Using Your SDIRA to Invest in Trust Deeds

Blue Diamond Documents is proud to share an article written by Bruce Silverman of Home Path Financial. 

We thank Bruce for sharing his vast knowledge with us.  If you have any questions please don’t don’t hesitate to contact me or Bruce directly.  Thanks and Enjoy…

There is an old adage in investing no matter what you are investing in; “Buy Low and Sell High”. This is especially true with Real Estate as we are now at a bottom and prices have not been this low in many years. Recently Warren Buffett said if he could, he would buy every single family home he could get his hands on. There is a lot of money being made right now “flipping” homes, and in many ways it is much better than owning rental properties, because the profits are realized in a very short period of time. In fact there is even a television show called “Flip This House” that some of you may have seen. There are professional rehab companies that are purchasing, rehabbing and selling these single family homes all over the country. You can take advantage of this unprecedented opportunity by becoming a “Passive” Real Estate investor. What I mean by “Passive” is that you can make a very good return as a Lender and don’t have to be directly involved in the process. Many of these rehab companies use private money to help them fund their projects, often from investors using their Self-Directed IRAs.

Let’s face it, investors today are very disappointed with their IRAs or 401Ks low, or flat, returns and are looking for something better. Because the primary goal is security they are putting their money in CD’s, Bonds and Treasuries. The problem with these investments is that the yields are extremely low, and after inflation is factored in, actually lose money! So the million dollar question is where can I get security, double-digit returns and cash flow? The answer is 1st Trust Deeds. Every investor should consider having Trust Deeds in their portfolio as they offer that security, pay three to six times what CD’s or Bonds pay and provide great cash flow. They also offer a solid alternative investment strategy for people discouraged by our weak economy, ever pending “Debt Crisis”, an extremely unstable Europe and a scandal ridden and corrupt Wall Street overseen by an ineffectual SEC.

A 1st lien Deed of Trust is the security instrument tying a loan to a piece of Real Estate and is recorded at the courthouse in the County the property is located in. Different States have different descriptions for the legal documents associated with mortgage lending and the actual description is “A Trust Deed Evidences a Promissory Note Secured by Real Estate.” When investing in Trust Deeds there are several things to keep in mind. First you are becoming a lender but with returns considerably higher than conventional financing. As a matter of fact a 30 year conventional loan is now around 3.5%. A Trust Deed will typically pay a lender 8-12% A.P.R. with the interest payments being directly deposited into the lenders account on the 1st of each month. The interest rate is usually determined by the amount invested and the term of the contract. As an example a $100,000 investment, with an 18 month contract and a 12% A.P.R., would create $1000 a month in cash flow, or a total of $18,000 in income. This income would be growing tax free if held in a SDIRA.

As a Real Estate transaction one of the issues is Loan to Value, or what is commonly referred to as LTV. You want to protect yourself with an LTV of no more than 75%. This will give you an equity cushion in the rare case of default.  In the case of a default you would foreclose on the property and keep it as a rental or sell it and realize the net gain.

The simplest and most common way to invest in Trust Deeds is to find an established rehabber and flipper of single family houses like Home Path Financial, LP (HPF) who has been doing this since 2004.  This way you are working with an established business and not private individuals. This will also exclude you from the many restrictions placed on lenders when doing loans on owner occupied properties. This is considered Commercial, or private lending as you are lending to a business. You are the Lender and HPF is the Borrower. HPF works on a 90-120 day sales discipline so the projects are designed to move quickly and therefore maximize profits.

There are many levels of security with this type of investment. You are provided with a Loan Agreement, Promissory Note, Master Deed of Trust and a Supplemental 1st lien Deed of Trust for each specific property you lend on. This is not a Real Estate Investment Trust (REIT) and there are no commercial properties involved. There is no co-mingling of funds and you are the lender on separate and specific single family properties. Funds are held by an independent 3rd party Escrow company and only distributed upon approval by you. The borrower pays all costs associated with the purchase of the property including closing costs, Title insurance and liability insurance, all to protect you, the lender. The borrower will even pay the $300 yearly fee to maintain YOUR Escrow account. Before completion the house is referred to one of our network of Realtors and marketing begins. After the house is sold the funds go back into the Escrow account until the next property is purchased when the process starts again.

