All Forum Posts by: Michael Bishop

@Brian Eastman thanks for the response. So if your IRA is subject to UBIT, taxable income is/can be calculated AFTER eligible deductions are made?

I know I'm a bit late to the party, but I was looking into UBIT and UDFI and the self directed IRA when I came across this page and wanted to throw in my two cents and get other opinions. From the IRA page on UBIT - "An exempt organization that has $1,000 or more of gross income from an unrelated business must file ."

The way I read it, this implies that any income from a passive investment in a syndication deal is subject to UBIT, whether or not the K-1 shows a loss. Thoughts?

I agree with @Joe Zinger and @John Johnson, roll your funds into a self directed IRA - which can take the form of a SEP IRA, a Roth IRA or a solo 401(k) - and avoid tax exposure.

I also think that @Paul Civitello made a crucial point but didn't emphasis it, and that is this:

You can purchase a property with self directed IRA funds, tax free, earn a profit, and put that profit, along with the initial capital, straight back in to your self directed IRA, all TAX FREE!! So assume you buy a house for $100K with IRA funds. You then put $50K in to it, and sell it for $200. You can then put $150K straight back in to your account without paying a single dollar in taxes on it.

Even with all of this advise, you should absolutely talk to tax specialist/strategist before making your final decision. Good luck!

A lot of people mentioning the $10K you'd save by doing a 1031, but I'd go one step further and say that it's even more about future value. This example from "The Perfect Investment" by Paul Moore absolutely blew my mind:

If you take $1 and double it daily, tax-free, for 20 days, it's worth $1,048,576 after day 20. Take that same $1 and double it daily, but this time it's taxed at 30%, and it'll be worth $40,640 at the end of day 20. A $1M dollar difference!!!

While this is an extreme example, it can still be applied to the 1031 exchange. Earnings accumulated on compounding of principal money and tax-free earnings will greatly (and mind-blowingly) outperform earnings on compounding of principal alone.

Two things to consider: (1) 1031 like-for-like exchange it, so sell it and put the proceeds in to your next investment property. This is one of the greatest tax benefits of real estate investing as it avoids capital gains taxes. There are some rules to know so do your research, talk to your CPA, etc. (2) pull out equity through a refinance. You say you want capital for your next deal, well you have it, it's sitting in your newly renovated townhouse. This way you can keep the townhouse as a rental AND buy another property.

Good luck!

One interesting recommendation I've seen that you may want to consider in the future is this; purchase a home warranty (in the $400-$600 range per year) and have the tenant pay for any service calls (typically about $60 give or take a few bucks). Depending on how much you want to pay, a warranty can cover almost anything in the residence. This would provide investor/owner alignment and cost sharing, and obviously you'd need to put it in your leases terms moving forward.

I've never done this myself so I'm not entirely sure if there are any stipulations for a rental property. Just food for thought.

@Kurt Granroth, as you've laid it out, it really does sound like the perfect plan. Things will vary of course, but theoretically that plan would work. Also remember that often times these are conservative estimates. So, you may achieve much higher than 8% annual over the first year or two (and beyond), or you may even see disposition much earlier than year 5, ultimately allowing you to reinvest your original $100K much sooner. To play devils advocate, surely you could lose your entire investment or realize returns much lower than expected, but vetting your Sponsor thoroughly should put you in a good position.

Something to consider is finding multiple Sponsors who operate across a number of MSAs as a way to further diversify and minimize risk. Most Sponsors, or those who raise capital for Sponsors, would be glad to have even just one of your $50K or $100K investment.

@Kay Kay Singh some very helpful and insightful responses here with a lot of experience behind them. To back what others have said an provide my own opinion, I'd stress two areas:

1. Narrowing down your market. A market can (and likely will) make or break a syndication deal. A strong, growing market can easily cover for an average deal or team, but the opposite is a lot less likely. Focus on population growth, job growth, and major employer diversification. Are population growth and job growth above national average? Is the market dominated by one major employer or does the main employer account for 1/4 or less of the jobs? Imagine one employer providing 50% of the jobs in your market, and suddenly up and relocating. This is a recipe for disaster.

2. Find a Sponsor that places a major emphasis on conservative underwriting. You always want an operator to under promise and over perform, rather than the other way around. For example, if the market supports a rent premium of $120 on renovated units, a Sponsor using a projection of $110 premium/unit in order to make the deal work is an absolute red flag.

To recap, a strong growth market and conservative underwriting would be my top two criteria. Of course, there are plenty of other criteria to consider, and I think that you're doing the absolute right thing in reading everything that you can and developing and plan that works specifically for you before taking action.

Best of luck and look forward to reading your criteria!

@Jared K. I guess I should have specified that my experience, and these numbers, are in the DFW market. I've seen plenty of deals throughout the country with these same returns and better, but, like you said, I haven't looked at the LA market enough to speak to specific numbers.

That being said, my recommendation to @Brian K. was not specifically aimed at the LA market. In fact, I think that international investors are better served looking elsewhere.

I would advise them to at least look into apartment syndication. Being international, passive investments with little to no required active management or sweat equity should be extremely appealing. Not to mention target equity multiples north of 2.0x, CoC easily reaching 10% and IRR in the 18%+ range. Provided that they're accredited, with that much cash, they could spread their investments around multiple deals and even multiple Sponsors, minimizing risk to an extreme degree. Check out my blog on some of the top reasons, in my opinion, why apartment syndication is a great option:

https://www.biggerpockets.com/blogs/10191/66365-8-...

I'd be happy to connect and discuss! Best of luck to them, and to you in providing them with sound advice, you've come to the right place.