All Forum Posts by: Account Closed

Definitely aware of the tax benefits, which makes this move seem so counterintuitive. I worked the numbers out though and I'm definitely interested in the hype I've been reading about regarding Roth.  

One other options I'm currently considering in possibly converting my Solo 401k into a Self Directed Roth if that's even possible since 80% of my Solo 401k is real estate. When I first read the rules of the Solo 401k you weren't able to have it as a Roth if you had real estate in it but I've also read that you can do it if it's a Self Directed Roth IRA. Anyone know if that's even possible?


 

I have other non-real estate investments and in my I reinvest the monthly profits in non-real estate items.  But your comments are definitely valid.  

So far I've used Hubzu and Auction.com and it's worked out fine.  The biggest pain is that there's a specific number that a bank wants to get called the Reserve.  Typically if that number isn't hit they'll cancel the sale and you won't get the property even if you were the highest bidder.  

The banks selling the properties will clear the title but you'll get title in a lesser state than Fee.  The banks will pay liens and their part of taxes and assessments prior to close or leave a tax credit on the closing statement.  They usually assign someone to you to help get everything closed and to answer your questions if needed.  

I should also mention that these sites require a Credit Card deposit to bid but only charge if you win.  You will also have to send a proof of cash on hand (not open credit) almost immediately upon winning so make sure you have the money to cover your bid.

The exciting part is when the auction's time runs out.  That's when people try to swoop in and steal the property at a bid just higher than yours.  On Hubzu's site thought any bid within 2 minutes of close will automatically reset the close time back to 2 minutes so nobody is able to time out a win at the last second.

I believe I bought 4 through auctions last year and 2 were substantially under market (over 10k under).  One needed a ton of work but when complete I had about 10k equity in the house.  On house I ended up and market value or a bit under as it needed a log of work and we were getting jerked around by an idiot inspector that cost me an extra 1500.00.  

Another thing of note is that you cannot see the inside of the houses.  Many are noted as vacant so you can walk up to it and look in the windows to assess any issues but if they are occupied you can't even step in the yard.  I've only bought vacant ones so I've at least had a peak at the trouble I was getting into..  

In the Phoenix area we used to have groups that would scam solo Realtors at open houses by having one pre-occupy the Realtor while the others took any valuables in the house including the Realtor's Laptop they left in the kitchen.  

Reminds me of when I was younger and trying to buy a few businesses.  Everyone would show their bottom line minus the time they put in and money they withdrew from the business.  Like a Restaurant that "nets 70k a year" but of course the owner is the head Chef and works there 100 hours a week without paying himself.  

In houses what I see is the owners spending a ton on customizing their house in a way that only they will appreciate and getting angry at you when you include in your repair costs the cost of removing their insane design flaws.  "Yes Mr. Seller I'm sure neon carpet and green appliances were all the rave when you installed them 'cough, cough' " 

So last year I bought, repaired and rented 10 houses.  These were in a town on the other end of the US from my residence and I personally only saw 3 of them before buying them.  Below are some of my experiences. 

1- Nothing to fix here, this is move in ready!!!

Both my realtor and contractor had told me this on a few houses up front that I hadn't seen before purchasing.  What I found out is that ALL houses need something done and "nothing to fix" mean only the basics like a fresh paint job, some patching, maybe a few missing appliances, carpet/flooring that needs cleaned or replaced and a few other items.  

Each time I heard this I didn't realize it meant that there's still $3,000 or more that needs to go into the unit that I hadn't budgeted.  So I quickly learned to ask more questions and make more liberal budgets to avoid the surprise on houses I didn't see up front.

2- OMG this would be cool!!

On my first 3 houses we found a few items that would make the houses really neat.  Adding a bathroom or converting space into other space so that the place was more like what I would want to live in.  What I didn't think about was whether it added dollars to my rental rate and in retrospect found that it was mainly just eating up my investment reserves.  I was guilty of over upgrading and my wallet hurts to this day.

3- Auction Sites -

This is one of my success stories.  Of the 10 properties I bought the best deals were on Auction sites.  They take copious amounts of paperwork and you've got to be prepared to do your thing quickly (and buy in cash on hand), but you can get really lucky and land some smoking deals.  I bought one house by mistake one day when I was testing the banks "sell" limit and although I didn't really want that house it required less than 5k in work and yielded about 20k in equity (off of a 50k purchase price).  I bought 2 more that needed work and enough work that it scared others off and by the time I fixed them up to rent the overall cost was well under what I'd have paid to buy a similar property off the market.  

I would warn that if you are buying "site unseen" via an online auction, make sure to get advice on that property from a local realtor.  If done right, however, this is an awesome way of getting cheap deals.

4- Keep a diary of expenses and help train your Realtor and Contractor- 

I used to do project accounting for a new home builder and was used to breaking down costs for options on houses so this came natural to me.  When discussing parts of a project with my contractor I'd go through every element of the project "so how much will the plumbing cost?  What about the cabinet for the sink and the new toilet?  How are we doing the tub/shower and what will that overall cost be?  Oh, show the flooring?  Will it be effected?  And, have your priced out the towel holders and TP holder and other add ons?"  Over time my contractor anticipated those questions and would add those into his estimates up front (he was somewhat of a novice but was trustworthy and reasonably priced).