The contracts are usually 18 months and you have the opportunity to renew. Most investors do renew and some of our lenders have been with us 2, 3 or even 4 years. You will be contacted three months before your contract is due to expire. If you choose not to renew, all draws from the Escrow Account cease, all works in process are completed and all remaining houses sold. Your entire investment is returned at the end of the contract. No investor has ever lost money with HPF and we have never missed, or even been late, with an interest payment.

One other thing you may want to consider is the area that the rehabber is working in. You want to be in a stable area where prices have already bottomed out and there is a good job market. You can invest in Trust Deeds anywhere, and may have a comfort level in your local area, but some parts of the country are significantly better than others. We at Home Path Financial, LP have been doing this for 8 years, and while we have done work in other States, we have identified Texas as the best area in the country right now and are concentrating our efforts there. 50% of all the jobs created in the U.S. in the last 4 years have been created in Texas and it is absolutely one of the best areas in the country to purchase, rehab and sell single family homes.

To find out more information about using Trust Deeds as an alternative investment strategy contact Bruce Silverman at Home Path Financial, LP. His phone number is 770-842-2015 or you can email him at bruce@myhomepath.com.

Hard Money Lender and Hard Money Borrower

Hard Money Lending and Hard Money Borrowing

May 9, 2012

Today I want to talk about another way you can use a self
directed IRA to can get out of the stock market and make a nice return in a  safe and secured way.

What I want to talk about is becoming a hard
money lender and or a hard money borrower.

First let us define a hard money
lender. A hard money loan is a specific type of asset-based loan financing
through which a borrower receives funds secured by the value of a parcel of
real estate. Hard money loans are typically issued at much higher interest
rates than conventional commercial or residential property loans and are almost
never issued by a commercial bank or other deposit institution. Hard money is
similar to a bridge loan, which usually has similar criteria for lending as
well as cost to the borrowers. The primary difference is that a bridge loan
often refers to a commercial property or investment property that may be in
transition and does not yet qualify for traditional financing, whereas hard
money often refers to not only an asset-based loan with a high interest rate.

Many hard money loans are made by private investors,
generally in their local areas. Usually the credit score of the borrower is not
important, as the loan is secured by the value of the collateral property.
Typically, the maximum loan to value ratio is 65–70%. That is, if the property
is worth $100,000, the lender would advance $65,000–70,000 against it. This low
LTV provides added security for the lender, in case the borrower does not pay
and they have to foreclose on the property.

Let us take a look at a case study of someone doing a hard
money loan in their self directed IRA.

John has $70k that he is willing to
lend.

Tom has a property that he is
closing on and needs cash.  Tom is buying
the property for $100k but the property is valued at $135k. John requires Tom
to sign a deed in lieu of foreclosure. Tom borrows the $70k from John for 18%
annualized return for 90 days. That’s $3,106.84. If Tom does not pay by the 90th
day John is guaranteed another 90 days of interest.  So Tom is motivated to get that loan paid
back before 90 days.

LETS LOOK AT IT FROM THE
LENDERS VIEW

John is a
passive investor no work for him.

John will be
first lien holder on a property that is valued at $135k for a loan of $70k.

John will have
in his possession a deed in lieu of foreclosure just in case Tom
fails to make payment.

John is
guaranteed 18% every 90 days annualized.   18% X $70k=$12,600/365days =$34.52 X 90 days
= $3,106.84

LETS LOOK AT IT FROM THE
BORROWERS VIEW

Tom is able to purchase an
investment property that is valued at $135k that he invested $30k of his own
funds.

