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Self-Directed
Real Estate Investing By Darren Hoefgen My disclaimer - before we start, please note, that I am NOT a financial planner, an attorney, a CPA, or have any kind of licenses or certifications as it relates to financial planning nor do I hold any SEC licenses or certifications. What I share here are things I’ve learned from my experiences, and from those of close colleagues and friends over the years I’ve been involved in Real Estate Investing. Please always consult the proper professional before you make a mistake. In other words, don’t do something stupid, get caught, and blame me. I’ve talked with hundreds and hundreds of people about using a self-directed retirement account, and there are usually a few immediate questions show up pretty frequently - so let’s just nip those in the bud immediately. Is it legal? Yes Why isn’t everyone doing it?
Most don’t know, and those that do ARE doing it.
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Why haven’t I heard about this if it’s such a great opportunity? I’ll answer that with a question - Where did your previous investing and retirement planning knowledge come from? Traditional investment bankers, financial advisors, and money and wealth managers usually get paid based on either trades and/or assets managed. They would lose income and thus have no incentive to tell you about self-directing if you were to move money FROM a fully managed provider to a self-direct provider and manage it yourself. (I’m not currently aware of any full-service custodian who will also do self-directed accounts.) Ok - so now that that’s out of the way - and we’re on the same page - let’s cover a few of the basics. A self-directed retirement account IS STILL A RETIREMENT ACCOUNT - so most of the same IRS “rules” apply. What do I mean? Well, let’s look at what retirement accounts were set up for - primarily deferring taxes, providing tax-free growth, and/or providing for - get this - RETIREMENT. Now you can feel free to argue
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how well they achieve that last goal, but that’s the construct we have to work within - so you must keep in mind, whether it’s a Self-directed or not, you likely can’t touch the money in there to maintain your standard of living until you’re at the IRS defined “retirement age.” If you do, you’re going to get hit with penalties and income taxes - which will kill your growth and the whole point.
Ok, I’ve got it - so why risk it, what’s the benefit of a self-directed account?
How do I keep it straight - what will and won’t be a problem? There are a couple of GUIDELINES I follow guidelines because there are all kinds of grey area here and I’m sure there are strategies to tippy-toe to the edge of what the IRS allows. Generally, I don’t recommend you push those lines too much.
You can buy Real Estate. You could hold a rental property and collect passive income. You can wholesale a property in your self-directed account. Let’s look at that. Let’s say you set up a self-directed Roth IRA. A ROTH IRA receives AFTER-TAX dollars and all the growth that those dollars create is TAX-FREE. Think about that a second.
Guidelines to avoid self-directed IRS issues First the bad news: You can’t benefit TODAY from your retirement money. This is the same basic guideline as your corporate America 401(k) plan. Your plan provider won’t allow you to pull money out of your account (assuming you’re not at withdrawal age) to pay for groceries, or buy a new car or a boat, or make a house payment - and you can’t do any of those things with a self-directed account either. But be careful - the IRS has it’s own definition of “you.”
What the IRS Means By “YOU” When I say “YOU” can’t benefit today - it’s the IRS version of “YOU”. Think of your family tree - anything linear on the family tree is not allowed. Grandparents, parents, kids - disallowed - if your parents benefit from your retirement plan today, you’re effectively benefitting, etc. HOWEVER - the limbs on the family tree are ok - siblings are fair game. What About My Business? Nope - sorry. Your business, or any business you have ownership in - would result in a benefit to YOU - so the IRS says that’s a no go. Now, some of you may be trying to churn ideas and figure out how to work around this. I’d encourage you to not - it’s not worth it. If you’re going to try to cheat the system, just take a distribution, pay the taxes and fees and move on. I’m told that if you play this game and get away with it for a while - the IRS could levy the 10% early withdrawal fees, the income taxes - but also all the growth that you created since would NOT be taxdeferred, thus causing you HUGE tax liability and likely penalties.
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The power of the self-directed retirement accounts is that you can pretty easily beat “traditional” investments. Your stock market investments are likely barely breaking double digits long term after expenses. With a selfdirected you can invest in plenty of other assets other than just stocks, bonds, and mutual funds.
