All Forum Posts by: David Held

Good afternoon. My CPA has raised concerns about two properties I may be selling and I'm hoping someone may be able to shed some light on the situation. Approximately one year ago, we purchased an old golf course with the intention of building rental units there which we were going to hold for a long time. The property was comprised of two separate parcels. One parcel was purchased through my SD IRA and the other was purchased by my LLC. We had no initial intentions to develop the parcel owned by the SD IRA with the hope being that our successful project next door would result in a substantial increase in value and we would just sell that parcel rather than deal with the complications of trying to build there through the SD IRA. The purchase price of the SD IRA parcel was admittedly higher than the fair market value at the time, but we were also going to add substantial value with the project next door. Fast forward to today and the substantial increases in construction costs and financing in our area make the project no longer feasible. I have spent the last year changing zoning regulations and completing preliminary engineering work for the project to move forward so at least in my mind our intent has been clearly established that this is an investment property. I was approached by a friend who wants to buy both parcels to build his own family estate there but he needs to finance the purchase so the sale price of each separate parcel has to be based on fair market value as it exists today. The concerns expressed by our CPA relate to the fact that the SD IRA will take a significant loss on the sale of that parcel and there will also be a significant gain on the other parcel. In my mind, the SD IRA loss is no different than a stock investor who took a risky bet and lost. If it's possible, I'd hope to do a 1031 on the LLC parcel to put off the taxes. In a perfect world, we could use suspended passive losses to offset the gain, but I doubt that's possible since we never got to the point of receiving rental income from the property. Any thoughts are appreciated.

I purchased raw land last year with the intention of constructing several rental units on it.  At that time, the construction prices made this a very viable strategy.  With current construction prices, material shortages and the general lack of availability of builders in our local area, I am now considering selling the land which has also appreciated significantly in value.  The time of ownership would be greater than one year at the time of any sale.  The question is whether the gain from this sale would be considered passive income which could be offset by passive losses on other investments or is this considered portfolio income which cannot be offset by passive losses?

I've been a civil engineer and land surveyor since 2000 and I started doing my own development projects in 2018 when a deal came along that was too good to pass up.  Most of the work I did up until 2008 was for residential development projects having a front row seat for the meltdown was a great learning experience because I got to see what differentiated the successful developers from all other others...

1.  Successful developers are well capitalized.  A lot of developers are/were over leveraged which works when it works, but it's also a recipe for disaster.

2.  Successful developers are realistic when analyzing a project.  What's a worst case scenario for lot yield, etc.  What's the realistic market absorption rate for the project and how does that affect holding costs.

3.  Successful developers have a relationship with their engineering and permitting team and will Always hire the best professionals who are almost never the cheapest professionals.  I no longer seek out or work for many residential developers because they are the worst kind of clients who seldom understand the difference between price and value.  Don't be one of those guys and your team will appreciate it and bend over backwards for you when necessary.  Case in point, a client who I have a great relationship with called last month to tell me he needed a stream crossing designed.  I looked at the lot he just bought and immediately asked if he had looked at splitting it into two lots.  He said the guy he bought it from (a former client who hires the "cheap" firm in the area) had his engineer look at it and they said it couldn't be split.  After about and hour of work and a phone call to the town, it's clear to me that not only can it be split into two lots but it can be spilt with no town approvals required.

4.  Development is very location specific as far as the process and requirements.  In our area, the land cost for.a development project is a relatively small part of the overall budget so make sure the juice is worth the squeeze in the big picture.

5.  Sometimes less is more when developing land.  A few bigger nicer lots may have more value than a lot of smaller marginal lots that require lots of engineering or site work.

6.  It can be very rewarding and enjoyable to build a project and create your own vision rather than having to work around somebody else's vision so definitely don't be afraid to move forward, just make sure you're properly mitigating risk based on your own circumstances.

From my own perspective which will hopefully help...I spent the first 20 years of my career contributing the maximum to my 401k, most of which included a decent company match and it has been funded by a pretty good paying W-2 job.  Three years ago I started with some real estate investing, flipping land and doing smaller land development projects and now my wife and I are starting a development project for 50 or so rental units that we'll build and hold onto.  This project was made possible by leveraging what had accumulated in the 401k and reinvesting almost everything that we made on the prior real estate deals.  After I started to understand the financial mindset of investing as well as the nuts and bolts of making money work for us, it became clear that if I was willing to invest the significant time to educate myself to become an effective investor and surround myself with like minded people, a couple of years of smart investment decisions can result in a better financial return than 20 years of up and down markets and fee heavy investing in a 401k.  While it's been a lot of work and it was the 401k funds that in part made this project possible, if I had known 20 years ago what I know now, we would have likely been financially free years ago and the W-2 would be a choice rather than a necessity.  Part of this is having a vision for the future so you can begin with the end in mind.  I spent a lot of years doing pretty well financially by the world's standards but since I didn't really have a clear vision of what I wanted in the future, it was impossible to come up with a clear actionable plan to get there.

