All Forum Posts by: Caleb Johnson

@Pretty Khare 

Hey Pretty,

That is a great question. I believe it is 6k a year. I know people can fast track that but I don't know how. I'm sure that is something that is on google. 

There are about 49 million households in the US who have a traditional IRA and there's an additional 20.3 million people who have Roth IRA's. Many American's don't know they can use their IRA and turn it into a self-directed IRA. This means that you can invest it in something that you choose. As long as it meets the government's requirements. This can be confusing so I did some research and thought I would share what I found. I am not a tax professional or IRA custodian so speak to your professional team before you do anything.

Let’s start off with what you can invest in. You can invest in rentals, flips, REITs and private placements. You will need a custodian who specializes in whatever strategy you decide to go with.

What you can’t invest in

Now there's a lot that you can't invest. You can't purchase your own property. This would be considered self dealing. There are limitations to who you can invest your IRA with. Disqualifying people are yourself, your beneficiary, your fiduciary, spouse, ancestor, lineal descendant and any spouse of a lineal descendant.

You can’t have indirect benefits from property that is owned by your self-directed IRA

You can't buy a vacation property and live in it occasionally. I know, if you planned on using your self-directed IRA to buy a vacation rental and stay in it a few weeks out of the year, you are out of luck. You can't rent an office space for yourself in a building that your self directed IRA owns. There are also rules in place that prohibit you from receiving gain today. This means that all income that is made from your IRA goes back into your IRA. This is because IRAs were designed to be for retirement only.

You can’t perform work on real estate purchased in your IRA

If you planned on buying a flip and then doing the work yourself, think again. You can’t perform sweat equity on the investment. However, you can do “desk work” associated with the investment.

In regard to Title, the IRA investments can’t have anything else connected to it

You and your IRA need to be two separate entities. The investment needs to be titled in the name of the IRA and not you personally. Now if the investment isn't owned outright, that is a different story. Talk with your IRA custodian more about that.

Unrelated Business Income Tax

I know, more taxes... Unrelated Business Income Tax, also known as UBIT, is something that you need to be on the lookout for when it comes to investing with a self directed IRA. You are only taxed on the LTV of the property. For example:

If the property is worth 100k

LTV = 75%, in dollars that's 75k

So you would be taxed on the 75k.

When it comes to depreciation, you can write it off as well as other operating expenses on a percentage basis.

Expenses must be taken from the IRA account and income must go into the IRA

When you get expenses or income related to an investment property held by your IRA, the expenses must be paid by your IRA. Your custodian will need to handle this. Now when someone invests in a syndication using their IRA, the percentage that you invested will need to go directly into your IRA account. If you got a loan using the IRA and the loan is non-recourse, it is possible to write off that proportion of expenses and depreciation of the property on your tax return.

Here’s some good news…

Real estate can be purchased without 100% funding from your IRA

You can use undivided interest (the ability to have ownership in something with multiple people while no one person has exclusive rights to the property). Each person owning a portion of the property is proportionate to the percentage of funds contributed. Once you receive profits, your IRA would receive them directly.

In conclusion, your self-directed IRA can be a great tool in your tool box. You can take the earnings out once you are 59.5 years old and your IRA has to season for at least 5 years. What we are seeing a lot of people do is invest their IRAs into syndication. Syndication can be a great strategy for someone who wants to be passive and get mailbox money. But that is something that you will have to look into yourself. And before you do anything, be sure to talk to your custodian and tax professional before doing anything in the above article.

Hey David, great questions. 

I just experienced this when I bought a duplex. You actually can't close a property with an LLC. It needs to be in your name and then you can put the property in the LLC after you close. An LLC doesn't protect you from getting sued. It just makes it a little harder for people to find out that you are the owner. What you need to get once you buy the property, is umbrella insurance. That is what will truly cover you if you are sued. Of course speak to your insurance professional and tax professional (make sure they have experience with investors) before you do anything.