If Tom is able to flip/sell this
property in 90 days, let us assume that it took Tom $15k to fix the property.
So out of pocket for Tom would be his original $30k as down payment and $15k to
fix the property  for a total of
$45k.  After the sale Tom would owe
$73,106.84 to John.  Toms original
investment of $45k would be returned to him and his profit in 90 days is
$16,894.00.  That’s just over 37% return
in 90 days.

We can use our self directed IRA
to be both the borrower or the lender in this case study.  It really depends on you and how involved you
want to be.  Both have a great return for
our IRA owned LLCs and our self directed IRA.
If you want more information on how you can take control of your
retirement account contact me at tim@checkbookiraprep.com
.

Timothy A Schubert CISP

Frequently Asked Questions

Here is a sample of some of the questions we get when talking about checkbook control. Hope you find this helpful.

1. Why have I not heard of a Checkbook Control IRA LLC, or investing in alternative assets before?
Even though we have always been allowed to invest in alternative investments and the Stock Market since the beginning of IRAs, stock market brokers have done a good job of convincing us that our only choices in our retirement account is Stocks, Mutual Funds CDs or Bonds. In actuality, the IRS never tells what we can invest in, only what we cannot. This list is very short.
2. What are considered prohibited assets in an IRA?
IRS Section 408 tells us that we should NOT invest in Life Insurance and Collectibles. These are the only two asset classes that the IRS has identified as prohibited. So what is allowed, along with stocks, mutual funds, CD’s and bonds is real estate, promissory notes, private placements, gold bullion and silver bullion and the list goes on.
3. Who is considered a prohibited person?
The internal revenue code has identified who and what is considered a prohibited person, or prohibited entity. The list is as follows: You and your spouse, your children and your grandchildren, your parents and your grandparents and all their spouses. It also includes any business that any of those prohibited people own 50% or more of. So what does this mean? It means that our IRA cannot buy, sell, exchange or lease with any of these people. Your IRA can buy real estate, but you cannot live in that property because you are considered a prohibited person.
4. Why would I want to have checkbook control of my IRA funds?
Most people feel like their retirement accounts are out of control. For me, the number one reason to get checkbook control of my retirement funds is to have total control of the assets myself. Secondly, when you have checkbook control of your retirement funds you save money in fees imposed by your IRA account custodian. Most custodians charge your IRA account for every asset you have. When you have checkbook control of your IRA funds, your custodian only sees one asset, an LLC. Therefore your custodian only charges your IRA account for that one asset. However, the LLC can own multiple assets but the custodian only sees one asset. Your custodian will also charge you transaction fees every time you buy or sell an asset. When you have checkbook control of your retirement funds, your custodian does not make the transactions for you, so therefore you do not incur those fees.

5. What is a truly Self Directed IRA?
The only difference between a Self Directed IRA and an IRA at your local Broker is who is in control of the account. If you have a truly self directed IRA, then you are in control of the assets and the direction your IRA funds are invested.

6. What are your fees to get checkbook control?
Our fees vary based on each states filing fees. The average cost ranges from $400.00 to $900.00. This is a one-time fee to Blue Diamond Documents.

7. What states do you provide this service in?
We file LLCs in all 50 states.
8. Is Blue Diamond Documents a custodian?
We are not a custodian; however we work with a number of custodians. Call us for our list of custodians that will allow you to have checkbook control of your IRA.
9. When I have checkbook control how do I title the investments I choose?
You always want to title your LLC investments in the name of the LLC. Never in your own name. You are the manager of LLC not the owner of the LLC, the IRA owns the LLC.
10. Do I have to send all the income from the LLC back to the Custodian?

No you can let your LLC checking account build up from your LLC income and then you can reinvest it however you see fit. The only time you would need to send money back to the custodian is if you need a distribution or you are dissolving the LLC.

Contact us today if you want to learn more about taking control of your IRA.

