How To Use Your IRA To Buy Real Estate


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How To Use Your IRA To Buy Real Estate

  1. 1. How To Use Your IRA To Buy Real EstateIn life there are tons of things we all learn by accident, which may be very beneficial to us. Sometimesunderstanding these kinds of processes can take some time. Sometimes after appropriateexplanation...BLAM, you get it. That is exactly what happened to me. After i first heard about thesubject , I will discuss on this E-book, it was complicated , however, I realized that it could reapmassive rewards in the future. That took a while will be able to understand the process. I remembertrying to tell a buddy who owned an apartment building about _________ and also what it could do forhim. I remember getting it all baffled (like telling an individual a good joke, however while you aretrying to the good joke, in mid sentence it becomes clear that you dont remember all of it and it is notdeveloping right, so you just say forget it as you are screwing the joke up). Fortunately , by mistake Icame across the company Pensco Trust that has educated me on this great opportunityof____________. I am considered among their "Preferred professionals." My learning curve is yourbenefit. Adequate with my teasing games, the purpose of this E-book, is to educate you on SelfDirected IRAs. So buckle up !This publication is built to provide basic details in regard to Self directed IRAs. It is presented with theunderstanding that thats not me engaged in making accounting or legal counsel. If you need legaladvice services of a proficient expert should be contacted. I can not in any way guarantee that thismaterial will be used properly for the purposes meant and I assume absolutely no responsibility for itsappropriate and proper use.We all know which Social Security (ss ) is struggling and also the money there will eventuallydisappear. Prior to 1935 there was no individual SS. All that been around were people saving theirmoney in their bank/under the mattress. In 1935 SS was made. Remember that this was the sametime frame period of the Great depression. Keep in mind the life span back then was like 62 yearsold. NOw it is 76. Baby Boomers make up a huge portion of the population. Baby Boomers areretirement everyday. You want several hard facts? well according to Research corporation Study: TheNew landscaping of IRA roll-over © 2005 BISYS Retirement Services.oThe first of the baby boomers reached age fifty nine.5 in this summer 2005o4 million much more will reach age group 59.5 every yearo24 million people will reach age group 65 by 2010o55% plan on to work right after "retirement"Now on the flip lets say there was no problem with ss. Have you ever talked in order to someone whogets ss checks? They dont get yourself a lot of money. It is sad sometimes. I am not wanting tooffend anyone, however the majority of the seniors you see at Wal-Mart greeting you and alsomarking your bill didnt have a "fortune " to rely on when they "retired". The topic ill discuss willprevent which from ever happening and I.1974 our elected representatives created IRA (personal Retirement Account) in order to supplementSocial safety. We know these are programs to help shelter funds away for tax benefits. Typicallypeople go after the traditional assets. We always learn about stocks, bonds and also CDs. Yes
  2. 2. almost all investments have risks , but the thing about these investments is that you could not affectthe results of the business/your return. You are a spectator, viewing the game. Also, you cant useleverage (among using leveraged is going to be discussed later). Also , with stocks if any little blip inmarket happens , like oil, battle , scandal, etc. Your value could drop. Real estate does go up anddown but generally you dont lose all of your profit worst case scenarios. REal-estate appreciation haskept pace or exceeded inflation. It is a cycle. When it goes down , the value does not drop instantly(like Enron).Self Directed IRA (SDI) an overview. NOw I am not bashing stocks and shares , I have them, shouldyou talk to any economic planner, they will let you know to always be diversified inside yourinvestments. This is what SDI does for you. Ideally you should have SDI, stocks and shares , bondsetc.SDI has been a well kept secret. Why? i think it is because of ignorance, and that i also the folks uponWall Street dont benefit. A broker with an investment company will not tell a person regarding it ,because they cant earn money off of the transaction (not to mention having them understand how itfunctions ). The last reason happens because there are "professionals" who dont have a clearunderstanding upon its use.To get a SDI, youd either have to go via an Administrator, or a custodian.What is an administrator ? Banks, brokerage firms (like Charles Schwab) and insured credit ratingunions.What is a Custodian?There are incredibly few self-directed IRA/401k custodians in the United States. To be a custodianregarding self-directed products, the custodian is known as a "unaggressive custodian." This simplymeans that they are obligated for legal reasons to provide only custodial and administrative servicesfor the qualified plan. They can provide absolutely no investment advice. This tremendously reducesthe fees connected with traditional investments as you , the investor, help make all of the investmentselections. They are also FDIC covered by insurance.What is the part of the custodianoHolds your IRA assetsoPerforms almost all IRA transactionsoKeeps almost all IRA recordsoProvides almost all IRS required reportsoKeeps IRA plan in complianceoProvides access on the internet accessThere are only 3 things your SDI cant invest in and so they areoCollectibles/antiquesoLife insuranceoStock of the sub-chapter "S" corporation (these are companies that are traded publicly on the stockmarket)As long as the transaction is for investment purposes and you have not created a "banned
