InvestorLoft Real Estate Investing Blog

Good decisions outweigh bad markets with SDIRAs

All our lives we, as investors, have been told to put money away for those rainy days. Today, investors are on the seemingly neverending search for solid investment ideas that produce sound returns with balanced risk. Consequently, advisors are looking for council on a lesser-known and often misunderstood category:alternative assets.

Alternative assets include a wide-ranging group, such as partnerships and private equity. But the largest segment of alternative investments has been and continues to be real estate. In fact, almost 60 percent of alternative asset investments are in this category. Investors can invest in condos, rental properties, raw land, commercial buildings and other types of real estate from within a Self-Directed IRA (SDIRA).

Most Americans already have real estate investments, i.e., their home, and most (given the opportunity) may prefer to invest in asset-backed investments over paper-backed investments. Many investors are wondering if today’s retreating real estate market means that the good times are over for real estate, or whether new opportunities will emerge from the wreckage. I believe that it’s the latter. Real estate advisors, with whom my company works, suggest that falling real estate prices, combined with increasing inventory, may create new investment opportunities. As prices begin to fall back to earth, the pendulum may swing past center to create oversold conditions, providing opportunities to buy real estate at low prices. Some areas in the United States may already be starting to enter this situation. Consequently, many typical real estate investors are being squeezed out of the market due to the current credit crisis.

This has created a unique opportunity for cash-rich retirement plan investors who are in a position to purchase real estate outright. Who are these cash-rich investors? Baby boomers. 2007 marked the beginning of the wave of more than 78 million baby boomers that will begin to retire over the next two decades. This group controls more than $14 trillion in retirement plan assets, which will transition from employer-based plans to individual retirement accounts. Many baby boomers have already begun to shift away from traditional equity investments to those that generate income. When you add the factors noted above with the possibility of real estate appreciation, it is easy to see why retirement accounts that invest in real estate are growing in popularity.

Just because you can invest in real estate in your IRA does not automatically make it the best decision for all account holders. Opponents of using a self-directed IRA to invest in real estate suggest that there are specific tax implications foregone by choosing real estate as an investment. First, profits personally made in real estate, if long-term, are taxed at the capital gains rate of 15 percent. When a SDIRA sells a piece of real estate, there are no taxes due at the time of sale. However, depending on the type of SDIRA, when the owner takes a distribution from a retirement account, the proceeds will either be taxed at the person’s ordinary income rate (for a traditional SDIRA) or will, potentially, be tax-free under a Roth SDIRA.

This is an important issue because ordinary income tax rates are typically higher than long-term capital gains rates. SDIRA investors cannot depreciate property or write-off interest from their mortgage on their personal tax return.

In general, real estate investors experience increased return potential because of their use of leverage and its favorable tax treatment. Most real estate investment experts advocate the use of leverage to build wealth. Most SDIRAs do not use leverage to buy real estate, although it is permissible. Without the use of leverage, real estate begins to look more like income-producing bonds with equity upside. The lack of leverage may also reduce one component of risk for investors as well since the rental income is not being immediately used for debt service. If a property goes unrented the account holder owns the property outright and may not be subject to foreclosure proceedings, as with most current leveraged properties. Consequently, the methodology for buying real estate inside a tax-deferred retirement account may differ over time from real estate purchased outside the account.

Prohibited Transactions

Investing in real estate with an IRA requires that advisors and their clients be knowledgeable about prohibited transactions and what constitutes them. A prohibited transaction can jeopardize the tax-deferred status (and tax-free status if a ROTH) of the account, and can result in serious tax consequences. Another important issue for real estate concerns the access and use of property held inside the SDIRA. In such situations, neither the account holder nor their family members (ancestral & lineal) may have personal use of said property. To do so would result in an immediate prohibited transaction.

Partnerships

For an advisor who is seeking a niche, SDIRAs might be the answer. It takes time to develop expertise in this area and an advisor who invests time in understanding real estate investments with SDIRAs can create a competitive advantage.

Today, many advisors are partnering with those who have alternative products in which to invest, whether they are real estate-related or other private offerings. These partnerships provide the advisor with the ability to meet the changing demands of their clients. Advisors are learning to work more closely with clients who may have a property or real estate professional already in mind. As investors’ needs change, alternative assets and self-directed retirement accounts will become important tools for advisors to help clients diversify and grow their retirement wealth. Those advisors that are prepared for this change will be at the forefront of the financial services industry for years to come.

TJ Valenzuela is with TAS (Trust Administration Services), a leading personal management provider of self-directed IRA retirement accounts, retirement planning services, and custody accounts at www.trustlynk.com

The content in this blog is not affiliated with nor is it endorsed by InvestorLoft.com and contributors receive no compensation for submitted articles. All articles submitted to InvestorLoft are subject to editorial review. Please seek the advice of qualified real estate, tax and financial professionals before investing in any project or opportunity. InvestorLoft does not provide tax or legal advice and any and all content herein is provided for informational and educational purposes only.

