All Forum Posts by: Michael Reach

@David Espana,  I like @Sunny Shakhawala's suggestion to buy the property yourself (if you have the means) in order to take control.  However, I might suggest a side-door approach.

You could probably buy the 1st position lien from the lender for well-below payoff.  Notes routinely sell at a discount to the unpaid balance and a loan with no payment history that has documented project issues on a property that isn't selling seems ripe for a strong discount.  The first lien holder, if they are aware of the situation, probably wants out just as much as you do.

In addition to the discount off the st lien payoff, you would also not have to come up with the money necessary to payoff your SDIRA's 2nd lien because you wouldn't be buying the house, just the note. If you did buy the house you couldn't take it subject to the 2nd lien because you would then have a loan from your IRA which isn't allowed. But, so far as I know, you investing in a note on a property while your SDIRA holds a completely different note on that property would not be a prohibited transaction. *ABSOLUTELY consult a tax professional on that point*

Once you own both notes, you are at the very least in control.  At that point you could perhaps negotiate a loan modification with the borrower that reduces principle in exchange for a shortened term.  That would force him to sell for less in order to sell faster and the principle reduction wouldn't hurt you because of the discount you'd bought the note for.

If that failed, you could negotiate a deed-in-lieu which would cost pennies on the dollar vs a foreclosure. Although that might get you back into prohibited transaction territory.

Or, here's an idea. Once you own both notes, negotiate a short-sale basically with yourself wherein you personally agree to buy the property from the borrower for the payoff amount of the SDIRA's 2nd lien plus $1 if the borrowers 1st lien holder (now you) will agree to take $1 for the payoff and release the lien (to which you s the lien holder would agree). That way:

• your SDIRA is made whole
• there s no prohibited transaction between you and your SDIRA
• the borrower doesn't benefit from his failed flip but loses only his investment and can't refuse to come up with additional payoff money
• you get ownership of the house for a total investment of a) the original SDIRA loan amount plus b) whatever discounted price you had paid to the 1st lien holder.
• You could then either sell it yourself or hold it for rental and sell at a better time

This is, of course, based on many assumptions that may not be true, not the least of which is your capacity to buy the note. I don't think there is any magic way to turn this loss into a gain but perhaps a way to minimize the loss, take the loss against taxable money instead of in your IRA and perhaps let time and rent checks erase some of the loss.

Also, I am learning about notes but have never actually invested in one and I have a whole one rental and zero flips in my experience so treat all my advice accordingly.

@David Desousa,

I'm going to disagree with the idea of leveraging into a more expensive "better" property mentioned above. I think the reason you are looking at such good cash flow is because it is a lower end property. That said, leverage is definitely your friend for returns. I don't believe you mentioned an expected after repair value. If the property after repair will be valued highly enough to qualify for conventional financing that would almost certainly improve what seems to me to be insufficient cash on cash return.

If the ARV will be North of $100k, then I think this sounds like a deal but you should put down 25% of the total project costs, get hard money for the remainder of purchase and the rehab (keeping your money in reserve for budget overruns), rehab, improve rent and tenant quality and then refinance out of the HML into a conventional loan. This assumes you can personally qualify credit-wise but using the proven rents as income. The HML would need to be long enough to give time for turning over tenants and performing interior rehab at end of current leases.

I think if you run the numbers on that you'd have smaller but still respectable cash flow but much better ROI, especially if it appreciates in the coming years and you then sell.

On the other hand, I'm still a rank newbie myself. So follow my advice with caution.

Hello @Devon Cornwall.  I ultimately decided against GnuCash.  I actually haven't implemented anything just yet but have narrowed my choices to either a) using Quickbooks Online for $10/mo or b) throwing in the towel and paying for a bookkeeper to do the accounting for me for what will certainly be much more than $10/mo.

A large part of my decision toward Quickbooks Online is that GnuCash doesn't support the concept of classes/tags/sub-customers.  That would make it more difficult to account for rental properties over time where income/expense can be for the same property but different units and different tenants/leases.  That may not be as important to you as a contractor.

I'm also now strongly considering focusing on Notes and having rentals only incidentally so that muddies the waters some with potentially a completely differnt chart of accounts running simultaneously with the rentals.

You may be interested in the somewhat in-depth but not very polished feature comparison I did for 16 accounting platforms and 37 Property Management platforms.  I was discouraged to find that not a single one of the PM platforms (at least in my affordability range) had anything even remotely acceptable for accounting.  I am tentatively moving forward with TenantCloud for Property Management but ignoring their useless accounting and building my own books in QB Online.

