All Forum Posts by: Scott Sauri

This might be a little bit off topic, but I just bought a place in Patterson Park (@ncarey on Bradford!). I am looking to rent it out starting February 1st and am preparing the Craigslist ad. My question is whether or not I should a) include a picture of the front of the house in the ad and b) include a link to the website with the full listing in the ad?

The reason that I ask is that I have heard stories of people monitoring Craigslist and then breaking into properties that they think might be vacant.

Any concern about this? The property is south of Fayette, so it's in the "nicer" 2 block area just north of the park, but it's still Baltimore and still north of the park, so I don't want to be naive.

Jon Holdman
Ah. That makes sense. Although, that seems to me to mitigate most of the benefit of the personal load vs. the property purchase because you lose much of the liquidity I mentioned.

So I guess the main benefit to loan/note scenario is that you are more likely to get a higher return (you indicate 12% is on the low side) while most of the property purchases I'm looking at are lower than that in cash on cash return. There are some very cheap properties that have better returns, but I don't really want to buy in a bad area where I think you are more likely to get a bad tenant.

Thanks for you help.

Dennis Tierney

Thanks for the alternative perspective. Concerning the concept of an individual partnering with his SDIRA; it is my understanding that the IRS only views it as an indirect benefit if you could not have afforded to purchase the property without involving the SDIRA. If you have purchased the property via other means (e.g. a HELOC, 401k loan, savings, etc...) then you are simply making a choice to partner with your SDIRA and aren't really gaining a benefit. However, if you didn't have a 401k loan or HELOC as an option and didn't have enough money to purchase he property without the involvement of the SDIRA, then you are gaining an indirect benefit because you are gaining access to something you would not otherwise have had access to.

Am I wrong on this?

David Beard Jon Holdman

So I knew that I was probably misusing the calculator I was using, but I still can't figure out what I'm doing wrong.

This is the calculator that I'm using:
http://members.cunamutual.com/calcs/calc.asp?nav_dest=calc:LoanCost&site=01901629

It's a pretty standard loan calculator that I've used many times for estimating mortgage payments and it is accurate for that use.

It takes Loan Amount, APR and Term of Loan (in months) as inputs and then outputs the Monthly Payment, Interest Cost and Cost of Loan (just the sum of the Loan Amount and Interest Cost).

I tried to use this calculator to reproduce the scenario in our example where I lend buy a property outright for $60k and end up with $5400 in profit after one year.

So I entered in $60k for the Loan Amount and 12 months for the Term of Loan. I then adjusted the APR until the results came out close to $5400 for the Interest Cost.

With an APR of 16%, the Interest Cost after 12 months is $5,326.22.

I've had a feeling that whole time that I'm missing some basic concept that completely invalidates this as a way to compare opportunities, but the only major differences that I can see between the property purchase scenario and the personal loan scenario are:

1. Liquidity and Opportunity Cost Associated with the Principal:

In the personal loan scenario, I would be getting a monthly payment of $5,443.85 that could be reinvested throughout the year and at the end of the 12 months I would have $65,326.22 in cash (assuming I hadn't reinvested those funds throughout the year).

In the property purchase scenario, I would only be getting $450 per month in rental profit (assuming the 50% rule) that could be reinvested throughout the year and at the end of the 12 months I would have only $5,400 in cash and property that I would then have to sell if I wanted to do anything else with those funds.

There is an opportunity cost to having the principal tied up in the property.

2. Possible Appreciation:

In the personal loan scenario, there are no other benefits besides the interest received.

In the property purchase scenario, there is the possibility of appreciation, especially if you know your market and are able to get a good deal on property.

I think these two differences somewhat offset each other, although to what extent depends on the specifics of the property and the opportunities for reinvestment.

Both have risks, but I don't really know a way to evaluation the risk of someone defaulting on a loan vs. the risk of getting a bad tenant and/or have a property lose value.

Anyway, please tell me where I'm going wrong on this line of thinking.

Hi Troy, would you mind sharing where you get a 4.75% non-recourse loan? Is that from a local bank? And what is the time frame for that loan. I am getting quoted 6.75% on a 20 year loan from NASB.

One more question. It's funny that you mentioned personal loans being a better option than RE for a SDIRA, because I'm actually attempting to compare two opportunities and was wondering how to accurately compare a real estate opportunity to a personal loan opportunity.

Jon Holdman - in your math example you came up with a cash on cash return of 9% ($5.4k/$60K). I understand that and it makes sense to me.

