All Forum Posts by: Joshua Ferrari

The CARES Act says we can't charge late fees, and includes a 120 day eviction moratorium from the date of passing. 

When the CARES Act came out, we were very straight forward with all of our tenants about this and were stern on the fact that rent still needed to be paid in full regardless, but if there were COVID-19 related issues, then we'll tackle those if they arise. With definitive proof that there was a change in their employment. 

We had some tenants begin paying late, but still paying in full. I believe it was our transparency and desire to help them that encouraged them to continue paying during the crisis. We even helped one tenant file for unemployment so they could continue to receive income and pay for rent.

You could try syndicating the multi and have an investor bring the 20% through their Self-Directed IRA. That would depend on how large the deal is though. Syndication typically doesn't make sense unless it's over $750K.

You could also bring on a capital partner and have them bring the 20% down. 

House hacking would also allow you to achieve a smaller down payment. 

Here is how you achieve the Self-Directed IRA route through syndication.

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 IRAcustodian 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.

There are also other options to invest using retirement accounts. Another example is a QRP. (Qualified Retirement Plan)

Spreadsheet for sure. Always keep record of everything involved with a syndication and inform your investors immediately if you expect there to be a delay/hold in their return. 

This example is over a 5 year hold period, if everything went to plan. (It never does) So, I just go in there and adjust to whatever the actual numbers are. 

Maybe you up the purchase price and BRRRR out once rehab is complete and you have a tenant in there.

Maybe you up the interest rate and pay interest only payments until you can BRRRR out.

Maybe you BRRRR out and keep the numbers the same. It sounds like he just needs fast cash. If you can finish the rehab in a few months and get a tenant in there and force some appreciation in the asset, then you'll both have what you want in a short amount of time.

Maybe give the seller the $15K down payment, and balloon the other $15K once renovations are complete and you have a tenant in there. 

You might have to raise the other $15K from a private lender, hard money lender, potential equity partner, etc. 

Give the seller equity in the deal. Pay $10K-$15K down, and once rented out, give him all the rent payments for however long, and once he's happy, you retrieve the rent payments and refinance out to pay him off or continue paying him the original terms, long term. 

Maybe you do a subject-to on their remaining mortgage, if they have one, owner finance the rest, and pay the $15K down payment. 

I'm sure there's a ton of other options, but here is a good start to some negotiation.

It’s very deal specific for a lot of factors.

You want to already have a plan and multiple different exit strategies. If anything goes sideways, like coronavirus, you’ll have those contingencies and will still be able to break even, if nothing else.

The overall goal is to be able to buy a deal that will produce a higher return faster. The quicker you can get that return, the quicker you can invest the funds into something else to continue expanding your portfolio. 

Here's how you calculate it: Divide the number one by the number of years of returns you're considering. For example, if you're looking at a 10-year hold period, divide one by 10 and it gives you 0.1. To annualize your returns, raise the overall investment return to this power, and then subtract one.

You're probably looking at it cap around 10 years because that's how long you have your hold time in whatever analyzer you're using. 

The way I see it, total annualized return is roughly the same as internal rate of return. Which is, in essence, the time value of money. Everyone always says "Time is money." They would be right. So, when calculating your return by this metric you're able to figure out how quickly you can make that return. (The sooner the better.) 

I would definitely get it quoted out, and see if the numbers will make sense for you. 

However, even if the numbers don't make sense, surely bitting the bullet and getting it done wouldn't totally trash the deal, and it would provide a much safer and efficient method for cooling and heating the property. Being that it's brand new, you also wouldn't have much of any maintenance issues with it for a good long bit. 

With the house being from the 30's, I'm sure that will bring about issues of its own with thermal efficiency, etc. Another thing to consider is the class of property you are wanting to renovate the property too, for a rental. If you the area is a C class area, then window units and portable heaters might be perfectly fine. If the property is A or B class however, not many renters will want to pay that price tag for no central A/C. 

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

I’m sure I’m missing a million others, but this ought to be a good start!

This depends largely on the deal itself. There are so many variables and different ways that you can structure it, but at the end of the day, it depends on you & your investors goals. 

We invest solely in multifamily. We typically do a 75/25 equity split with an 8% preferred return for investor/operator synchrony. We also, typically put some of our own money in the deal, which gives us some more credibility on our belief that it's a solid deal. Sometimes instead of investing our own money, we use our acquisition fee as our investment and include that into the investment fund. So, if it was going to be a $75K acquisition fee, we'll add that into the fund and get a 75% split on the overall profits based on our $75K investment, plus our asset management fee, & our 25% equity of the deal. 

Your exit strategies also play a role in how you structure the deal. We always want to have some type of liquidity event from year 3-5 so that we can return at least 75% of our investors capital, so they aren't illiquid in the deal for too long. That's typically what I hear from investors, is that they don't want their capital tied up in one asset for too long. 

You also want to be sure that your investors aren't putting all their eggs in one basket. If you look out for their best interest, then they will look out for yours as well. Make sure they haven't invested all the capital they have in this one deal, and make sure they understand the time table and risk that comes with investing in real estate. 

What type of properties are you bringing investors in on? Single family? Single family portfolio? Multifamily? Multifamily portfolio? Mobile home park? Self Storage? Retail? Commercial? Office? The structure of the deal depends on the needs of you and your investors. Make 100% sure that, however you structure it, it makes your investors happy, lines up with your end goals, & is conservatively underwritten so you can be sure that you won't lose your investors capital. 

First job of a syndicator is not to lose your investors capital. Second job is to make them a return on their investment. 

@Anthony R.

This is all I'm seeing under the HEROES Act. Nothing about non-rent payments. That was the Rent & Mortgage Cancellation Act, which likely won't pass.