All Forum Posts by: Robert Karnes

Investment Info:

Other commercial investment investment.

Purchase price: $450,000
Cash invested: $450,000
Sale price: $730,000

100 unit self storage facility

What made you interested in investing in this type of deal?

After my initial success with another storage facility I wanted to find a larger facility.

How did you find this deal and how did you negotiate it?

I became aware of the facility due to a real estate yard sign. I live in WV but owned a different business in nearby College Station.
Originally I offered much lower than the asking price. The offer was based occupancy below 40%.
The offer was rejected out of hand.
I moved on to exploring other properties.
About 5 months later the seller reached out to see if my original offer was still possible. I said yes.

How did you finance this deal?

I initially started to pursue an SBA loan. When I received the final approvals from the lender 75 days into a 90 contract I thought all was good. The lender told me no, they couldn't actually close in the 15 days left. The seller was not willing to extend and I was fortunate to be able to self-fund the deal.

How did you add value to the deal?

I took the property from 38% occupancy to 100% occupancy in about 18 months. I put in technology like online rental, security cameras, etc. Repainted doors. Installed corner bollards to protect the buildings. Added several outdoor RV parking spots.

What was the outcome?

At 24 months we sold for a solid profit. The timing worked out well because I also sold my other TX business.

Lessons learned? Challenges?

SBA loans always take way longer than expected.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Yes. Both on purchase and sale.
On sale I worked with a real estate agent who specializes in Self Storage.
Dave Knobler of Marcus and Millichap.

Investment Info:

Other commercial investment investment in Rock Cave.

Purchase price: $160,000
Cash invested: $40,000
Sale price: $280,000

Self Storage.
50% occupied when purchased.
100% occupied when sold.

What made you interested in investing in this type of deal?

I wanted to try the self storage vertical. I had a friend who owned the facility. He was not interested in it as it was a very minor part of his portfolio.

How did you find this deal and how did you negotiate it?

Friend

How did you finance this deal?

Initially owner financing, after a year or so I refinanced with a local bank.

How did you add value to the deal?

I held the property for about 6 years. I initially cleared out non-paying tenants. Then rented up empty units. After 18 months I was 100% occupied and maintained 95%+ occupied for the next 4 years. Finally I raised prices.

What was the outcome?

I recently sold this facility to free equity for the purposes of building another facility in a nearby town.

Lessons learned? Challenges?

I was just a great starter project. Small facility, in a rural community. I brought technology to the facility. Online rentals, security cameras, etc. I later bought 2 other facilities based on this experience and flipped them after renting them up and/or increasing rental rates to add value.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

no

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $90,000
Cash invested: $90,000

Short Term Rental in a mountain community.
https://airbnb.com/h/unterwalden-riverfront-cabin

What made you interested in investing in this type of deal?

I like the rural mountains of West Virginia. Helvetia in particular is an area settled by Swiss and German immigrants and retains much of that character.

How did you find this deal and how did you negotiate it?

I originally purchased the property as a place to build a family retreat. The seller believed they had a 5 acre property and their asking price was high for that acreage. After a brief discussion I realized based on their description that the property was much larger. It turned out to be 13 acres and includes 2000 feet of river front on a native trout stream.

How did you finance this deal?

Cash.

How did you add value to the deal?

I had Amish builders build 3 cabin shells which I finished out over a few years.

What was the outcome?

My build cost was about $90,000 per cabin, I currently live in 1, have a long-term tenant in one and have the 3rd as an STR. The STR does about $35,000 per year gross.
We have a 5 Star Super Host rating on AirBnB and are Premier Hosts on VRBO.

Quote from @Janet Holman:

They are liars. They say there’s a computer glitch. They owe me 3000

Dollars for two guests. It’s been 11 Days and they just keep lying. I want my money. The website says I owe them money and I don’t. They are saying it will be fixed in 14 days. It’s been 11 already. I need my money. Terrible. I’m canceling next booking. Terrible. I will not let people stay from vrbo with no payout. 

I am wondering if VRBO just doesn't have the money to pay on time. I see this from a thread started a year ago. I haven't been paid for the last 3 guests over 40+ days. I have had at least 4 support  calls as well as chats. Nothing but excuses.

This isn't from a NEW listing. I have several listings. Premier Host. We have been on VRBO for about 20 months. Five different properties.

Web interface says I owe them a balance???? No cancellations, etc. and when I talked to somebody initially it was because I needed to update my tax forms? 

Then with tax forms all updated I got an email saying the problem was BECAUSE I updated my tax forms I had to wait until they were verified.

Another email today says a computer glitch with their IRS interface is making it impossible to verify my tax forms. I pointed out that must mean NOBODY can update/validate tax forms. YES I was told and yes, thousands of hosts are currently not getting paid I was told.

I have two upcoming bookings with VRBO and like you wondering if I should just cancel and pull out of their system.

Frankly I don't want to be the guy stuck holding the bag if they can't pay their bills.

Giving people the runaround on this can't possibly inspire confidence.

Luckily VRBO is a small percentage of my overall bookings.

Quote from @Brian Eastman:

@Robert Karnes

Both an IRA and Solo 401(k) can use debt financing such as a mortgage. The difference is that an IRA is subject to tax on the portion of income the IRA receives from the non-IRA money in the deal and a 401(k) has an exemption from that tax when the debt-financing is used for the acquisition of real property.

The UBIT cost of UDFI does not normally add up to that much in an IRA, and the net effect is a small reduction in the boost of returns that leverage creates, so it is still a net positive strategy.  Of course, if you have the option for a Solo 401(k) and can eliminate both the tax and the headache of a separate tax return for your retirement plan, that is a win.  