However, when I try to figure out what a comparable personal loan situation would be, I get a little bit confused.

Using a loan cost estimation calculator (based on monthly compounding), if I were to lend a person $60k, I would need to charge 16% interest in order to get $5400 back after a 1 year.

Does that comparison make sense?

Either way, at the end of 1 year, I will have my original $60k (either in the form of cash paid back via loan payments or in the form of the property) plus an additional $5400 (received as interest payments or rental profit).

It seems to me that the difference is that in the personal loan scenario you are getting about $5400 monthly payments (assuming 1 year/16% terms) that can be reinvested throughout the year while in the rental property scenario you are only getting $450 in rental profit that is liquid. The rental property, on the other hand, has the potential to appreciate in value.

Sorry if this off point again and should be a separate thread.

Thanks for the quick responses. Sorry that it's taken me so long to get back to you, but I wanted to do some more research before chiming in again.

I guess I hadn't learned as much as I thought I did.

I actually did know that you money can't be exchanged between the SDIRA and a disqualified party. I just managed to confuse myself when I started to factor in my current 401k.

I did not realize that there is $50k limit on 401k loans, because I had never really considered doing so and hadn't researched it. I've now read several articles/FAQs about that and feel that I have a handle on it.

Jon Holdman Will Barnard

You both mentioned an example where I could borrow $50k from my 401k and then form a partnership with my SDIRA to buy a property. Do I need to establish a formal/legal entity or can I just write two checks, one from personal account and one from my LLC account, and then make sure that both myself and the LLC appear on the deed?

Also, both of you indicated that you would advise against owning RE in a SDIRA (except in specific circumstances) because you lose some of the advantages. I've read similar comments in several other threads and depreciation is usually mentioned.

Two questions on these benefits:

1. Are there other benefits lost besides depreciation deductions?

2. If I do end up financing part of the purchase price through my SDIRA via a non-recourse loan, the I would have to pay UBIT. In that scenario, wouldn't I then be able to take advantage of the depreciation deductions to offset the UBIT?

Finally, I know nothing at all about note buying or originating. I've read a little bit about peer-to-peer lending, but I'm not sure that's the same thing. I've done some searching on the forum for a beginner's introduction on this, but haven't found anything yet.

Actually, I did find this one (https://www.biggerpockets.com/forums/70/topics/48164-do-i-have-enought-capital-to-enter-the-area-of-notebuying-), but I think I need a little bit more elementary intro to start.

Could you direct me to any could posts/sites/articles that would help me begin to understand why this may be a better option for SDIRA investing than RE is?

Thanks again!

First of all, thanks to everyone who takes the time to post on this site. I've been reading for a few months now and have learned a lot. This is my first post and I hope this thread isn't too old to be commenting on now, but after some searching, this seems to be the closest to what I am looking for.

I have already converted an old 401k to a SDIRA and used that to fund a checkbook/IRA LLC. I am currently looking at properties and there a few that I can buy outright, but I have more options available if I decide to finance (obviously).

My questions are regarding the financing. From what I can tell there are only a few lenders that make non-recourse loans and I am currently working with someone from NASB as they seem to be the most referenced national lender in this area.

However, after reading this thread, I am now wondering if I should be borrowing against my current 401k rather than obtaining financing from NASB.

1. Can I borrow money from my current 401k and then lend that money to my SDIRA LLC? Can I or my 401k even make a non-recourse loan to my SDIRA LLC at all?

2. I'm reluctant to borrow the money to partner personally with my SDIRA LLC on a deal, because I am worried about that creating a prohibited transaction since I can't really afford anything on my own without investment account money. Although I'm not really clear on
the rules there.

For example, if I have $100k in my SDIRA LLC and $200k in my current 401k, could I borrow $100k from my current 401k to buy a $150k property? Would this not be considered a prohibited transaction because I, technically, could have afforded the property on my own by borrowing $150k from current 401k?

3. This is really a separate, but related, question. Given the above account balance examples, even if I decided to buy a cheaper property outright with my $100k SDIRA LLC, would it make sense to borrow against my current 401k to buy a second property outright? The cheaper properties that I am looking at are between $60k and $90k and would likely get a rent between $900 and $1100. Those numbers seem in line with what Mark H. was calling a good deal earlier in this thread.

What is the downside to doing this? Just the risk that the real estate investment will not perform as well as the mutual funds that those funds are currently invested in?

Sorry for the long post!