That comparison is shared from my Google Drive at the link below:

PM Software Comparison

Thanks @Dmitriy Fomichenko.  One last question about asset protection/asset privacy.  I understand your are the Solo 401K expert and not the asset protection expert but to the extent an investor wants to apply good asset protection and privacy practices to investments within a Solo 401k what protections come built in vs needing to be added thru entity layering?

Is the Solo 401k protected from liabilities of the plan sponsor (my company) and vice-versa?

Is the Solo 401k protected from the liabilities of the owner (me) and vice-versa?

Is property held in a Solo 401K readily identifyable as my property (albeit, within my retirement funds)?

Or are those all protections that would need to be addressed with trusts, LLCs and a holding LLC all under the Solo 401k?

Thanks @Dmitriy Fomichenko.  Terminating a Solo 401k with real estate inside of it sounds like a nightmare.

It sounds like I might need to:

• Roll my Roth IRA into a ROTH SDIRA and find a separate use for it abandoning any hope of pooling my money
• Rollover my 401k into a SDIRA for now and NOT convert to ROTH
• Focus on performing notes in my SDIRA for now
• Create a business entity when I'm ready to actively work non-performing notes to eventually create eligibility for the Solo 401k
• At that point roll my SDIRA into a Solo 401k and convert to ROTH within the Solo 401k

Does that sound like a reasonable plan?

I would like to eventually have everything in ROTH money but I can't afford the tax consequences of converting all at once.  Especially if its going to be down the road before I can even start.

Can I convert my Solo 401k to Roth on a piecemeal basis when it has non-liquid assets like real estate and notes in it?  Would I have to move an entire note or property rather than a certain dollar amount?  Notes would probably be easier than property in this regard because they have a more definable value than property, right?

@Dmitriy Fomichenko

Thank you for starting this thread and still actively answering questions over a year later.  I've read all current 13 pages and would like to clarify some things and ask what I believe are new questions if you don't mind.

I'm very new - one rental in my own name - and do not have current self-employment income.  I like the idea from someone earlier of forming an entity that I could then contract with for property management thereby qualifying to open a solo 401k.  If I did that, and after some additional properties, didn't want to actually do the property management and chose to subcontract the management, would that still be considered active income?

Starting out at least, I'm more concerned with getting my existing retirement funds into a useful vehicle than being able to make large contributions.  So, if I'm OK with my 401k being sponsored by a very tiny business, is the IRS OK with that?

I've seen several references to the need to terminate the solo 401k if the business terminates or fails to maintain active income but I'm not sure what such a termination would look like. Investing in real estate in a tax free (Roth) vehicle seems like a one way transaction. Does terminating just mean that you can't contribute any more? Would I be forced to liquidate the assets and go back to a traditional Roth IRA? Where I would the be locked out of any future rollover into a Solo 401k?

My existing retirement funds are fragmented between a current employer Roth 401k I can't access, a former-employer non-Roth 401k and a Roth IRA. Is there any way at all to get that Roth IRA money into a solo 401k?

• Can I re-characterize back to non-Roth, then roll over, then re-convert to Roth?
• Can my Roth IRA (after rollover to SDIRA) invest in an unsecured loan to my Solo401k? Or vice-versa?
• I believe a Roth SDIRA and a Solo 401k can jointly own an LLC as long as no other members are non-qualified correct?
• But that structure would prohibit any future consolidation of my current-employer 401k, correct?

My goal is to invest in notes. The nature of note investing would seem to be both passive and active and one note can change from a passive income stream to a problem that requires active rehab or even become REO that would then need active rehab and flip or rent. Would note investing possibly be subject to UBIT for foreclosed and rehabbed properties or would that be "related business" for a note investor? If I wanted to buy non-performing notes with the goal of taking the property as REO and (pay someone else to) rehab/rent them then either hold them or sell, do you see any issue doing that inside a Solo 401k?

@Duncan Pratt, I'm a former mortgage originator. I'm not aware of any reason Canada would be different from the USA in this regard because the FICO model for calculating a credit score is what it is. But I suppose it is possible there could be a difference.

If you look at your credit report, each inquiry will show up. However, only the first inquiry OF THE SAME TYPE within 30 days will diminish your score. If you shop 30 mortgage brokers in one month, the impact to your score would be the same as the impact of shopping only one. However, if you also shopped multiple banks for a car loan that month, then you would have two inquires count against your score. If 31 days after the first inquiry, you get another, then that would count as a second inquiry as well.

