All Forum Posts by: Daniel Dietz

@George Paiva it is a single family. I agree the cash flow after PITI and other expenses is on the low side. I should also say I am looking at the longer term potential of my capital, not current income.

Part of how I am looking at it is between the cash flow and principal pay down it is actually about $150 or $1800 a year. This could be one I keep for the long haul, or in maybe 5 years sell and take the equity and appreciation and use that towards a duplex or multi family.

For a little more background about me, most of my dollars are tied up in my IRAs (probably about 5 times my current income) and I dont have a lot of 'liquid cash' after accounting for personal emergency funds etc... I also have a lot (about equal to my IRAs) tied up in my personal residence that I still own jointly with my ex-wife and we are trying to sell. Unfortunately that house is in probably the upper 5-10% for our market, so is likely to take a while to sell. On the good side, it is free & clear :).

So, the potential deal that this post refers to would work really well with the limited cash I have on hand right now, and give me more Land-lording experience so that when I DO sell my personal residence and start to use that money to acquire more rentals, I will also have that benefit. The 50%+ cash on cash is really appealing in that regard too, as it is making maximum use of the available funds.

Dan Dietz

Hello,

I have been looking to add to the first duplex we purchased with our SDIRA that is doing well. I particular, I have been looking at doing a deal OUTSIDE of our SDIRA to have more flexibility and to be able to get financing instead of paying cash.

A business acquaintance knew I was looking and has a rental house he is looking to get rid of. He has had it about 10 years, manages it himself and is just looking to free up some time. He is considering doing owner financing or other creative financing to make it happen. The house is in a nice but modest area that is well located in a neighborhood of almost all owner occupied homes close to schools, parks, etc... It is assessed at about 70K and surrounded by homes that are 70K up to about 100K. It is occupied and the tenants would like to stay if that worked for us. He has not had a late payment in over 2 years from them.

He is willing to sell it for 55K (he owes about 53K) with at least a 5 year balloon, so we can get a couple of years of rental history and then refinance into a traditional loan of some sort. I am figuring 58K 'All In' The current rent is $700, but I feel it could easily be $850 or so, but I am basing my figures on $800.

The house has had new roof, windows, siding, water heater, and flooring in the last few years.

My rough figure are;

• 8800 Operating Income
• $3800 Expenses (only about 40% since all the recent upgrades)
• $5000 NOI
• - $4000 Debt Service
• = $1000 Cash Flow

Not quite $100 'per door', but I would also be building equity at about $100 a month, along with likely appreciation of $100 - $150 month. (I am not banking on this, but buying at a discount and being the cheapest house in a good neighborhood with a recovering market make it seem likely).

What I really like is the ROI and Cash on Cash

What your thoughts?

Thanks, Dan Diet

Daniel,

I know this topic has been covered here in detail before, so you might want to do some searching too.

I also use a SDIRA, but have not borrowed yet as the properties I am targeting are not 'eligible' in most Non-recourse lenders opinion, since they are houses converted to duplexes, pre 1940 construction, and under 100K purchase price. This is also my first year, so have yet to do the actual book keeping of what I am going to say below, so take it with a grain of salt! It is what I understand things to be from what I have learned here on BP.

As far as the whether to leverage or not..... to me it is a no brainier if you can. With that said, I look mainly at 'return on my investment'. Save you have 100K to invest and you can buy one property for 100K, or leverage it into 3 100K properties.

For rough numbers, let's say you make an 8% return with out appreciation, or 11% with appreciation, on the all cash unit. This might give you a NOI of about 8K, which is also your cash flow since there is no interest or principal payments. Hence your 8% return on the 100K.

If you leverage your money and get those 3 100K properties, looking at your return on your investment/equity, you might be at about 14% without appreciation or 24% with appreciation. This might give you a NOI of about 25K, but you then deduct interest of say 11K for a cash flow of 14K (hence your 14% return) and you also get depreciation of about 11K, leaving you a taxable income of 3K. It the UDFI is 33% in rough numbers, you only owe a tax of 1K.

This means by leveraging within your SDIRA, even AFTER you pay the UDIF, you have raised your return from 8% to 13% or almost 60% better. If you factor in appreciation, the return might go from 11% to 22%, or 100% better (doubling your return).

Again, these are just my THOUGHTS. Maybe @Steven Hamilton II could chime in and give his input on this line of thinking too.

Dan Dietz

Hello,

I and my 2 partners used UDirect IRA Services out of California to do our SDIRAs. There fees seem very reasonable, very quick service, and also good referals to Lawyers etc....

One thing I liked about them is they encourage 'checkbook control'. Not sure it it would be of the same benefit to you doing flips (we are buy and hold rentals at this time). To me this is a huge advantage to be able to just take care of things on our own time frame. We simply set up a checking account for our LLC at a local bank and had UDirect fund it from the funds we rolled over.

Dan Dietz

Hello,

Some good advice above. I have not used Jason Zook myself, but know others who have and been very happy with his service IF your property qualifies.

My question is this, how many members in the LLC, and does the same person (you or others) have an interest in both the Solo 401K and the LLC, or are those two portions different owners?

Dan Dietz

Hello,

I just wanted to throw a possible 'exception' in to this conversation. Partially, to make the point that there are always those deals that do NOT fall in the realm of 'typical'.