5-  Cheaper to see it, oh yes it is.

With items listed above I learned that if I'm going to make a large investment it just makes sense to see it first.  The $500-700 in travel costs are nothing compared to a bad decision you have to live with.  Here are my 2 stories:

Story 1-  Saw this beautiful and inexpensive house listed in an OK neighborhood.  Realtor and Contractor saw it and both said yeah this is a nice house.  I buy the house and we fix it up and it's not renting.  I ask the realtor why this one is so slow to rent and she tells me "well it's probably because the only bathroom in the house is in one of the bedrooms".  Well OMG had I known that I don't think I would have bought this house.  Why would anyone willing live in a house where they had to go into someones bedroom to do their business?  Had I been there this wouldn't have happened.  I did finally get it rented but between tenants it will likely cost 2-3 months vacancy so it's my dog house.

Story 2- Beautiful house comes to market in decent neighborhood.  Again, Realtor and Contractor see the house and exclaim how awesome it is.  It backs up to a river, has a great back yard and the inside is in decent shape.  During repairs my Contractor does nothing but complain about the neighbors on both sides of the house.  They've let their houses wear down to where they looked vacant and their front yards looked like they were intentionally growing waist high weeds.  Again I didn't know this and a site visit would have told me to back away.  Luckily this house rented quickly and steadily so I dodged a bullet.  

So in the end I feel I've paid my "fool's tax", which is what my dad used to call it and hope that you all can learn from my investment in experience. 

I'd be interested in the answer to this. My original thought would be that a law suit couldn't pierce the IRA and if all of you're planning to put all of your properties in the same LLC it might be overkill on protection as in if they take the LLC's assets there's nothing left to protect inside your IRA. Whereas if you have several properties in the IRA and each are in their own LLC it would be a little expensive and cumbersome to support the paperwork and having a balloon insurance policy (if you can even get one in an IRA) might be a better option.

On other thing I've seen on several sights is how if you have multiple similar LLC's (like 10 LLC's for just 10 houses) the courts could tend to assume they are all 1 LLC type and if the suit proves true negligence a judge could decide against you and possibly pierce the veil.

Again I'd like to see the answer from someone who really knows this area. 

I'm 52 and plan on retiring to around 100k in annual expenditures around 59 but not drawing on a Roth until 62 or 63.  I would like for the money to make around 8% and adjust with inflation (which Real Estate technical should).  

At 62/63 my wife and I should receive about 50,000/year in Social Security between us (assuming it hasn't been reduced by then).  We should get around 9k/year from an old pension and the remainder should come from 401k's and personal investments.  

The ideal goal would be to keep our taxable income low enough that almost none of our SS income is taxable.  In 2019 I believe that the total taxable limit is 35,000 from SS/2 + taxable income.  So without any taxable income but the Pension we are at around 34,000 (50,000/2 + 9,000 ).  So that leaves me with the need of roughly 41,000 year of nontaxable income between my currently real estate investments and Roth Distributions.  

If I had a 300,000 Roth IRA today making 8%/year for the next 10 years it would be large enough to cover the 41,000 Non-Taxable need long term or even permanently and would hopefully make my federal tax bill = 0.00.

Oh, and yes I believe taxes will go up.  

Last year through personal and retirement funds I bought several properties in the town I grew up in which is in the midwest.  The town is supported by several small businesses and one large business (employing roughly 10% of the town).  The large business is an Automotive plant that has been pretty stable over the last 10+ years.  

Plus side to this town is that nice properties are fairly cheap, renters have been pretty quick to find and profits have been 10%+ on assets invested.  Further I have a trusted family member who is a contractor and is happy to do work for me at very inexpensive levels.  Also, through shear luck, I acquired the perfect Realtor to find properties for me and especially manage those properties.  Right now I'm sitting on a solid block of steady income.  

Down side is the fear that the economy tanks and the Automotive Plant has long term lay offs and the ripple effect hurts the other businesses.  I can handle a short term downside but a long term (10+ years) would be devastating to my retirement.  Is that a realistic fear?  

One other concept might be to invest in HUD homes in that area. I have one already and it is the financial flagship of my small fleet. I would think these would be safe from a short to long term economic storm but are they really?

Insights and opinions welcome.

Thanks.

Last year I converted an old 401k of mine into a Self Directed 401k and used that to buy and refurbish a few properties and now the monthly income is very nice and I sleep at night knowing I'm not overly reliant on the stock market.

As I think forward to retirement, I've read several articles about taxation and the goal of keeping taxable income low enough to avoid paying taxes on up to 85% of your Social Security.  With that is the advise to convert existing standard 401k's to ROTH 401k's so you will have the flexibility to determine your taxable income each year and control your taxes.  To do this, however, you have to pay taxes on the conversion at your top rate.  

For example let's assume my top rate is 24% and I wanted to convert 300,000 it would cost me about 72,000 in taxes to convert a 300,000 401k taxable instrument into a 300,000 non-taxable instrument.  

So is it worth it?  Should I take that 72,000 and invest it elsewhere in hopes it would yield more than the tax savings on a 300,000 tax free investment?  Does the anticipation of a looming recession change the logic on a move like this?