Ok - so you open a SELF-DIRECTED ROTH IRA and fund it with $500 from your personal checking account that’s money you’ve already paid income taxes on. Now you find a property and you put that property under contract - and your contract you negotiated calls for a $500 earnest money deposit - and you use your new Self-directed ROTH IRA to cover the earnest money deposit. Then you call up a local investor and you wholesale that property to them for a $10,000 wholesale fee. Guess what happens to that $10,000? It goes back to your self-directed Roth IRA - and because it’s a ROTH IRA when you withdraw that money in the future, you won’t be taxed on it! Now think about doing that a couple times of year. Would putting an extra $20,000 tax free a year into your retirement be helpful? Now do you see the power of this tool. And this is just one example… What if you decided to lend out of it - and you lent on secured assets and had a double-digit return - wouldn’t that be a better investment than the stock market - no security, and no consistent double digit returns? Just because it’s not considered “mainstream” doesn’t mean it’s not a good idea to investigate and add it to your investing strategy. What do you think - worth exploring in more detail?
Then join me Tuesday, October 8th at the MAREI meeting where I will be sharing how I utilize my own Self Directed accounts as well as those of others in my own real estate investments.
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STRUCTURE of a Sub2 Deal by William Tingle Today’s topic is deal structure. I have had numerous questions about it so in the interest of giving you guys the information you need to get some deeds we are covering it today. So…how do you structure a sub2 deal? First, let me say that when you talk about deal structure you can be talking about a lot of different things. Deal structure can mean a step by step of how you put the deal together…this means from the time you pick up the phone when the seller calls you to what contracts are best to use, how to handle insurance, taxes, how best to deal with the bank to get information, do you need to use a title company or close it yourself, right down to handling negotiations with the seller. Deal structure can also mean evaluating the numbers and the actual property itself. Things like location, condition, number of bedrooms and baths…to make a decision on how, and even IF, the property can be utilized in your overall investment strategy. For example, if the interest rate is too high to make sense for cash flow but the property has good equity, maybe it should be a get the deed then retail flip deal. If there is not a tremendous amount of equity but the property condition is good and the interest rate on the loan is really good and it is in a great neighborhood where families want to live, maybe a get the deed, sell it with seller financing is in or-
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der. Or you could even rent it out or lease option it if that is your thing. For our purposes of talking deal structure today, we are going to be talking about the latter and how to figure your best exit strategy based on the numbers and the property. I am also going to be sharing with you the thought process I use in determining if I am even going to take the deal at all…or not. No, I don’t take every deed that is offered to me and you shouldn’t either. Don’t make someone else’s problem your problem. If you have been following me for a while, you already know I am not interested in a rental, a rehab, or a lease option (buying or selling) at all. I am only interested in deals that will allow me to add another home run down payment, grand slam cash flow, monster backend profit seller financed property to my portfolio. Period. This is a change I made in my business about 9 years ago and it is all I do today. Several years ago I made a decision to simplify my business and that is exactly what I did. When you simplify it makes your life much less complicated and I have found it to be much more profitable. Today my business conforms to my lifestyle and not the other way around. So…on to deal structure. First, let’s briefly touch on the basics of
subject to… When you buy a property subject to the existing loan, what you’re doing is asking the seller who has a property with a mortgage on that property to transfer the title or deed the property to you. They sign over the deed…you take over the property and you start making payments on their existing loan. You’re not going to qualify for that loan, you’re going to take over the loan payments, taxes and insurance for the property. Now, if you are like me, you’re plan will most likely be to go out and find someone to buy that property from you with seller financing. They will give you a down payment and make payments to you every month. At some point, we like the 3 year plan, they will refinance at which time the seller’s original loan will be paid off and you will receive your backend profit on the deal so in this scenario you would make money up front in the form of a down payment, monthly payments as cash flow and on the backend as a payoff. Of course, you could also rent it out, lease option it, sell it for retail or even live in it yourself. You own it so you can do whatever you want. So let’s say you find a seller who is agreeable with a subject to sale (maybe he has to move for a job transfer or is getting a divorce) and he has a property that has got a $150,000 mortgage on it with an Grow Your Business
interest rate of 4% and let’s say it’s worth 170k and we can sell it for 179k. Those are fairly common scenarios where the seller’s equity would barely cover a realtors fee to sell and selling to you will give them a much faster, more certain outcome. These deals are found every day. This house is in good shape and needs no repairs.
agree to do them, I always found when I got a lease option property back, without fail there was deferred maintenance to deal with. Expect that to eat into your 5k up front and $350 a month you collected not to mention paying for any repairs that may happen while your tenant/optionee occupies the property. Still, this option is better than a straight rental in my opinion.
Based on the interest rate on the sellers loan, 4%…the equity spread I will have between my buy and sell price, 29k…the monthly cash flow I can get from this deal, $450 per month…and the condition of the house, excellent…my first choice is, of course, to seller finance.
Selling retail would not be a good option with this one. Even though it is in good shape needing no repairs and has a great interest rate, there simply is not enough equity to sell retail.