I recently rehabbed a house that I bought from a Professional Flipper who I have supplied cabinets and counter tops to (my day job) for many years. He does about 6-10 a year and it is how he makes his living. He had a couple for sale, one waiting for a delayed closing, at least two he was working on, and just picked up two more the same day. He had too much on his plate.

The house I bought was assessed at 140K, he picked it up for 75K, sold it to me for 85K on a Land Contract @ 6% with a balloon at 6 months, and NO money down out of my pocket. He borrows his operating funds from Private Lenders (family) @ 3%. I needed to do the work and provide fix up funds.

My dad was going to take an IRA withdrawl (he's old enough to) and lend me the 25K or so for the fix up. He realized he would take a big tax hit. I approached a older, retired family friend about being a Private Lender. We have know each other a couple of decades and are familiar with each others finances. I asked to borrow 25K for 6 months @ 6% (these are funds he would have in CDs otherwise at <1%. He counter offered at 3% interest and I can keep it for 3 years if needed (back up plan was to rent it, which is what happened).

So, this entire job was truely with NO money out of my pocket. BUT...... these were WELL established LONG term relationships. I have shared my finances with both of them in detail, which is essentially that I DONT have much liquid cash, but do have a LOT of assets in retirement funds (I didn't know about SDIRA yet) and my own house equity. I look good on paper I guess you could say ;-). I also have a 25+ year stellar reputation in construction in our area.

Mostly I wanted to throw this out there to just let others know that it IS possible, BUT also VERY dependent on those long term relationships and having great finances even if not available for the project at hand.

Dan DIetz

Hello,

First let me say I do NOT think the first deal I am going to mention is normal, but it is what worked for me. Also, both of the lenders are people I have had LONG business and personal relationships with, they know my complete financial background (which is very good).

I bought a wholesale deal from a 'flipper' that I usually supply cabinets and counter tops (my day job) to for his flips. He ended up with 'too many' houses at once when he had two that took a while to sell, three he was working on, and he picked up two more when multiple offers went through for him. House was assessed at 140K, he got it for 75K, sold it to me for 85K with 6 month terms, 6% interest, and interest only payments and a balloon at 6 months. He has access to cheap capital through borrowing from Private Lenders who are relatives and happy to get 3% instead of the < 1% they would get in CDs. He paid 3% to them and made a bit by charging me 6%. I did not have to screw around with all the back paperwork, appraisals, etc.... and he made a quick 10K for himself

For the rehab funds, I looked at different ways such as credit cards, HELOC, etc... and finally asked 'good friend #2' whom I knew had pretty large liquid assets including CDs at low rates, etc... I offered to pay him 6% for 6 months also. He counter offered at 3% for 3 years :). He was getting under 1% on this money, and he know my back up plan was to do this in a way that it could still make sense for a rental if it did not sell, so it might be more of a 'long term' type of deal.

............................

With those figures in mind, I am just now starting to seek Private Lenders for Buy & Hold rentals, and am hoping to get funds in the ball park of 5-7%, mostly by trying to work with people I know who likely have large amounts in CDs and other low yield investment, and would be happy to get MUCH better returns. Again though, the people I am starting to talk too are ALL people I have LONG relationships with through either personal, business, and civic activities, or some relatives too.

Dan Dietz

I think part of what Dmitriy is pointing out in his last paragraph is this, to put it onto an actual Iscariot; Say you hired your SO (which is fine) and he fixes up your building (which is fine). What if THEN, after the fact, he ends up buying it (still fine) but then YOU want to move into the building your SDIRA held? Not fine! A 'grayer' area might be if you lived together and you hired him and payed him from your SDIRA, and part of his pay came back into your joint household to pay the bills. Probably not fine. Just trying to put it in an easy to understand form.

Dan Dietz

All situations are different, but here is mine. I rolled my SIMPLE plan into a Traditional IRA at a previous employer, while I was still working there to gain more flexibility. Not sure if it is that easy for the OWNER to do.

Several years latter, I rolled that IRA into a SDIRA (Self Directed IRA) which I could then buy the real estate (and many other things) with.

A few words of caution. Just so he knows, he can NEVER enter into a 'prohibited transaction' with the SDIRA, which means he can never sell to, buy from, or rent to a 'linear family member' such as a parent, child, child in law, etc.... Some people think "I will buy this now and pass on to my kids" etc....

Also, when you do the conversion, you do NOT want to ever 'withdraw' the funds, only transfer them so there is not tax or penalty due.

It can also be hard to find lending to use within ANY kind of self directed account. Not impossible, but LOTS of requiremnts compared to outside of a self directred account.

Dan Dietz

Gunnar,

Thanks for the reply.

To make sure I am understanding you right, it sounds like it is a 'standard partnership' using an LLC, that I assume the different members have different quantities of shares depending on their percentage of the investment? If that is the case, I assume any given member could sell those shares if they desired to at some point in the future?

Did you mean the 80% note was from a Private Lender? If so, did that Note 'come with the property', or was it something you or one of the partners need to go out and find?

Looking at the numbers you shared, that does look like a fantastic return! It sounds like you 'put the deal together' as far as the partnership/LLC goes and use a contracted Property Manager. If you dont mind me asking, do you get a larger cut of the profits for the effort of coming up with the deal, or are you just a 'percentage partner'?

Thanks, Dan Dietz