  3. 3. transaction" (will go over later) the list of investments are countless.The beginning of the long list of real estate you should buy with your SDIoForeclosures, options , Pre-construction, raw terrain , apartments, offices, remove malls, mobileproperties , public storage, any kind of investment propertyoTrust deeds/mortgage notesoPrivately held C-Corp stock, LLC regular membership.The rules on prohibited transactionsoCant buy from or sell to a disqualified/prohibited personoCant make personal utilization of propertyoCant use SDI as collateral for personal loanPersonal use prohibitionsYou cant personally make use of a vacation home. Even though you rent it out for 354 days andspend one day in it, this really is illegal. You cant execute maintenance on the property. You can hirea maintenance crew while using money coming out of your SDI, but you cannot physically work onthe property. You also cant hunt on raw terrain , dock boat with a SDI owned boat slip. There wassomeone , who worked with Pensco, that bought a certain area of a water fishing spot in Alaska. Theperson, could hardly fish there, therefore she leased out the area to other anglers and received profit.More on disqualified personsYou cant obtain a person providing services to the investment. It has to be a clean standing. It cantbe enterprise between employer and also employee. If you have your SDI in an LLC and you want tobuy property , you will not be able to should you own more than 50% of the company. You cantbuy/sell to a member of your family including spouse, ancestor, lineal descendant and also anyspouse of the lineal descendant. That means , not you mom and dad , children, your boy in law etc.But, you can buy/sell to a sibling. Presently there cant be a sale/exchange/leasing of any property orproviding a loan between a plan plus a disqualified person. Lastly , you cant buy some thing youalready own (SDI cant be useful for funds to pay off your mortgage. There should be no identifieddirect or roundabout personal benefit to the account owner).Basic rulesoCant involve the account holder, his/her spouse a lineal ascendant/descendant of family nor thespouses of your children and also you cant use SDI funds to pay off an individual mortgageoCant make individual use of property (should be for investment functions only)oCant personally guarantee the loan for the SDI nor make use of the SDI as collateral for a personalloanoCant work for or take income from a good SDI investmentoCant have got your spouse, nor your family members (your siblings are ok) own the property prior toits purchase by your planoCant have your business hire or be located in or even on any part from the property while it is inyour plan. You might receive any property like a distribution from your plan as a retirement benefit
  4. 4. What transactions are banned ?The following are defined as prohibited purchases when they involve the account holder:oBorrowing money from the SDIoSelling property to the SDIoReceiving unreasonable compensation regarding managing assets for that SDIoUsing the SDI as security for a loanoBuying property for individual use with the SDIoCollectibles/antiquesoLife insuranceoStock of a sub-chapter "azines " corporation50% ruleIf a disqualified person(azines ) owns 50% or maybe more collectively of an entity , then the SDIcannot engage in a transaction with the entity since the company is considered a disqualified person.Using IRA as collateralYou cant use your SDI as collateral for a loan. If you will get a loan it must be an unsecured loan. Ifyou go into default in paying the loan , the lender cant go get the money from your IRA, nor can theygo after individual assets.Any kind of prohibitions have fines , if you violate all of them. SDI is no various. Here are theconsequences if you do not comply:oLoss of IRA status caused by prohibited transactionoLoss of tax exempt statusoIncome tax on account valueoPenalties and interestoPossible audit to determine degree of prohibited transactionsIf you really want more information on the rules check out:oIRS code 4975oUDFI/UBTI: internal revenue service code 598oDepartment of training (DOL) 2004-8Tax court docket casesoSwanson 1997oRollins 2004oRousey v. Jacoway 2005Ways to invest by using your SDIoProperty purchase almost all cashoProperty purchase employing a loan (NOTE it has not always been the truth where you can get aloan from a bank for the SDI. These previous couple of years a few establishments are offering loansin order to SDI. I have people contacts, contact me and that i will explore selections for you)oAs a part of an LLC or even "C" Corp.oAs a lender on the trust deed (mortgage note)
  5. 5. oAs somebody in a joint ventureoAs a Tenants in accordance T.I.d. Member (if the terms I use are unfamiliar to you, look them up onthe internet )oMake a private loan to an entity or even person (hard money loans)To give you ideas of what investors have purchased through Pensco:oLargest US massage schooloCypress tree farm in Costa RicaoFish farm in Salinas, CAoInterests in movies, playsoCondo in LithuaniaoHouse on the private lake in ColoradooThoroughbred race horseoNudist resort in virgin IslandsoOver 35 you.S. BanksoNapa valley B & BoBiotech companyPenscos top trader success story will amaze you on the possibility your SDI may have. In March of1999, four guys opened up SDI accounts. They each invested independently and through their IRAsin a organization they were starting. These people brought in other not related investors. Thatorganization is bought out a couple of times. The company goes public and sells out in June 2002.Well how much do they make? CEO produced $34 million (a dozen ,000% return). Chief scientistmade $22 million. CFO help make $17 million. Marketing VP makes $8 million (4,000 return) What ismuch better than that? They all put in $2,000 through their IRAs besides the CEO who invested$1,800. Pensco explained the characteristics of the 1 year Roth IRA and they almost all chose toinvest using a Roth IRA. If the CEO gets an average return of 12% until he is eligible to withdraw tax-free with 59.5 he can have $1 million , $100 million tax-free ! Yeah that is me the money !Lets compareReal Estate Investing : with SDIoTax deferred growth on revenue and cap gainsoNo 1031 requirement!oNo annual tax reportingTaxable investments non SDIoTax deferred cap benefits (if 1031)oTax on net earningsoAnnual reporting requiredHow that worksYou have an account with Pensco (it is possible to roll over your current IRA account to them) you tellthem what you want to invest in , they do all of the paper work , make out the check and now it isinside your trust account. Almost all money that is required for expenses and all income go into/taken
  6. 6. out from the trust account. The title of the property in your IRA is going to be held with Pensco Trustas follows: "Pensco Trust Custodian, FBO (client name) IRA, (Acct #). Almost all documents will beexamined and initiated from the you (the IRA owner) and authorized by Pensco trust.Introducing SDI upon steroids in the neck...Solo 401(nited kingdom )A solo (nited kingdom ) is a combined wage deferral and profit sharing retirement arrange for soleproprietors, small enterprises with no employees (other than part timers working less than 1,000hours per year or even their spouses).Roth contributions can improve tax free $15,000 to %20,500 per year or 30k to 41k per marriedcouple (for 2007 ). Unlike a Roth IRA, there are no revenue limitations placed on the contributor. Youcould be a zillionaire and it would not matter! Currently a single person making over 110k cantcontribute to their Roth married couple is actually 160k.Who can usually benefit from Solo (401)koReal estate brokersoConsultantsoContractorsoLawyersoElectriciansoAny single practitioneroEven if you function full time for an boss and have a business on the side where you are a singleproprietor you can establish a solo KThe difference is...oYou can borrow up to 50k (or up to 50% of balance, if less) from your solo 401 koYou can invest in life insuranceoYou can invest in "azines " corporationsoYou can avoid UDFI and money gains UBIT (UDFI and UBIT is going to be discussed later) whenusing leverage to buy genuine estateoA portion of your savings can increase tax free for lifeoYou can put away more money faster with larger contributionsoNo income cover on contributing to the Roth componentoAbove fifty year old employee has the option to put up in order to $20,500 annually away, to growtax freeWhy appealingoAllows the only real proprietor funds to grow tax freeoWhile Roth IRAs allow similar contributions they are limited by $4,000 in 2007 ($5,000 if over 50),and also to those earning yearly gross income of a smaller amount that $110,000 for that yearoYou can increase tax free development opportunities by also contributing to a Roth IRA($4,000/$5,000) in addition to the solo (k) (15,500/$25,000), if you are eligible (check with Penscoregarding details)oA husband and wife in business together can put up to $51,000 ($25,500 each ) per year of after tax
  7. 7. funds into retirement accounts that will grow tax-free for their lifetimes and the ones of their heirs(including $5,000 Roth IRA contributions) and also another $59,000 ($29,500) every that will grow taxdeferred. That is a total of $110,000 as a couple of which usually $51,000 will certainly grow tax free(thinks each is over fifty and earns under $100,000oAnd theres no income limit upon contributionsoMay roll before existing plans and also IRAs into itTypes of purchases of SDIAll cashYour SDI buys one property all cash. Absolutely no debt, LLC, and also partners. When you do thatyour SDI needs to have enough funds to cover purchase price, all high closing costs , custodial feesand ongoing property expenses. Should you run out, you can loan your personal money to your SDI(with interest and principal).Multiple SDI - almost all cash T.i.C.SDI might belong to anyone : even prohibited people. All SDI go on contract, and on title , as "tenantsin accordance." Ownership percentage should be identified and all costs and proceeds proratedcorrectly according to these kinds of percentages.Multiple events - IRAs & People all funds T.I.d.Same as several IRAs, as long as theres no loan (as an almost all cash deal) it doesnt matter whothe SDI belongs to, or who the people are. Almost all names must be upon contract and title forunique proportions.All cashBuy/sell, with/without, friends/family is by far the easiest and most common transaction. When thishappens all revenue comes back to SDI, so having a1031 exchange is not necessary to defer taxes.The money in your trust account is also used to pay any expenses sustained. Real estate investmentrelated expenses are paid out from the SDI.Getting a loan to buyIn yesteryear there were NO financial institutions lending to SDI. Only until lately a few banks withinthe nation offer this particular service. The loan that is offered is a non-recourse loan. This is greatnews, due to the fact now investors could use leverage.When you get a loan for your SDI you:oCant ensure the loan personally.oCant co-invest with your IRA.oPay the tax on any revenue or capital benefits derived from leverage.oIncrease the returns and also growth of your SDI two to three times.What is a "non alternative loan?"oYou usually are not personally liable for pay back of the loan. In case of a default/foreclosure thelending company can only recover the property and your equity.oTypically requires 30-35% down payment. If there is low cash flow or the condition from the propertyis bad chances are they may require a larger down payment.
