Creating a non-recourse note for your IRA deal

30. April 2008 admin

As an advisor for self-directed IRAs I am constantly asked how an investor can locate a non-recourse for their IRA to purchase a property. So often investors are concerned with banks, their requirements, the underwriting process and timing and how it affects the funding of the deal. What if all of those issues could be controlled by two parties you and the seller? Perhaps changing your perspective may be an easier way to accomplish the same objective. Creating a owner financed note that is non-recourse may be just the answer. The benefits of structuring a deal may have the following components:

The terms of the note are determined by you and the seller

Seller has a favorable tax structure

The due diligence process is controlled with no underwriter nonsense

The note is structured to be sold on the open market

Closing is less expensive and manageable

The note is compliant to the IRS code

The deal gets done

When buying property with a non-recourse note it is difficult to find a lender that is willing to underwrite the purchase. Banks as we all know are only interested in providing notes that are in their benefit and in their time frame. As the saying goes “He who holds the purse strings calls the rules”. Let’s turn the tables and provide the seller with a proposal for a note that he carries back and is fully negotiable on the market. What that means is that he is not required to hold the note any longer than one month. So if an investor is able to negotiate reasonable terms with the seller and the seller is able to sell the note immediately on the open market then you and the seller hold the purse strings.

If the seller desires to hold the note himself then the interest is considered passive income and the tax treatment is favorable as compared to ordinary income.

The due diligence process can be reasonably controlled since the seller has a good understanding of the potential cash flow and there are no annoying unrelated questions by a underwriter that is following a checklist.

If an a advisor that understands how to structure the note so it is readily sold on the market is utilized then the seller has the option of keeping the note and “seasoning it” or selling the note immediately after the closing assuring himself of cash upon sale.

Since there are no fees to pay to a lender or loan broker along with the removal of any unnecessary requirements the closing costs should be lower. And those lower costs may provide leverage for negotiating a favorable terms.

If the note is compliant to the IRS code and the terms are flexible enough to provide the ability to pay down the principal then the potential of having to pay unrelated business or debt taxes are reduced or perhaps eliminated.

If the deal gets done it is a win for your retirement account and a win for the seller!

Business IRA, ICO - Ira COmpany, ICO - Ira COmpany, LLCs, Real Estate, Roth 401k, Self Directed 401k, Traditional IRA, alternative investments, checkbook control, early retirement, forclosures, ira, ira llc, real estate investing, real estate ira, real estate notes, real estate outside IRA, roth ira, self directed ira, self directed ira custodian, tax lien | 0 Comment (s) »

As in Sports, You Can Also Warm Up in Real Estate

24. September 2006 taxdefer

Real estate investing is a vast and open field. Ask any successful real estate investor and they will tell you that investing in real estate can be an overwhelming task for first time investors, especially IRA investors who are new to investing in real estate with their IRA funds; although one may be have purchased real estate as a personal residence, purchasing investment property is an entirely different animal and it requires a totally different skill set if one wishes to be successful.  First time investors can easily be overwhelmed when directly buying and selling ‘123 Main Street’ due to either a lack of real estate investing experience, a lack of time, or a small amount of funds in a 401K/IRA.  Real Estate like products such as (tax liens, private mortgage notes, real estate notes, private REITS, or private limited partnerships) might be just the right fit for first time investors who truly wish to begin investing in real estate like products without hassling with collecting rents, dealing with tenants, or lining up contractors to rehab properties.

If you’re hesitant to begin your real estate financial education by “wheeling and dealing” in properties, you can choose to go on “warm-up” mode.  One way of warming up without feeling that you’re diving head on into uncharted waters is by purchasing some shares issued by a private real estate investment trust (REITs) which you’ve may have heard about. Private REITs are companies that typically own and manage large undertakings like warehouses and shopping centers and office buildings.

If you are keen on IRA wealth building strategies, a smart maneuver would be to own shares in several private REITs.  Your self-directed IRA adviser should be able to come up with a short list.

However, history has proven that investing in the real estate market – selling/buying and managing properties - will give you an edge over passive investors who stick to more traditional ways of investing.  So ideally you’d have private REITs in your portfolio when you’re in your 20’s and 30’s.  By the time you hit your 40’s and 50’s, and begin to feel that real estate runs in your blood, you may want to take a more aggressive stance by buying and selling within your IRA and still be able to enjoy tax-deferred growth.

This is a copyrighted article provided by Joshua Geary, Asset Exchange Strategies  

 

REITs, alternative investments, investing, ira, ira private placement, real estate ira, real estate notes, self directed ira | 1 Comment (s) »

Poetic Justice?

23. September 2006 taxdefer

Try this exercise.  Go to your local library and take out about 10 books on real estate.  Chances are, out of those 10 books, you’ll get 5 that contain the famous real estate poem called “Investor’s Lament” written by an anonymous poet. 