Benefits of a Solo 401k

Today I want to talk to you about individual 401ks also known as solo 401k and what are the benefits of this type of plan? And what are the nuts and bolts of this type of plan? Let’s dig into this topic.
An individual 401k is the type of plan that has the ability to invest in anything the law allows, like real estate, private placements or any alternative investment to the stock market. It’s the most tax-advantageous, self employed plan available with very high annual contribution limits. You can set up this plan even if you’re employed at a full-time job. And, you can borrow funds from the account.
An individual 401k plan is available to any individual who is a business owner or who will be establishing a business and does not have, or plan to have, full-time employees. The plan works great for consultants, home based businesses and independent contractors. Another advantage is the owner’s spouse may also contribute to the plan.
The IRS requires any one that is going to have there own individual 401k have a written plan document that establishes the rules of the plan. This plan must be put into place, with rules and guidelines that state how the plan will operate. While the plan itself is lengthy, the Summary Plan Description explains, in plain terms, how the plan works.
Another great benefit from a control perspective is that a trustee must be designated to hold the assets of the retirement plan. In the case of an individual 401(k), you are able to act as your own Trustee and are charged with investing trust assets prudently and productively. You personally cannot benefit from the trust, you as the trustee cannot co-mingle personal funds with the trust and cannot enter into a transaction with the trust.
There are two types of contributions in an individual 401k plan: salary deferrals and a profit sharing contribution. Both contributions are generally tax deductible and they grow tax deferred until withdrawals which may begin penalty-free after age 59 1/2. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals must begin at the age of 70 1/2.
As with any retirement account in order to initially fund the Solo 401(k) you can rollover funds from Traditional IRAs, SEP Plans, previous employer 401(k) plans, Money Purchase plans, Profit Sharing plans, Keogh plans, Defined Benefit plans, 403(b) plans and Rollover IRAs. This is accomplished by setting up an account for the Solo 401(k) and directly transferring the funds from the Custodian to the trust bank account.
Another great benefit with an individual 401k is the amount you can contribute to the account. For tax year 2011 you can contribute the regular 401(k) maximum of $16,500 (with an additional $5,500 if over the age of 50 at year end). And, you can add up to 25% of compensation for the profit-sharing portion. The combined maximum of these contributions can’t exceed $49,000, plus catch-up additions, if applicable. Also, your plan can be designed with a “designated Roth component”, if you desire it.
You want your plan to have a loan provision permitting you to take out a loan. You are able to borrow up to 50% of the total 401(k) value up to a maximum of $50,000, tax free. Repayment of the loan is according to a loan amortization schedule provided when the loan is initiated and must be paid back into the account (including interest). Failure to make the loan payments may cause a loan default causing taxes and IRS penalties.
We are pleased here at Blue Diamond Documents to announce that we are now offering plan documents for a solo 401k plan. We can help you get started with your solo 401k plan at a very competitive price. If you are a self employed person with no employees we can help you start saving for your retirement future. Call us today at 623-628-2072 for more details. www.checkbookiraprep.com

What is a prohibited transaction?