Self-directed IRAs can build your nest egg

Many investors have become disenchanted with recent stock market volatility, stories of corporate scandal and corruption. In addition to impacting retirement account values, these events have also strained investor confidence. It is no wonder then that more and more investors are pushing their advisors to offer Self-Directed IRAs (SDIRAs) that allow them to invest in alternative assets which they believe will provide greater diversification and control over their retirement nest eggs.

Factors
While the list of alternative investments includes a wide-ranging group of assets–including private equities, hedge funds and mortgages–one area that has captured the greatest level of interest is real estate.

Typically, real estate comprises 60% of clients alternative asset investments. Some real estate advisors suggest that falling prices combined with increasing inventory is creating new investment opportunities. As prices begin to fall, the pendulum may swing past center to create oversold conditions, providing opportunities to buy real estate at low prices. Some areas in the U.S. may already be starting to experience this phenomenon.

Another factor to consider is that many real estate investors are being squeezed out of the market due to the current credit crisis. This has created a unique opportunity for cash-rich retirement plan investors. These investors are either purchasing the real estate outright, through a partnership, or LLC. It is estimated that the first of more than 78 million baby boomers will begin to retire this year. This group controls more than $14 trillion dollars in retirement plan assets. These assets are being rolled-over from employer-based plans to individual retirement accounts. Many baby boomers have already begun to shift away from traditional equity investments to those that generate income, such as, income-producing property. Add these factors with the possibility of equity appreciation, and it is clear why real estate is growing in popularity.

Opponents of using the SDIRA to invest in real estate focus on key concepts which they believe have a profound effect on individual financial strategies. Before engaging in any transaction prudent investors are wise to consider them. First, profits personally made in real estate, if long-term, are taxed at the capital gains rate of 15%. When a SDIRA sells a piece of real estate there are no taxes due at the time of sale. However, when the owner takes a distribution from their retirement account, the proceeds will either be taxed at their ordinary income rate (for a traditional SDIRA) or are tax-free under the Roth SDIRA.

Additionally, SDIRA investors cannot depreciate property or write off interest from their mortgage on their personal tax return. Another important issue concerns the access and use of property held inside the SDIRA. Neither the account holder nor his or her family members may have personal use of said property; doing so would result in a prohibited transaction. SDIRA firms, such as Trust Administration Services can help educate investors about how to use a self-directed retirement account to invest in alternative investments and other investments.

Taking the First Steps
Any investor that has been intimately involved in a real estate transaction is already familiar with the basic requirements of buying real estate in a SDIRA. There are other issues which must also be considered, such as ensuring the proposed investment is not a prohibited transaction. This is why choosing the right self-directed retirement plan custodian is important. Important factors to consider when selecting a self-directed IRA custodian include experience, a consistent service record, organizational structure and wealth o expertise.

After the proper SDIRA custodian has been selected, the investor should request and complete the appropriate forms for their Traditional, Roth, SEP, Simple, Individual 401(k) or other qualified plan(s). The SDIRA advisor will guide the individual through this process.  Once the account is established, the SDIRA custodian will forward the transfer form to the resigning custodian, whether that is a brokerage firm, mutual fund, insurance company, bank or trust company. Upon receipt the prior custodian will transfer the assets to the new SDIRA. A high-quality SDIRA advisor will make the process seamless for investors.

Cost
The fees associated with maintaining a SDIRA vary among firms and is one of the most important distinguishing factors. Most SDIRA firms choose to charge based on a percentage of assets, while a minority employ a transaction-based fee schedule, which is typically kinder to larger retirement accounts. When considering alternative investments, which have longer time horizons with potentially higher returns, the percentage of assets fee approach may not be as beneficial to the SDIRA account owner. Consequently, each account holder should consider his or her specific situation before determining which is best.

Summary
Ongoing market volatility, combined with the need of baby boomers to generate income, and retire securely, is causing investors of all shapes and sizes to take a hard look at their investment allocations to ensure there is a proper mix of opportunity and risk. As investors needs change, alternative assets and self-directed retirement accounts will become important tools to diversify and grow retirement wealth.

TommyJoe A. Valenzuela is Vice President of Sales and Marketing for TAS (Trust Administration Services), a division of First Regional Bank and online at www.trustlynk.com. He has over fifteen years experience in the financial services industry. He is a guest speaker at industry conferences, addressing topics such as taxable investment strategies and retirement plan investing.

The content in this blog is not affiliated with nor is it endorsed by InvestorLoft.com and contributors receive no compensation for submitted articles. All articles submitted to InvestorLoft are subject to editorial review. Please seek the advice of qualified real estate, tax and financial professionals before investing in any project or opportunity. InvestorLoft does not provide tax or legal advice and any and all content herein is provided for informational and educational purposes only.

Not all rates are created equal.  Rates for a residential resale for a first-time home buyer are not the same rates that apply to an investor that will be purchasing multiply properties with cash.  Nor should they be.

