All Forum Posts by: Mike Bryant

This article explains all the reasons why it is MUCH BETTER to LEND out of your IRA than to actually BUY property in it. It's a relative nightmare to manage a property, pay repair bills, etc if you have an actual HOUSE owned by the IRA. A note however, is merely an asset with a defined stream of income, so long as the borrower doesn't default.

http://www.irs.gov/pub/irs-drop/rr-14-01.pdf

It's actually 1.75% for the mid-term AFR according to the document from the IRS. My software loaded 1.95%. I'm overpaying!! What did you look at to think it was higher than 1.95%

Short term AFR = 1-3 years

Mid-Term AFR = over 3 to 9 years

Long Term AFR = Over 9 years.

@Yu L. To answer your question, the Note is written at the current AFR and that stands for the whole term. Its not an "adjustable rate". I will produce an amort schedule with the fixed 1.95% interest rate.

In reviewing other comments as well, I agree that the $2200 rent is quite low for a $450k property. Of course I don't know your market, but the numbers don't work unless you are buying it cheap and as you said, look to do the repairs and then flip it for your profits.To hold it does not seem to make the most sense. How are you funding the $80,000? I just can't make the numbers work on this deal....

In contrast, we just had an offer accepted on a small 10-unit building with NOI of $28,200 (using the 50% rule), and we are paying $185,000 for it, with $15,000 down and the seller carrying a Note for $173,500 at 1.95%. Needs $60,000 in rehab. The ARV is estimated to be $250K, but using the income method, it might be closer to $300k. The payment on this Note is $1150 per month with a balloon after 9 years of $56,000. It does need approx $60,000 in rehab, so we will bring in $90,000 in Private investor funds at purchase, ARV is $250K. Essentially we paid the seller full market value (less repairs) in exchange for great terms over 9 years. Our payment to the seller is right at 50% of the NET monthly cash flow (after the 50% rule).

GROSS RENTS = $4700, Less 50% rule = $2,350 NOI (Monthly)

Private Lender 1st = $750 interest only - could roll to a P & I refinance down the road.

Seller carry 2nd = $1150 (@1.95% interest) rapid principal paydown.

Net Monthly Cash flow = $450 - or $5400 annually after all debt service and expenses.

Maybe my numbers will vary a bit from this once we get into it, but our projections are fairly conservative, and we plan to renovate and hold this property for at least 9 years, then worst case scenario we will owe the $90k first and $56k 2nd, and if there's no appreciation the building would still be worth at least $250k. Any appreciation is gravy. Also we hope to complete the rehab on $50,000 and built in an extra $10k as a buffer. We have learned to run our numbers always based on worst-case scenarios. Been there, done that on the "pie in the sky" projections.

@Yu L. As mentioned above, be sure to factor in an "operating Reserve" to handle Vacancy, Repairs and Maintenance during the life of the hold. We use 15% of rent at MINIMUM (in nicer properties), and up to 25% in lesser, older properties. So, you would set aside $330 per month into a reserve account. It may or may not be enough to handle repairs, etc. but you should at least assume it isn't part of your ROI. So, that makes your monthly cash flow $270 at best. Annual $3240. So if you have $80000 into it your ROI is 4.05%.

We structure similar deals here in KC, and yes, you should use the Applicable Federal Interest rate (changes monthly - and varies by term length - check this at www.bankrate.com) I just wrote a 9-year seller financing deal at 1.95% (over 9 years is 3.32% I believe). We do explain to the sellers that getting a higher sales price and less interest MAY be to their tax advantage (but please consult your tax advisor - I am not one). If they want a higher interest rate we lower the price so that the total payout is the same.

I have only a small Roth at Equity Trust, and have not used it to fund any transactions. But my CPA just set up a SDIRA with ETC to fund our most recent acquistion. From the time he initiated the set up of the IRA on Dec 9, and the funds were in there and ready to wire to the title company on Jan 16. So with holidays that is just over 30 days. Sometimes these delays can be with the other company where the funds are being rolled from, I know ETC always states to allow 30 days to have funds transferred (rolled) from another IRA or 401k. I have not heard about delays after the account is in place.

Equity Trust's annual fees are around $300 for a smaller account (not sure the exact breakdown but its based on account value), and NO transaction fees.

If you are planning to do many transactions, I think Equity Trust is a better option. www.trustetc.com. They are very Investor-friendly and have excellent resources and great customer service.

@Kashana R.

That is the best approach you can take! Even an "expensive" HML is worth it if you have a deal. We figure our funding at the most expensive rate we think we'd have to pay (worst case scenario), then if we get it "better", just more profit. And if you are prepared, you can educate your "warm market" about using IRA money for your deals. Its a win-win. Your mindset should be to offer a great investment option vs. asking for money. This is tricky but makes all the difference. People who know and trust you, AND are tired of the gambling of mutual funds, etc, will end up making good Private Investors for your business.

Great comments - most of all by @John Malahay , "Know Your Market"... One investors view of a "war zone" may be different than another. You should have a comfort level in any area you are buying to hold longer-term. Also mentioned is timing, not only is the picture a snapshot from 2011, the fact remains that a "borderline" area today could be a war zone 10 years from now. I agree that the image had nothing to be concerned about, but you can do a deeper investigation of the area if you aren't that familiar with it. Also @Patrick L. - The Detroit Google Image is pretty rough - I wonder if the Google Map employee got combat pay for driving through there!! Wow!

@George Bittar , we use a vendor in San Diego called US Lead List. You can google them. They call it Inherited, so I don't know if its specifically a "probate" list. We get responses from widows, and heirs of estates. Always it is somebody on title has passed away recently. US Leads will make their quarterly list available to 3 purchasers in any county they have access (which is most of the US). Call them to see if your area is available. Its a great list.

We use Click2Mail to send a mail merged yellow or green postcard. Cost to print and mail is 44¢. (I think postage is going up 2¢ next week, so it will be 46¢).It's all automated of course, but you can upload a customized template to make it look personal if you want. I've never done a "yellow letter" but have heard about it for years. I like the postcard because it doesn't need to be opened. If they have any inkling or desire to sell, they'll call you. You get a few angry callers from this list, but very few; many more good leads!!