Over the years of working in the Self Directed IRA world the number one question has always been. What is a prohibited transaction?
This is how the code reads:
A prohibited transaction happens under the Employee Retirement Income Security Act of 1974 (ERISA) when the plan engages in a transaction that the fiduciary knows or should know is a direct or indirect:
1. Sale, exchange, or lease of any property by a party of interest;
2. Loan, or extending of credit to a party of interest;
3. Furnishing goods, services, or facilities by a party of interest;
4. Transfer of plan assets to a party in interest or the use of plan assets by or for the benefit of a party
of interest;
Who is a party of interest?
Under ERISA, the following are parties in interest with respect to a plan:
1. Any fiduciary, counsel, or employee of the plan;
2. A person providing services to the plan;
3. Any business owned by a prohibited person 50% or more.
4. A relative that is spouse, ancestor, lineal descendant, or spouse of a lineal descendant and any of
the persons described in 1,2,3.
What this is telling you and me is that your retirement account cannot buy from yourself or your spouse or any of your relatives mentioned. A prohibited transaction is when your retirement account self deals or when you as the account holder benefits personally from the transaction. You cannot take a loan from your IRA and you cannot extent credit to your retirement account. You should not engage in a transaction with someone that is doing a service for your retirement account, like your attorney or CPA. And your retirement account should not engage in a transaction with a business that anyone of those individuals owns 50% or more of.
I have had many discussions with clients that want to invest in companies they own more than 50% or they want to lend money to their son or they want to pay off their mortgage. This is called self dealing and it is prohibited. Your IRA is meant to benefit you when you retire not before. So if you are considering an investment that is going to put money in your pocket today it is probably prohibited.
What penalties may be imposed on a party in interest or disqualified person for engaging in a prohibited transaction?
Under the Code, a penalty tax equal to 5% of the amount involved in the transaction is imposed on the disqualified person (other than a fiduciary acting solely in that capacity) for each year or part thereof that the transaction remains uncorrected. An additional tax equal to 100% of the amount involved is imposed if the prohibited transaction is not timely corrected. Under ERISA, any fiduciary who engages in a prohibited transaction is personally liable for any losses to the plan and must restore to the plan any profit made by the fiduciary through the use of the plan’s assets. Also, the civil penalty imposed by the Department of Labor (DOL) for certain breaches of fiduciary duty applies to prohibited transactions, but the penalty is reduced by any penalty tax imposed under Section 4975.
How is a prohibited transaction corrected?

A prohibited transaction is corrected by undoing the transaction to the extent possible, but in any event placing the plan in a financial position no worse than the position it would have been in had the party in interest acted under the highest fiduciary standards.
Bottom line if you have a prohibited transaction in your retirement account fix it and fix it now.
Remember to continue your education, you won’t have these problems in you know what the rules are and you obey them.
Timothy A Schubert CISP

Investing in Hotels and Motels

I recently had a conversation with an individual that was considering investing his IRA into a motel. He was a successful executive in the hotel industry so he felt he knew what to look for when considering the many hotel and motel opportunities. He is typical long term employee that had an employer sponsored 401K that allowed him to invest in a select few mutual funds. Over the years he had contributed a substantial amount of salary deferrals, along with company matching he had accumulated a nice little nest egg. The problem is as far as he was concerned, was that he was investing in things he didn’t understand. He was investing in things he had no control over and it just wasn’t working, he always wanted to invest something he knew and understood.
After leaving his job of many years and doing some research he discovers that he could roll his 401k to a self directed IRA and take checkbook control of those funds. His research revealed to him that he could invest his retirement funds into investments that he could control, investments that he understands. His expertise has always been hotels and motels and now he could use his retirement funds to invest in just that. He shared with me some of the properties he was looking into.
He found a fifteen unit motel in Pagosa Springs, Colorado it has an owner’s house, lobby and office on 3.5 acre of land with room for commercial expansion. It also has a workshop and full RV hookups. Asking price is $499,000. His research also tells him that the annual income for this hotel is in the neighborhood of $150,000.
He also showed me a new motel and restaurant that was recently built on a location with high traffic in Kickapoo River Valley. The restaurant seats ninety people and includes an ice cream shop, drive thru window and sales of gourmet coffees, snacks and other beverages. The Motel has 19 units that could sleep seventy four people. The motel is already set up with Wi-Fi, cable TV microwave oven and a refrigerator in each room. The motel and restaurant is considered turnkey. The asking price for this business is $945,000.
These are just a couple of the many motels he is considering for his self directed IRA. I explained to him he needs to know the rules of investing his IRA into a business. He is very confident that he understands the rules and this is good use of his retirement funds.
So what about you, what are you passionate about? What do you know and understand? And why are you not using your retirement funds to invest in that? You can be take checkbook control of your retirement thru and IRA owned LLC and invest in what you know and understand. In investment choices you control and are comfortable with and investment direction that you understand. Take charge of your retirement future today, contact us now we will help you get started with your IRA owned LLC. Remember now cares about your retirement future more than you do.

