All Forum Posts by: Joshua Ferrari

I wouldn't waste your time creating an excel spreadsheet for an analyzer when you can use someone else's for really cheap. I bought Michael Blank's Multifamily Syndicated Deal Analyzer for a one time fee of $130. It has everything I need on there and if I need to change anything or add anything, it's super easy, and I saved a TON of time by not trying to create one myself. 

Here's a little bit of advice and clarity on how Self-Directed IRA's can assist you in creating wealth.

How to Invest in Real Estate through a Self-Directed IRA

A Self-Directed IRA is a traditional IRA or Roth IRA in which the custodian permits a wide range of investments that are allowable in retirement accounts. One of these alternative options, real estate investments, is appealing to many people who consider using a Self-Directed IRA to purchase rental properties and/or invest passively in syndications.

However, just because something is allowed by the IRS does not always mean it is the best choice for your retirement savings. Here are some important things to be aware of when it comes to using an IRA to purchase/invest in real estate.

Self-Directed IRA Definition

The term "self-directed" means that alternative investments are accepted or offered by the IRA custodian. An IRA custodian is the financial institution responsible for record-keeping and IRS reporting requirements. The "self-directed" aspect kicks in each year, since you must accurately value your investment annually and report the value to your IRA custodian.

How They May Be Used to Buy Real Estate

The first step is setting up a Self-Directed IRA. Several reputable companies provide individual investors with the ability to set up self-directed retirement accounts. Due to the complex nature of Self-Directed IRAs, it is helpful to have a custodian that will provide some much-needed guidance as you travel through the murky and confusing waters of the IRS tax code.

Some IRA custodians have more complicated fee structures than others. Therefore, it is important to do your homework and examine all of the potential fees and expenses that will impact the overall return on your investment. In many cases, it is also advisable to establish a limited liability company (LLC) or other entity to hold the investment assets. In Multifamily Syndications, there will already be an LLC that your SD-IRA will own a percentage of.

Primary Benefits of Owning Investment Real Estate in an IRA

Perhaps the biggest benefit of using a Self-Directed IRA to purchase real estate is found in the potential tax benefits. As is the case with any investment in your IRA, you benefit from tax-deferred income until the day you take withdrawals. Or, if your investment holdings are in a Roth IRA, your investment gains accumulate tax-free, and you can withdraw it tax-free.

You still must wait until you reach age 59½ to withdraw your funds, or else you will be subject to an early withdrawal penalty, and the withdrawal will be included as ordinary income on your tax return. However, active investors may buy, sell, or flip properties and move funds from one project to another while maintaining the tax-deferral status of the IRA.

Another benefit of owning real estate in an IRA is the familiarity. Investor interest is often sparked by global market uncertainty, and this can lead investors to stick with more local investments. Self-Directed IRAs provide you with an ability to invest in investments that you know and understand.

Potential Downsides and Risks

As an account holder in a Self-Directed IRA, you are responsible for doing the required due diligence on the property itself, unless it's a passive investment. This may be an appealing feature of real estate investing in IRAs if you are a real estate professional or experienced investor. However, if you are not a savvy real estate investor, it could easily lead to a bad investment decision or leave you vulnerable to fraud. The Securities and Exchange Commission has released an investor alert addressing Self-Directed IRAs and the risk of fraud.

One of the biggest risks of owning real estate in a Self-Directed IRA is the potential lack of diversification. While not impossible for super savers who have accumulated substantial amounts of wealth in an IRA, many investors lack the cash needed to create a diversified real estate investment portfolio. Only focusing on the upside potential is a major risk to consider before purchasing, or investing in, an investment property.

Liquidity is another big concern when investing in real estate within an IRA. There is always a possibility that you may not be able to access the value of your investment to make distributions when you may need the money the most during your retirement years.

Self-Directed IRA Tax Pitfalls to Avoid

Owning real estate in an IRA allows your investment to grow on a tax-deferred basis (Roth IRAs provide the potential for tax-free growth). However, if you don't follow the rules, you could purchase a property the wrong way, disqualify the IRA, and create a taxable event. IRA ownership of investment property also loses some of the tax breaks available to real estate investors if the property operates at a loss. You also cannot claim depreciation on IRA-owned real estate.

If you plan on using an IRA to purchase a vacation home or a primary or secondary residence, think again. Self-Directed IRA investment transactions involving real estate must all be arm's length transactions. That means that no self-dealing or personal transactions are allowable with Self-Directed IRAs. This rule also applies to immediate family members. If you buy a property from or sell a property to a family member (or yourself), you will create a taxable event.

Unrelated business income tax (UBIT) is another potential tax issue. It will be especially important to pay attention to this tax if you are thinking about using a mortgage to purchase an investment property.

With a traditional IRA, you must take required minimum distributions once you reach age 70ý. If you own real estate in an IRA, it is very difficult to sell off your real estate holdings in small chunks each year. For that reason, you must keep enough cash in your IRA accounts to cover your required distributions, or else you'll run into tax problems.