The exemption from tax on UDFI in a 401(k) applies whether the funds in the 401(k) are tax-deferred or Roth.

Be advised, UDFI (debt-financed income) is exempted, but UBTI (business income) is not.  Those are two different forms of income that generate an obligation to pay UBIT. 

Thanks for the advice. I have all different kinds of IRA but solo 401k looks likely next.

Quote from @Brian Eastman:

@Robert Karnes

Your plan is generally solid. The IRA can long-term lease the property to someone who will then be a short-term operator.

Unless you plan to acquire the property using mortgage financing, an IRA and Solo 401(k) will be largely similar. If you plan to use a non-recourse mortgage for the property, then looking for a legitimate fit for a Solo 401(k) could be worth your while to avoid tax on Unrelated Debt Financed Income (UDFI). Beware internet promoted schemes like being your own property manager. That is "technically" feasible but not always net-beneficial. There are a lot of trade-offs, complexities, and expenses involved that can effectively cost more than the amount of tax being paid on UDFI by an IRA. Why spend $1000 to save $800, figuratively speaking?

A fixed rent from the operator would clearly be passive rental income not subject to tax on Unrelated Business Taxable Income (UBTI).

The percent of revenue approach would be more aggressive. It {could} if structured properly still be considered passive income, but it could also be viewed by the IRS as operating business income subject to UBTI. You would definitely want to engage a tax attorney to consult on that topic. These are the types of interpretive details where if you ask 4 tax professionals you will get at least 3 answers. So, you just kind of have to determine how aggressive you want to be and what is the worst case scenario if 3+ years in the future the IRS determines you had a failure to file on UBIT. In addition to the tax, you will tack on penalties and interest. It does not disqualify the IRA, but it would result in a big dent in your returns.

The better approach may be an agreement with the operator for a higher than market rent due to the intended use, or perhaps some kind of periodic maintenance surcharge to cover the additional wear and tear of short term rentals.

Currently the intent is to pay cash from the SDIRA. You and Todd both talk about a Solo 401k in the context that it could use non-recourse financing without invoking UBIT. Is that the case? Also true with a Roth 401k?

Obviously pulling cash out to repeat makes a certain kind sense for scaling. 

Thanks.

Quote from @Chris Seveney:

@Robert Karnes

Speak to your advisor as I would not think this would fly. You renting a property and not owning it to then rent it out would seem to look like an operating business where you are leasing something to generate revenue from it

Your sole purpose also for this is to not have to pay UDFI / UBIT.

I may not have been clear. My SDIRA LLC would own the property. It would sign a long-term lease with an 3rd party, independent, experienced STR host/Property manager. They would have the STR business.

My SDIRA LLC would simply be a landlord that allowed the property to be sublet. I tossed in the percentage of business as many commercial leases have a gross sales component but if that were to trigger UBIT I would explore something different for that element.

The purpose is dual, avoid UBIT but also avoid an involuntary distribution. I think one or both would be triggered if I were the one operating the STR.

Thanks

Quote from @Todd Goedeke:

@Robert Karnes You can avoid UBIT by being a passive investor . Are you self employed? Consider having a property management company with you as owner to allow you to start a Solo401k. Once opened transfer IRA money( not Roth IRA) to Solo401k. Simplify your agreement with a property manager by leasing the new property to them.Check with your tax atty or CPA, you can t share in profits from a business without triggering UBIT. Structure lease terms so you receive in guaranteed income at least a 20% plus cash on cash return with 20% down payment. The advantage of Solo401k is that you can have debt, leverage. Include terms in lease where property manager pays for all furnishings, RE taxes, insurance, and interior maintenance.

Consider contacting IRA Financial Group or one of the contributors on this group regarding set up of your Solo401k. It's always helpful if Solo401k provider has a tax atty on staff to give you assistance with your STVR RE questions.

You are nailing what I am looking for. Although I do already have the Roth IRA. Essentially setting up an arbitrage so a property manager can run an STR our of my "long-term" rental.

It would seem, if structured correctly, I can get at least a share of the larger returns from a STR while avoiding the UBIT and involuntary distribution concerns.

I may look into rolling over in a Solo 401k. Question in your suggestion, why not a Roth solo401k?

Thank you

Quote from @Collin Hays:

I bought a cabin once in a SDIRA.  HUGE mistake.  This scenario is fraught with IRS minefields.  You're a one-eyed gopher in a cactus patch.  Just don't do it.  

Thanks Collin. Was the Cabin used as an STR? Was it just the complexity that you disliked or did you actually get tripped up?

Quote from @John Underwood:

UBIT is generally mandated when you borrow money for a self directed IRA asset. Solo 401k's are exempt from UBIT, if you can qualify (google this) it is a much better retirement vehicle. 

I own 5 properties (LTR's in myself directed IRA and one so far in my Solo 401k. My IRA is buying another property for 50k next week. Both are ROTH's so I will never pay tax on the gains or incoming rents.

You sound like you already know the rules, but you can't ever use the property for you or your parents or kids as long as it is held in your IRA. You also never do any sweat equity work on the property.

One day when you retire, and your IRA does a distribution of the property from the IRA you can then use it as you wish.

 Thanks John. I would be paying cash so that element of UBIT wouldn't concern me. I once owned a riverfront cabin in an IRALLC and followed all of the rules but I did long-term rental with it. I live in a different riverfront cabin so it was never tempting to use it. And as a long term the UBIT question never came up.

Now with this cabin I want to partake of the STR cashflow without getting caught up in UBIT or a prohibited transaction. I think even if I took on a partner with a 50/50 split I would be subject to UBIT on my IRA's cut of the profit. It seems like a long-term lease to an experienced host that roughly split the profit between me as landlord and them as operator would effectively work like a partnership without the downside.