The question that an investor should ask when it comes to rates is, “Will the rate I get today benefit me when I go to sell this property and purchase another property?” This is where your title company comes in.  The title company you chose will be your biggest ally in the fight to get the best rate and return on your investment.

For example, at Fidelity National Title (www.fntarizona.com) there is a hold open rate that is 125% of the owner’s policy. This allows the policy to stay open for up to 2 years awaiting a resale and the net will be a substantial reduction in the owner’s policy.

For example: say you have a $100k property and the title is $730, 125% of $730 = $182.50.  This is what the investor (as a buyer) pays.  If you sell the property within the time allotment and the policy is $1,020, you will then pay the difference of the two policies $1,020-$730 = $290.

To learn more about Fidelity National Title’s and the 30% investor rates available, send an email to info-fntarizona@fnf.com or call 480-214-4540.

The content in this blog is not affiliated with nor is it endorsed by InvestorLoft.com and contributors receive no compensation for submitted articles. All articles submitted to InvestorLoft are subject to editorial review. Please seek the advice of qualified real estate, tax and financial professionals before investing in any project or opportunity. InvestorLoft does not provide tax or legal advice and any and all content herein is provided for informational and educational purposes only.

Creative Real Estate Financing Strategies

Funding your investment property purchases — how do you get it done these days? No one want to tie-up the bulk of their liquidity to pay cash outright and everytime for a portfolio purchase, so where do you turn when traditional financing and mortgage options are more challenging to obtain?

This week’s blog entry focuses on 3 financing thoughts for the “creative real estate investor” out there. We’d love to hear more thoughts from the lending and Agent/Broker communities on how your clients are getting the deal done as well. Feel free to leave a comment below (and gain a valuable linkback to your site!)

1. Self-Directed and Real Estate IRA Funding – With the recent downturn in the equity markets and bonds being…well…bonds, investors are looking for other places to stash their nest eggs for the long-term. Retirement plans rolled-over to a self-directed or real estate IRA custodian will allow investors to use their retirement assets to invest in real estate. The balance of some retirement plans can allow some lucky investors to pay cash lock, stock and barrell for a rental property and enjoy the benefits of long-term cash flow into their IRA. Others can use a portion of their retirement assets to acquire a qualifying property (and yes, there are restrictions on real estate purchases in an IRA) and utilize leverage to finance the remainder of the purchase with a non-recourse loan.
    
2. Non-Recourse Loans – When using your retirement accounts to fund a real estate investment purchase, most investors don’t want to tie-up all of their account’s liquidity in one transaction. That’s where non-recourse loans come in. There are several institutions out there like North American Savings Bank that will finance the balance of qualifying real estate purchases made through your self-directed IRA. Lenders generally require around a 30% downpayment contribution from your IRA and they’ll be looking for specific types of properties (i.e. cash-flow potential residential or commericial real estate, no raw land, farms ot condo-tels), but these lenders specialize in helping you “get the deal done” when you want to diversify your portfolio and place a certain amount of cash in each deal. More information can be found in our educational article on non recourse loans in our Self-Directed IRA Learning Center.
    
3. Ask the Bank – We know it sounds strange, but it’s the most obvious place to start asking questions. Many investors have long-standing relationships with their financial institutions, so why not talk to the folks who watch your money? Most institutions have lending specialist who are familiar with the bank’s entire array of lending products and can look at your particular situation and recommend what the bank would perceive as the best-fit product. What’s the worst that can happen? You leave learning about a new product that can help you meet your goals or you move on to other financing options. A win-win either way.

In these days of tightened lending criteria and the stated income mortgage having gone by the wayside, what’s a real estate investor to do? Creative financing requires putting on your thinking cap and looking for new, untapped sources of liquidity. Forget thinking outside the box – you need a whole new frame of mind when it comes to your real estate financing needs.

The process of purchasing real estate in your IRA is relatively simple, yet widely unknown and the subject of this week’s blog. For those in search of a financing source for their real estate investment goals, we’ll plant some seeds worth cultivating today.

The lending environment today is a far cry from where we were 12-24 months ago. While many of the tools that real estate investors used to achieve their goals have now been dispensed with (i.e.: stated income loans, 80/20 loans and the Option-ARM), there’s a pile of money just waiting to be used and it’s likely you’ve been sitting on it this whole time: your IRA. Most investors aren’t aware that they’re able to expand beyond the norm of mutual funds, stocks and bonds with their retirement kitty, but it’s an easy process.

Here are 3 tips to get you started on the path of utilizing your IRA to invest in real estate:

1. Find a custodian for your IRA. There are specialized custodians for self-directed and real estate IRAs. Consult our handy list of custodians to begin your due diligence process.
2. Learn about non-recourse loans and how they can help you finance your real estate purchase by using leverage in your IRA.
3. Review permitted and prohibited transactions. Purchasing real estate in your IRA doesn’t come without Uncle Sam’s restrictions. Once you know what they are, finding a qualifying property is simple!