What are the Pros and Cons of a Self Directed IRA?

If you want to use your IRA to invest in something other than stock market based investments you can open a self directed IRA with a custodian that will allow you to invest in alternative investments. While this type of retirement account will give you more control over where your money is invested, it may be risky for the average investor. It has the same advantages and disadvantages that a stock market based retirement account has if you as the investor makes uneducated investment decisions. Any financial planner worth his salt would tell you to invest in what you know and understand. In classes I teach I will ask my students “who in here has mutual funds?” most everyone in the room will raise their hand. Then I will ask “who can tell me the name of your mutual fund and who can tell me the name of the fund manager?” No one knows that. The point is we put our retirement futures into the hands of someone we don’t know and into something we don’t understand.
You can invest in a wide variety of choices which is one of the biggest pros associated with a self directed IRA. These investment choices include but are not limited to real estate, tax liens, private companies and even gold and silver bullion coins. The truth is you can invest in anything that isn’t on the IRS’ list of “prohibited transaction.” About the only investments that aren’t allowed are life insurance, S-Corporation stock and collectibles, that’s it.
Another obvious pro is diversification. If you have your IRA truly diversified across many asset classes you would have less exposure to the different markets as they fluctuate. If you have a portion in stock market based investments, a portion in real estate, a portion in loans, and a portion in precious metals you have less exposure to any one particular market.
One of the cons associated with taking control of your retirement account is you need to educate yourself regarding the rules of investing. What you can invest in and who you can invest with. It is your responsibility to understand the rules and to follow them. One of the biggest things you want to avoid is what the IRS calls self-dealing, which can result in large penalties. This refers to receiving a benefit today from the transaction your IRA has engaged in.
Another Con associated with a self directed IRA is higher fees. The few custodians that offer a truly self directed IRA tend to charge more because of the extra work associated with handling alternative assets. It’s important that you find a custodian that has experience working with the specific alternative investment you are interested in.
Only you can weigh the pros and the cons. Only you can decide if self direction is right for you. Remember it’s your retirement future we are talking about. I don’t know about you but as for me I want to be in control of my retirement future. I will do my homework and know the rules so I don’t commit a prohibited transaction. I can’t leave my retirement future in the hands of someone else, it’s mine.
For more information on taking total control your retirement funds contact us today.

Timothy Schubert CISP

Who is the right custodian for my Self Directed IRA?

When choosing a Self Directed IRA Custodian here are a few points you will want to keep in mind. First and foremost, you want a custodian that you can have a long term relationship with. You need to feel comfortable with how your communication is with your custodian. Do they answer the phone when you call? Do they call you back when you leave a message? You want a custodian that you feel you can trust and has the experience needed to manage your specific type of alternative investments successfully. 

There are many SDIRA custodians to choose from, but their services and fees can vary considerably.  Be sure to read the fine print on the custodians’ fee schedules. Take your time comparing the services they provide and the fees they charge.  There is nothing worse than hidden fees, like termination fees or transaction fees that are in the fine print you never read or asked about. If you are not careful all of your profits can be gobbled up in your custodians’ fees.  Know the fee schedule and ask them to explain all of their fees to you before you move your IRA funds to any custodian.

Typically a SDIRA custodian will not offer investments; they just manage the alternative investment that you choose to invest in. They also will do all the required reporting to the IRS on a yearly basis like the 5498, this reports the value of your retirement account and it also reports if you did any rollovers and contributions into your IRA.  They are also responsible to report any distributions out of your IRA on form 1099R. 

And finally you want to choose an SDIRA Custodian that has a clear understanding of the complex rules and regulations when investing in alternative investments. They should be able to provide you with good information concerning these rules and regulations. If you are asking basic questions on self dealing and prohibited people and they do not know how to explain it to you, keep searching.  You want a staff that is competent when it comes to the rules and regulations and can articulate what those rules and regulations are.