Hi Tom,

When I was in this same situation, I found a property that I was able to purchase as two pieces. This was raw land which made it easier but it could also work if you were buying multiple buildings/units in the same deal. The self directed IRA bought part and I bought part. The individual purchase prices were adjusted so the IRA was making a "bad" investment, but a good chuck of the IRA funds were able to be pulled out through the transaction for use and multiplication today. You don't get to totally cash in the IRA, but this way you can have two parallel investing paths working for you and get a real jump start on the investing for yourself today if you have a large amount of capital in the IRA. The key is finding the right deal so you can do this and have it make sense for your own financial goals and plans.

Just a few thoughts from my own experience...you should find out what you're able to borrow from your 401k and what that process is like.  You'll probably find out it's relatively easy to get the loan, but every employer's plan language is a little different and every plan administrator has their own twist in how they do things.

I used a loan from my 401(k) along with every bit of savings I could get my hands on to fund my first real investment deal back in 2018. The deal was good enough that my dad came in as a 50% partner to fund it and covered the closing costs since I brought him the deal. It was a flip on a parcel of land that was listed on the MLS for several months, but with a little leg work and by leveraging some contacts, we had a buyer lined up before we even closed and we made about an 80% profit. The real point is that it's good to be positioned so that when a great deal comes in front of you you're able to take advantage. So if it's easy to get a loan and you don't have a good deal in front of you put the money in the 401(k) to take advantage of an employer match and you'll have more to borrow when there is a deal.

On a related note, if you're going to get serious about real estate investing you may want to consider a self directed retirement plan so you can invest in real estate for at least a portion of your retirement as well.  Being able to buy and sell without paying capital gains taxes and without the headaches of a 1031 can make a tremendous difference over many years of compounding.  This is a path that we've just recently started down and I wish I had known about it a long time ago.

Thank you for the insight.  My initial thought was to come up with 5-6 different unit styles that can be mixed throughout the project.  It sounds like your project goal was similar to mind...keeping it a higher end product to attract higher end occupants.

I've been investing in land for the past 3 years and making decent returns by either adding value with obtaining development approvals for tough parcels or subdividing larger parcels and selling lots. I'm an engineer and land surveyor so I've been able to do all the work myself and I'm fortunate to have the knowledge and experience to very quickly evaluate potential deals in my local market. Having worked in a W-2 environment for the last 20 years, I've now had my eyes opened to the incredible wealth building power of residential rentals versus the "quick fix" and subsequent tax bills from the land deals I've been doing. With that said, I now own a parcel on which I'm planning on building approximately 25 duplexes (50 units). The property will be subdivided and each duplex will sit on its own lot. My all in cost for each building will be approximately $250,000 ($125,000 per unit). The conservative market rental rate is $1,500/month for each unit. Taxes would be around $2,500/unit per year. I believe that by next spring when I would likely start construction, I should be able to build at least one building with cash we have on hand and perhaps two buildings with cash. While we're talking with a potential partner who owns lots of mobile home parks and apartments and would bring in the capital to build everything at once, we're also considering building out this project on our own. The plan would be to build the first building with cash and get it rented. At that point we should still have adequate cash on hand to immediately start the second building and we can do a commercial refi on the first building. I've been told by a few more experienced people that a commercial lender would typically use a cap rate of around 8% to determine the value, in which case we'd be able to pull all of our money out and still have strong cash flow. Ultimately, we'd keep repeating this pattern until the project was built out and fully rented, essentially using the BRRRR strategy with new construction. Since this is our first project like this, I'd love opinions from those with more experience...do you see fatal flaws with the strategy, are we missing the boat on anything huge, etc. I'd also appreciate any thoughts on what the value of this whole project might be when it's completed and stabilized. Would a 6% cap rate be reasonable if we wanted to sell and then 1031 into other properties to build a portfolio? This project has lots of appeal because our cash investment in the land we're developing is almost nothing and we have the security of just being able to sell lots to all the builders I work with. It also allows us to gain experience with managing rentals as it's built out and we don't have to go looking for deals to scale the initial portfolio.