The higher equity and great location let me take the deed on this one and do a quick retail flip. I put a sign in the yard and within 1 week had a contract with a newly married couple for 105k. They were pre-approved for a home loan and because the repairs needed were all cosmetic the closing sailed through.
Even if you were able to sell it FSBO, if you had to hold it for a few months before you sold and the seller needed any closing cost assistance, the cost to sell could be substantial, leaving you with as little as a 5k or even less in profit.
They got a 140k house for 105k and doing the repairs themselves for only 5k or so meant they got 30k in instant equity. I got a check for over 15k in just a couple of weeks and my seller sold his house. Win, win, win.
That is just too much financial risk for such a small reward in my opinion.
Remember, you can do anything with a sub2 deal that you can do with any other property. Subject to is simply a form of financing. A very, very good form of financing. You must look at the property and the numbers to learn how to effectively and profitably structure the deal.
But let’s look at all of our options. As covered earlier, you can sell this deal with seller financing. You find a buyer and sell it for 179k and your buyer gives you 15k as a downpayment. Your monthly payment on the seller’s loan is $950 and your buyer’s payment to you on the loan you make to him is $1400 so you are making $450 a month in cash flow. The interest rate on your seller’s loan is 4% and the rate you gave your buyer is 7%. When your buyer refinances in a few years, you will receive a payoff of around 20k giving you a total profit on this deal of over 50k. As you can see, a 50k profit on a relatively low equity deal is why I absolutely love buying subject to and selling with seller financing but as I said, you have other options with this property. You could rent it out. The great condition of the house and no back payments to make up mean that if the rents in this area were say $1200 a month, you could get in with nothing out of pocket and immediately start collecting what appears to be a $250 a month positive cash flow. Remember though, as a landlord, you are responsible for repairs and one big repair in a year such as AC or water heater replacement and that 3k in positive cash flow for the year is gone. You could also lease option this deal. Someone should be able to give you 5k as option consideration and you should be able to collect slightly higher than market rent so let’s say $1300 a month from your buyer. Now you have 5k in your pocket up front and have $350 a month in positive cash flow coming in. Contrary what some people will tell you, passing off repairs onto a tenant/optionee isn’t always legal and while they may
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Now, if this property had a horrible interest rate but considerable equity and even needed some repairs, it might be a candidate for a retail flip. Let me give you an actual example of one of my deals from several years ago… * I was driving around in a neighborhood one Saturday morning and had gotten a little lost so I was turning around in the driveway of a home in one of the nicer subdivisions in town when a gentleman yelled at me from the garage. Just when I thought he was going to fuss me out for using his driveway to turn around he said, “Hey…you buy houses?” He had seen the magnetics on my truck and my obvious response to his question was…uhhh, yeah. He told me he needed to sell his house so I took a look. The carpets were stained and it needed interior paint but otherwise was in pretty good shape. I figured the houses in that area were worth around 140k in top shape but this one would need 10k or so to be in that condition. He said he knew the house needed work and just wanted out of it. His wife had gotten a job transfer several months ago and left him to sell the house. He had spoken to a couple of realtors but they all wanted him to replace the carpet and paint the inside and he just didn’t have the money to do it. He only owed 88k to Bank of America but his interest rate was 13% and his payment was too high to use as a rental or make any money either on the front end with seller financing due to
the repairs needed or monthly due to the high payment. The house did have equity but the only payday with this one would be the backend payoff and I just ain’t into delayed gratification when it comes to getting paid.
Buying a property by getting the deed is an incredible tool to acquire real estate. When you buy subject to, you own the house but you are not on the loan. You do not have to qualify for a loan, you don’t have to have a down payment, you don’t have to have good credit but you still have total control of the property with actual ownership… …and the great thing about these deals is it is so incredibly simple to pick up several of them a year. I hope this has helped you better understand subject to and deal structure as it relates to planning your exit by evaluating the property and the numbers. Would you like to learn how to buy houses subject to?Would you like to learn how to buy houses subject to and save the day for your seller at the same time? Join me in November at MAREI. William Tingle www.Sub2Deals.com
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Your Creative Investing Strategy Session with William Tingle. Sub2Deals.com are real estate transactions that require little cash or credit and are known as buying “subject to” existing financing. Whether you are just starting out on the path of Real Estate investing or you are a seasoned investor, you will learn new ways to acquire property.