We here at Blue Diamond Documents have formulated relationships with a number of SDIRA custodians that we can refer you to. Remember, read the fine print, ask the right questions and do good due diligence on any company you are going to trust with your retirement funds.

Timothy Schubert CISP

Using other people’s money in your Self Directed IRA

There are a lot of would be investors that want to get their retirement funds out of the stock market and into alternative tangible assets like real estate.  But a lot of account holders have a problem; they don’t have enough funds in their retirement account to buy a rental property.  Sure there are great deals in real estate today, but that doesn’t matter if you don’t have enough money to grab those good deals.

Today we are going to explore ways to use other people’s money in your self directed retirement account so that you can invest in this buyers market. 

The first method is partnerships.  Partnerships are probably the most common way of raising capital and for me it is the easiest way to raise capital. A partnership is created when there is more than one person or IRA investing together to buy an asset.  I have used the IRA owned LLC method to create partnerships and it has worked very effectively.  We have created a Limited Liability Company and have added those IRA accounts as members for example a member would be ABC Custodian FBO John Smith IRA and ABC Custodian Jane Smith IRA and so on.  I have an LLC that I manage that has eight different members. Ownership of the LLC is determined by capital contribution.  If my IRA has contributed 50% of the total capital to the LLC then my IRA owns 50% of the LLC and would receive 50% of the profits from the investments the LLC makes.

The best way to create partnerships is to talk to your friends and family. More often than not they are unaware that they can use their retirement accounts for alternative investments.  Most Americans think that their only investment choices are in the stock market.  If you talk to your circle of friends about their ability to get out of the stock market and into assets they control and manage they will thank you for it. 

 

Another way to use other people’s money in your retirement account is through non-recourse loans.  These are loans that your retirement account would obtain; remember it is prohibited for you to extend credit to your IRA. So you are not able to get a loan for your retirement account based on your good credit history.  Let’s go thru the steps that it takes to get a non-recourse loan.  First there are certain lenders out there that understand this concept and will lend to an IRA, not very many lenders understand this concept and will not lend to your retirement account.  What the bank will be looking at is the value of the property, how much can the property rent for and how much cash is in your IRA.  They typically require 50-60% down they are usually 2 to 3 percent higher than a typical loan with their interest rate and they want you to have in your cash reserves 10-20% of the loan amount after you close.  It sounds like it has a lot of requirements but you must remember the bank is not lending you the money to buy the investment property, there is no recourse against you in the event of a default.  The bank is lending to your IRA and your IRA owned LLC will now have a property titled to it and it will now have a mortgage.  I have two mortgages in my IRA owned LLC, without the help of non-recourse loans there is no way that I would be able to invest in two rental properties.  It’s a great way to use other people’s money.

 

Another way to use other people’s money is thru the use of a simple prom note.  Mostly this is done without collateral, so it could be a little more risky.  Most people I know that do this are doing this with people they know and have a good comfort level with.  My IRA borrowed funds from my brothers IRA and that allowed me to invest in a project that required me to be a qualified investor.  I was a qualified investor but I had no cash in my IRA. So with the help of my brother and his IRA I was able to take advantage of a great investment opportunity.  Prom notes are easy and quick. Most self directed custodians just require that you create a promissory note and both parties sign and deliver it to the custodian.  Of course for me I have checkbook control of my IRA funds and I never ask my custodian to get involved in the transactions my LLC are engaging in. I always have a good paper trail for all of my transactions that includes good well written promissory notes.

If your strategy is to fix and flip then you may consider a hard money loan. You will pay anywhere from 13-18% for this type of loan.  But you are typically out of these loans in 90 days or less.  I know of a hard money lender that charges 18% guaranteed 90 days of interest in other words you have to pay him at least 90 days worth of interest.  Let’s say you identify a property that cost 100K and this lender requires 40% down that would require you to come up with 40k to purchase this property.  He will put in 60k and will require a minimum of 90 days worth of interest at 18% that equals $2700.00.  Let’s assume you sell the property in 70 days for 150k.  Your lender will be paid back their principal of 60k and interest of $2700.00 for a total of $62,700.00. After your original $40k your profit in a 70 day loan is $47,300.00.  Hard money loans are great for short term loans and if structured right it is good for both the borrower and the lender. 

