the top level schools in all of Dallas county). We can get about $3,000 to $3,200 per month in lease which after taxes and insurance is $2,000 to $2,400 income monthly.

However, not sure what the tax hit is on cashing out the $311K from her dad's annuity but thought that we can use the IRS form 709 gift tax form to limit the taxes and take the gift and pay for a new home which may or may not affect taxes. We're calling our CPA Monday to ask but thought I would ask here since there are so many RE and professional people here.

If we purchased a home and leased our house, that would be our second leased home on our portfolio and move the income from his income to our income which could help us get qualified down the road. Depending on the price of the home we get and any updates we want to do, this might limit us to any cash out but would increase our monthly income to help pay for our daughter's college in the fall.

OR we sell our home and cash out about $120K - $150K and use that to finance a fix and flip home (maybe with some private money or hard money help). Tough decisions. What would you suggest or in our shoes do?