WHY REAL ESTATE •
CASH FLOW l Cash You Can Spend NOW
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APPRECIATION l Real Estate Always Increases in Value Over Time
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TAX BENEFITS l Depreciation, Interest Other Tax Incentives
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LEVERAGE l Real Estate Allows You to Use Other People’s Money for Maximum ROI
SUB2 REAL ESTATE INVESTOR
WILLIAM TINGLE
Your instructor for your Sub2deals—Creative Real Estate Financing Workshop
Saturday, November 16th The Holiday Inn & Suites 8787 Reeder Road, Overland Park, KS 66214 9 am to 4pm l Lunch Included Be sure to register at www.MAREI.org. Early bird pricing through October 31st, just $39 for MAREI Members plus $10 for family or business partner.
WORKSHOP HIGHLIGHTS •
What Is Subject To & Why It’s Legal
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How to Market for the Best Deals
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Why, Not to Worry about “Due on Sale Clauses”
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How to Create Immediate Cash Flow With NO Landlord Headaches.
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How to Invest Sub2 Virtually
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How to Retire Rich In just one day, William Tingle can show you a completely new way to acquire property and build wealth.
Starting with the ever famous Carleton Sheets Training Course, William soon left his job at the time. To date he has taken the deed to over 500 properties, and despite “retiring’ to Belize over 10 years ago, he still acquires 20 –25 properties a year.
ATTEND THE NOVEMBER MEETING FOR A PREVIEW Page 12
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With MAREI Business Members Save time and money by starting with service providers who already know your business. Who can solve problems as they arise to help you get the deal completed on time and for maximum profit. Accountant Coleman Accounting Service Bob Coleman www.ColemanAcctg.com 913-787-0308
Attorney Anderson & Associates Julie Anderson www.MOKSLaw.com 816-931-2207 Attorney Rick Davis Levy Craig www.LevyCraig.com/Rick-Davis 816-460-1819
Auction Company Auction.com Rachel Bailey www.Auction.com 816-797-6875 Monthly Auction 101 Workshop
Building Supplier Coronet Window Company Brent Huckabey www.CornonetWindow.com 816-472-1788
DeMayo Enterprises Wholesale Cabinets Mark Yanda www.DeMayoEnterprises.net 913-980-4260
Hearth Masters Fireplace / Masonry Gene Padgitt www.ChimKC.com 816-461-3665
Earthwise of KC James White www.EarthwiseKC.com 816-231-7011
Genesis Home Restorations Mold Remediation Terry Amerine GenesisHomeRestorations.com 913-270-0812
Joe’s Carpet / Weber Flooring Joe Weber www.WeberFlooring.com 913-469-5430 Rugs, Rolls and Remnants Jerry Ratway www.RugsRollsRemants.com 913-593-0568
NuLook Custom Finishes Cabinet Refinishing Carol Baldwin www.NuLookFinishes.net 913-385-2574
Contractor
Olson Foundation Repair Luke Olson & Peggy Stroud www.OlsonFoundationRepair.com 913-592-3300
Above & Beyond Building Services James Carollo www.AandBKC.com 816-674-6132
Under Pressure Property Services Rehab, Maintenance, & Staging Dallas Kidd www.MyUnderPressure.com 913-274-9555
FlipperForce.com Rehab Analysis & Management David Robertson (816) 559-1782
Financial Planning (Continued on page 14)
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TR Bass Financial Terry Bass 816-251-4524
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Insurance Agema Insurance Fred Dickinson www.AgemaIns.com 913-543-8116 Arcana Insurance Insurance for Investors NREIA.ArcanaInsurance HUB.com 877.744.3660
Bob Woelfel InvestorsChoiceFunding.com 317-205-4797 Lima One Capital Tracey Vinzant LimaOneCapital.com 913-671-0040 Merchants Mortgage Mushy Money Susan Aubin www.MerchantsMtg.com 303-514-0815 North Oak Investments Hard Money Tommy Nigro www.NorthOakInvestment.com 816-249-1001 REI Investor Funding Charlie Fitzgerald www.REIInvestorFunds.com 913-843-8650
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Deal Makers Monthly Meeting Property Investors Inc. Todd Franzen & Chris Hellums www.MyPropertyInvestors.com 1-800-614-7705
Property Manager Home Rental Services Paul Branton www.Home4Rent.com 913-627-9543
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Michael & Michele Belman www.MMPropertyPros.com 816-490-6745
MRE Property Management Turn Key & Management Nick McKinnis www.MREKC.com 816-388-9588
PMI Destination Properties Ryan Kernicky www.PMIDestination.com 913-583-1515
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Collins Cook Realty Christina Erickson-Hoffman CollinsCook.com 816-865-5932
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