An important reminder that if you are considering using other people’s money in your IRA you need to familiarize yourself with the UBIT rules.  Always continue to educate yourself about the power of self directed IRA and ease of an IRA owned LLC.

Timothy Schubert CISP

Top Five Checkbook Control IRA Mistakes

#1.Making Contributions to the IRA LLC
The Self Directed IRA owner wants to make an annual contribution to the IRA and does not send it to the IRA custodian first but instead writes a check to the IRA LLC checking account. In this case, you are personally interacting with our IRA LLC. That is considered a prohibited transaction. Remember your IRA contribution is only considered valid when it has been received by your IRA custodian. The correct way to do this is send your IRA custodian your contribution and have them send a check to the IRA LLC as a capital contribution.
#2.Engaging in a Transaction with a Disqualified Party
A key rule that you must know if you are going to have a Self Directed IRA and take Checkbook Control of your IRA is Internal Revenue Code 4975. It has a specific list of persons and entities which are prohibited from interacting with your IRA owned LLC. The list includes you and your spouse, your children and your grandchildren, your parents and your grandparents and all there spouses. It also includes any business that any of those individuals own 50% or more. It is your responsibility to act in the best interest of the LLC and to know the rules of self dealing.
#3.Use of Personal assets and Sweat Equity
The owner of the IRA is clearly allowed to manage the investments of the checkbook IRA LLC. The management can be very involved; it could require considerable effort to find the right real estate and the right tenants. The problem is a prohibited transaction or indirect benefit line could be crossed if the the IRA owner were to use their personal tools and equipment to improve the property. Another mistake is the IRA owner provides all of the labor for making the improvements.
A good rule to follow is that you are allowed to manage the LLC assets, but you should not provide sweat equity or use your personal assets to improve the property.
#4.Making a Personal Guarantee
The IRA account owner is a disqualified person and cannot make a personal guarantee of a loan for the IRA LLC. The account holder cannot guarantee a loan to purchase property, nor could you open a margin account at a brokerage firm in which you personally guarantee to cover any margin calls. This could also apply in cases where the LLC is attempting to get a credit card from the bank, and the bank requires a personal guarantee on that card. IRA account holders cannot extend credit to the IRA owned LLC.
#5.IRA Owner Receives Fees or Commissions from IRA Transactions
There are cases where an IRA owner is also a real estate agent and they want to earn a commission from selling property to their IRA owned LLC or some other disqualified party’s IRA LLC. This transaction would be viewed as conducting a transaction with your IRA or receiving an indirect benefit and would be considered a prohibited transaction. If you or a disqualified party is receiving a direct benefit from the IRA account this is clearly not allowed.
There are those that would say “that a disqualified person can be paid reasonable fees and expenses for providing services to the IRA”. Such an example could be that your spouse is an attorney and your self directed IRA LLC hires her to review a legal contract that your LLC is about to engage in. There are not any clear guide lines as to what is “reasonable fees”. So, my position on any transaction with a disqualified person is just don’t do it! If you feel your situation may be an exception to this, then you should get someone with extensive knowledge of ERISA rules to give you an opinion. As harmless as some of these transactions may appear to be, I feel it is better to stay clear of having a potential prohibited transaction in your IRA LLC.
Here at www.checkbookiraprep.com do not offer legal advice and would recommend that you get legal advice before engaging in any transaction with your IRA owned LLC.
Remember no one cares more about your retirement than you do so continue to educate yourself on the power of self direction and using an IRA owned LLC. It’s your retirement take control of it.
Timothy Schubert CISP