Inquiries for credit cards or other miscellaneous types of credit other than secured loans do not combine. Two credit card application on the same day will count as two inquiries for your score.

More importantly, recognize that your inquiries make up a tiny fraction of your credit score. Payment history, credit age, balance/limit ratio, etc are all much, much more significant.

Bring judicious with inquiries is wise, but letting worries over the impact of inquires on your score keep you from seeking the best deal is not. Just try to do all your shopping in a short amount of time and then stop until you are ready to move forward on a specific property.

Work with a lender to ensure you have all the information you will need for a complete application and that there aren't any issues with your application that are non-score related before letting them pull credit. Then you are prepared to very quickly have multiple lenders pre-qualify you.

I will also suggest that while over paying on your interest rate is not fun, you should consider more than just the rate. A lender that understands where you are coming from as an investor, can show you alternatives you hadn't considered without pushing you into something you don't need and cares to put in the extra effort with the processor and underwriter that can sometimes become necessary with a complex application is worth paying a small premium for.

@Jeremy Hoover Have you considered buying the property and the current owners rights in the land contract land directly from the current owner? If you do that, you in the property and your friend is you the remainder of the contract. At which point you can buy your friend's interest in the land contract for the $6k difference and then pay yourself off as both borrower and lender in the land contract. You might get even get a discount below the current unpaid balance on the contract, especially if the current owner is unaware of your friend's plans to payoff early. A lawyer could probably also short circuit that process a little so it isn't three transactions.

The profit potential seems impressive or maybe TGTBT.  I would have three skeptical questions:

• Why do they need to borrow $130k when their arrearage is $95k and they are just trying to forestall foreclosure for 2-3 months?
• If the business has thus far failed to generate sufficient revenue to make the mortgage payment why would someone be buying the business?
• What would your return be if you made the loan but the borrower didn't pay the arrearage and the 1st lien holder foreclosed?

The 1st lien has $320k UPB but also $95k in arrears. In other words, they owe $415k on a property worth only $600k. To put that another way, their current LTV on a non-owner occupied commercial property is already 69%. Its hard for me to imagine the property would sell for more than 70% of market value at a foreclosure auction and any other buyer is just a plan at this point.

My advice, as a rank newbie you should probably ignore, is:

1.  Stipulate in the note, to the extent possible legally, that the proceeds of the loan are solely for payment of the first lien (arrearage and pre-payment of next 3-6 months months payment) and ensure the closing agent gives the money directly to the lien holder.
2. Change the terms of the loan to be strictly interest and points for only a 3 month term and let the borrower worry about the equity.  $130k with 50 points financed at 15% for 3 months interest only and a single balloon payment should yield about $75k which is 230% annualized. That gives you the same return as the equity split and if everything about the deal is kosher, the the borrower should not have any complaints with those terms.  If he does, maybe the equity isn't there after all.  By forcibly prepaying the first lien for 4-6 months and then setting up a three month term, you put yourself in a position to be able to foreclose before the first lien holder if it comes to it. That would give you control over the property for only your initial loan plus legal fees and the cost of making payments on the existing loan.
3. You could also try to by the first lien at a deep discount from the first lien holder.  That gives you flexibility to either do a workout with the borrower for terms they can handle or hold it for two months till the supposed sale happens and get the spread between what is owed and what you paid.  Or you could foreclose.  But I'd be very cautious of this property.  Good luck evicting a bunch of assisted living patients that had their money taken by the big-bad previous owner.  Unless you want to get into the assisted living business.

Brandon, as someone only in the early education phase of note investing, I also look forward to hearing responses to your question from more experienced investors.  For my part, I would think your best strategy might be to sell now before a refinance.  Putting aside any less desirable  aspects of your note, if it has been performing for over a year I would think it is worth more now than it would be if you refinanced and then tried to sell with little or no payment history on the new note.  As I understand it, the newer a note is, the riskier it is and therefore the greater the required discount to sell it.

On the other hand, depending on the goals of your borrower in asking for a refi, you might be able to add value by increasing the Net Present Value of the cash flow.  If they need a lower payment, a longer term with a sufficiently higher interest rate would accomplish the borrower's goal but also increase return on investment.  Likewise, if the borrower wants a lower interest rate, coupling that with a sufficiently shorter term (assuming the borrower can handle the payment) could also increase return on investment by making that return happen faster.  If you can then hold the note for a year to reestablish pay history, the new note could then be worth more than the current note.

Again, I'm VERY new so please take the advise of others over mine.  Unless, they agree with me. :)