If you’re just waking up to smell the coffee and realize you should have caught the train earlier – in real estate, that is – you’ll find yourself wishing you penned this yourself.  The poem has 5 stanzas or verses, but we’ll print only part of the second verse, the entire fourth and the entire fifth (we plucked this poem out of “The Beginner’s Guide to Real Estate Investing” by Gary Eldred, PhD, 2004): 
 
“When Tucson was cheap desert land, I could have had a heap of sand;

When Phoenix was the place to buy, I thought the climate was too dry;

‘Invest in Dallas – that’s the spot!’

My sixth sense warned me I should not.

A very prudent man am I, and that is why I wait to buy. 

Last night I had a fearful dream,

I know I awakened with a scream:

Some Indians approached my bed –

For trinkets on the barrelhead

(In dollar bills worth twenty-four

And nothing less and nothing more)

They’d sell Manhattan Isle to me.

The most I’d go was twenty-three.

The redmen scowled:  ‘Not on a bet!’

And sold to Peter Minuit. 

At times a teardrop drowns my eye

For deals I had but did not buy;

And now life’s saddest words I pen –

IF ONLY I’D INVESTED THEN!” 

In our next blog, we’ll share some of Eldred’s views about a misconception on mortgage rates being at “their all time low.”  It’s something that IRA investors should consider when eyeing real estate.

Real Estate, Retirement, investing, ira | 0 Comment (s) »

Dance to the Music

22. September 2006 taxdefer

Further to our last blog, we think the words “cash balance” are leaving a bad taste in our mouths. Its essence lies in distinguishing between a defined benefit plan and a defined contribution plan. A defined benefit plan means an eligible employee receives a specific benefit at retirement, whereas a defined contribution plan means the employee receives a retirement amount to which his employer has made contributions. And this is what the US Department of Labor says:
“A cash balance plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance.”
The above explanation looks harmless enough, but in light of what’s been happening lately, we should judge a book beyond its cover. The Labor Department explains it further.
“In a typical cash balance plan, a participant’s account is credited each year with a pay credit…and an interest credit…Increases and decreases in the value of the plan’s investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer.”
“Borne solely by the employer” it says. It presupposes a commitment on the employer’s part to safeguard the cash balance plan, but what if it goes to court and says, we either get released from our commitment or we declare bankruptcy? Isn’t that what Delta did?
The next time you hear Who Wants To Be a Millionaire, don’t think of Kelly, et al. Think “pension” and then call your IRA Advisor.

Retirement, ira, pension plans | 0 Comment (s) »

Wishing for the Good Ole’ Days

22. September 2006 taxdefer

Remember Grace Kelly, Frank Sinatra and Bing Crosby singing Who Wants to Be a Millionaire in the film High Society? In those days, cash was king and cash simply meant cash – money – dough – bucks. So the words “cash balance” had an equally simple meaning. It meant how much money one has – either in the home vault or in the bank. It was black or white. You either had money or you didn’t. You were either a millionaire or you weren’t.

Today, the words “cash balance” are a tad more complicated, taking on a larger than life meaning. Why, you ask? Because these very same words are being used to define pensions – yours and mine. And for some reason we don’t think it means cash on hand. It’s cash you think you’re entitled to – but watch out, it really is more like what our employer thinks we’re entitled to.

That the Senate has introduced pension reform means that there’s perhaps a bigger problem in the horizon.

In our next blog, we’ll discuss why there’s reason to be concerned about the concept of cash balance – and why the good ole days are forever gone. No more high society, folks; the no-pension society will be taking over.

Retirement | 0 Comment (s) »

Not a Prophecy of Doom, But a Call to Action

17. September 2006 taxdefer

For some 44 million Americans, the headlines are grim.  Early this year, bigwigs like IBM, Sprint and Alcoa announced they were freezing their defined pension plans.  And only recently, a federal judge approved Delta Airlines’ request to terminate its pilots’ pension plan. 

Richard Macy, CEO of Pension Benefit Guaranty Corporation (PBGC) – the government’s pension watchdog – will have a lot of questions to answer from disgruntled would-be pensioners.  The phenomenon of the disappearing pension act has reached alarming proportions forcing the Senate to introduce pension reform legislation.  Edward Kennedy said that the government is there to help Americans who fear that their pensions will disappear into thin air. 

Oh dear, if you’re still relying on the government to bail you out every time there’s a problem, you may have your antennas tuned into the wrong channels.  The idea here is that the disappearing pension act is a wake up call to review your saving strategies and start an ambitious personal retirement program – emphasis on the personal.  If you want more proof, the PBGC said that in the last five years some $8 billion in pension savings have been wiped out.  What’s scary is the PBGC was reportedly reeling from a $23 billion deficit in 2004 when it took over defaulted plans. 

That’s THE compelling reason why timely PERSONAL action – yours - is most crucial.  Don’t wait for your company to be making the next announcement. 

Take personal action steps now to grow your retirement (tax deferred and tax free preferrably) and diligently keep improving your financial education.  A great academic education is wonderful, but I stress to keep growing in your financial education.  My dad used to tell me “once you get an education no one can take it from you”.  However, getting an education is not an event or an endpoint.  It is impossible to know everything about investing.  If information doubles every 6 - 12 months, then my call to action is to make a lifetime of improving your financial education and I will see you on the high ground!

Retirement, ira, pension plans | 0 Comment (s) »