Let me know if you have any more questions! There are also other options to invest, either actively or passively, using retirement accounts. Another example is a QRP. (Qualified Retirement Plan)

This topic could go on for days at a time. You have to be more specific with what your goals are. Let's say you wanted to be financially free in 5 years. Well, you could BRRRR or Flip this property and that would give you enough cash to buy another one and do it again and again, until you reach your level of financial freedom. If you tried to just hold the property long term with no cash out refi, then that wouldn't be the answer to your goal of financial freedom in 5 years because all your cash would be tied up in that one deal. Unless, of course, you use other people's money to pursue more deals, but that's an entirely different topic.

As a multifamily syndicator, here is some of the data points that we look for in the deal, and in the market, in order to be sure that the deal is a good one:

- Market Performance: Rent Growth, Market Vacancy, Long-Term Vacancy Average, Adverse Cycle Occupancy Bottom, Median Income, Employment Pool, Rent to Cost of Ownership, Income to Housing Cost Ratio, Market Rankings, Construction/Absorption Ratio, Pricing, Cap Rates, Trends in Capital Market, Etc.

- Forecasted Market Performance of the Same

- Property Specific Performance: Asking Rents, Actual Rents, Vacancy, New Lease Trade-Outs, Average Vacant Days, Lease Terms, Retention Rates, Renewal Trade-Outs, Sales Record, Renovations Completed, Market Comparable Amenities based on Class of Asset, Revenue, Rent Roll, Trailing 12 Months of Operating Expenses, Property Taxes, Property Insurance, Market Trends of Specific Floor Plans, Etc.

This is but a few of the major things we look at to be sure we are providing our investors with a solid investment that brings healthy returns.

There's a bunch of calculators on Biggerpockets that help analyze deals. A good rule of thumb for a buy and hold, and/or BRRRR, is the 1% rule. If you buy the duplex for $100,000, then you want to be sure that both of the units will bring in a combined amount of $1,000/month.

Try reading some more books and listening to some podcasts about underwriting deals before jumping into anything. The last thing you want to do is jump into a bad first deal. 

Best Ever Apartment Syndication - Joe Fairless

Traction - Gino Wickman

Extreme Ownership- Jocko Willink

Advanced Tax Strategies - Amanda Han and Matthew MacFarland

So Good They Can’t Ignore You - Cal Newport

10X Rule - Grant Cardone

Raising Private Capital - Matt Faircloth

Vivid Vision - Cameron Herold

The 4 Hour Work Week- Tim Ferris

The Miracle Morning/The Miracle Equation - Hal Elrod

The Hands-Off Investor - Brian Burke

Rich Dad Poor Dad/Cashflow Quadrant - Robert Kiyosaki

Never Split The Difference - Chris Voss

Crushing it in Apartments and Commercial Real Estate - Brian Murray

Multi-Family Millions - David Lindahl

Wealth Can’t Wait - David Osborne

Miracle Morning Millionaires - David Osborne

Retire Early with Real Estate - Chad Carson

These aren't "House Flipping" specific, but they are some awesome books that have seriously catapulted my knowledge of the industry. This will be a great start for your education! 

@Evan Polaski

That makes a lot of sense. Our big value add is our in-house property management. We're able to eliminate $68K of payroll expenses off of the current operating expenses. 

Roughly 25% of the units still need renovated, and 50% of the units still need to be raised to market rent. So there's definitely a small value add play, but the majority comes from the massive deduction in expenses. Our exit cap rate (conservatively) was written at a 7.5% after a five year hold, with an entrance cap rate of 6.82%, and we still came out with almost 25% IRR after return of lender required reserves in year 1-2.

To me the deal makes a ton of sense, regardless of meeting the 7% cap rate one of my partners says we should be meeting. 

 @Adriel Hsu

We're underwriting a 12.48% - 18.10% CoC right now. Does that sound like something most investors would pursue?

The major difference in the numbers is based on new reserve requirement from the lender. Which we're told we will get back between year 1-2 and use as a capital return to our investors thereby reducing our total capital investment and increasing our investors returns. 

@David Lilley

Glad to know it's still a deal. Now I just have to find one more general partner to help raise money.

@Adriel Hsu

C-Class Asset, C-Class Location

Smaller Value-Add, Big value add comes with our in-house property management team

It's in Mobile, AL

According to my partner, anything below a 7% cap rate doesn't make sense. I find it hard to believe when this deal is poised to produce an average of a 22% IRR over a 5 year hold period. I know tons of investors that would dive at an opportunity like this.

What is everyone seeing, on the commercial multifamily side of things, in respect to cap rates during this market cycle? I've got a deal at a 6.82% cap rate, and a partner saying that's too low. What is everyone else seeing? 

You won't really know whether or not to go with them unless you get the screening report pulled. 

Obviously you can vet their character, personality, professionalism, etc., but for financial and background check sake, you've got to get that report. 

Plus the tenant pays for it and not you, so you aren't out any money. Sure it sucks for the tenant if they pay the money and then you don't pick them, but that's the way it works everywhere and the prospective tenant should know that coming into the application.