When it comes to buying multiple properties, you can get multiple properties. You just need to make sure your DTI is in check. You can also 10 agency loans in your name. These are Freddie Mae and Fanny Mac. If this is the case, you can get the loan in your wife's name and then she can have 10 properties in her name. There's many more strategies.

I would also mention investing as a passive investor. This would allow you to have limited liability. You get a check in the mail as well as great tax benefits. This is usually for people that don't have time to invest in RE and their time is better served making money at their job. 

@Nicholas DeCespedes Thanks for the feedback. Isn't that a HELOC?

Hey John, 

Those are some great takeaways. What I learned on the last deal we did was to expect some push back from the tenants. This might sound obvious, and I expected that there would be push back, just not exactly what the tenants did. The tenants said that they paid the previous management company in advance, so they didn't need to pay for the next month. We did some digging and found out that they hadn't paid. We promptly asked them to pay or we would be start the eviction process. 

Hey Patrick,

I used apartments.com and it is ok. I also looked at Avail.com but you had to pay a little. That's why I ended up going with apartments.com

@JD Martin

Hey JD, thanks for the feedback.

It really depends on what you want to do. When I started, I wanted to go through the trenches and learn what it took to rehab my own property. Catching mice just so happened to be part of that. Some people just want to be passive and you can absolutely do that with SFH or small multifamily.

While investing in the past 2 years, I have been threatened, I’ve caught mice with my hands, called the police on tenants, done cash for keys and many more interesting things. All this has taught me that I don’t want to be a landlord. However, I do know that I want to be a real estate investor.

Tax Benefits

First, being an investor in real estate gives great tax benefits. (Depending on the type of strategy you use) Some strategies require you to pay capital gains tax if you sell it before you have owned it for 2 years. (Flipping) But as a passive investor in a syndication, gives you the ability to use bonus depreciation. This can give you a majority of your investment as a loss via a K-1 statement all while receiving positive cash flow.

Appreciation

Second, is capitalizing on appreciation. Now there's 2 kinds of appreciation that you can use. Forced appreciation and market appreciation. Forced appreciation is when you increase the NOI of a commercial asset which directly affects the value of the asset. Then market appreciation is like the market we are in now in New Mexico and other parts of the US. There are too many renters coming into the market and with there being a shortage of apartments, that makes the rent go up.

Leverage

Third, is leverage. You are able to buy something that is worth, let’s say 100k, for only 25% down if you use a conventional loan. That’s only 25k. Now, I don’t know about you, but I can’t ask my financial advisor for 100k of Apple stock and only give him 25k and expect to get a 100k invested. That just won’t go over well. Sometimes, you don’t even need your own money. You can find someone who wants to partner with you and they will be the money.

Principal Pay Down

Fourth, principal pay down. When you get a mortgage on a rental property, you pay P&I. So every month, you pay down your principal loan amount. But it isn’t you paying that off. It is your tenant. Some loans that you can get IO (Interest Only) at the start of the loan. This means that you won’t be paying towards the principal. But these loans serve their own purpose.

Cashflow

Finally, cashflow. Which should be number one. This is the first thing we should be looking at as investors. If the market drops and the value of the property drops, you want to be sure you can pay the rent and hold it for the long haul while the market turns. This also is what gets you financial freedom so you can spend time with your family and give your time to charities and serving at your church.

With all this said, what should you invest in?? I think the answer is pretty clear and that is investing in commercial real estate as the operator or limited partner. As the operator, you get to be in charge of what the asset does. As the investor, you get to collect a check. Now what’s better than that?

Hey everyone! Thank you for taking the time to read this. 

I am going through a refi on a 4-plex in Apache Junction in AZ and I need to get an appraisal. I know in AZ I need to give a 2 days notice before I can enter the premises. You probably probably think this is a silly question, but do I need a special document that tells them I will be entering the property on this date or can I just send them a text saying the time and date I will be doing the walk through. 

I appreciate your time. Have a great day!

Hey Micheal, you could set up a monetary system to pay them depending on when the work is complete. So pay them whenever they finish a certain task. You can even put in there that after a certain day, if they don't complete, they need to pay you for days past the predetermined date.

Hope this helps! -Caleb