  8. 8. Non recourse loan processoAfter setting up the SDI, it will typically close in 30 days.oCash out refinance: money is distributed back into the SDI.THERE isnt any PRE PAYMENT for any NON-RECOURSE LOAN!Property EligibilityoSingle family residentialoCondos (100% complete, 33% or more sold, and also HOA turned over simply by developer)oDuplexeso4-plexesoMulti-family (five or more)oCommercial property : including retail, warehouses , and office buildingsIneligible properties include:oResidential with large acreageoRaw landoFarmsoManufactured homesoHotels, condo-hotelsoCo-ops, timesharesoSenior or assisted living facilitiesoNon-franchise restaurantsoEntertainment propertiesoMini-storeageRequirements for financial debt financing must be confirmed for purchase along with supplies (10-20% loan amount).Documentation required for loan acceptance :1.Completed loan application2.Most latest asset statement making sure IRA assets for purchase and reserves.3.Purchase sales contract4.Acceptable real estate appraisal for the property being financed. The appraisal must come fromlender.5.Copy of drivers license6.Property insurance should browse the IRA/LLC as the insuredIncome requirements for homesoThe financed property need to generate sufficient net operating income in order to exceed debtservice payments by:10%single family (less then 10% or negative cash flow is suitable with sufficientsupplies on SFR). REgarding 2-4 unit properties it is 10-15%oIRA property must be verified for purchase along with reservesHow the closing process operates :1.Title organization prepares closing documents.
  9. 9. 2.SDI operator initials for acceptance.3.Originals provided for Pensco for execution by the tile organization or broker.4.Pensco signs, notarizes and returns package. They overnight and also wire balance of funds forfinal.5.Title organization forwards recorded offer deed to Pensco.6.Through your trust, you now own the property.Another way to invest using IRAThis is a true tale from a Pensco client. One investor wanted to buy a property in san francisco. Theybuyer didnt have all of the funds for a down payment. Therefore , he approached uncle and askedabout him or her if he had been interested in earning a specific percentage return upon his IRA. He orshe agreed. So, the buyer took his portion and combined that along with his friends SDI, to purchasethe property. His / her friends SDI released him a second on the property. This developed a "win"situation for everyone. The buyer gets the property. His friend gets a fantastic return on his / her IRA(that is secured by real estate) the sales agent wins since the deal closed. Who owns the property ishappy, since they sold the property. The bank , is happy because they are making a return by givinga loan. All of this is possible since the SDI was used.There was another person, who used his SDI to buy pre design property. In vegas , there was adeveloper who was forming a residential area. The investor greeted the developer and also solved aproblem for the kids. Apparently there were several fall outs together with buyers. The trader , said(paraphrasing) "ill buy any properties that fall out of escrow for a discount."If you would like to read upon an investor who utilized their SDI, research : Time June fourteenth2005. Investor utilized $195,000 to invest in property on Marco Island FL. Sold resulted in a $500,000profit heading to IRARental property purchasesQuestion:I wish to purchase a rental property regarding $100,000 can i use:oA. $30,000 of my IRA fundsoB. $65,000 of my own fundsoC. $5,000 loan from my friend to do this?oD. Every one of the aboveoAnswer: DIn the begging of this E-book, I expressed which using SDI may be kept a solution. One of thereasons is because of misinformation from "professionals" is actually from CPAs. Several CPAs saynot to use an IRA to invest in real estate because:oYou will lose tax benefits e.g. Depreciation (not quite)oUsing SDI "destroys" tax deferred compound growth in IRA (wrong)oYou need to pay ordinary income tax versus capital gains tax at the end of the collection (true justlike any additional IRA investment)Some CPA view items do not take into consideration the next :
  10. 10. oThey do not address need for diversification within the retirement portfolio in order to hedge againstadditional assetsoBroadly implies that even though you know that you can get far better results investing in real-estatethrough your SDI you shouldnt do itoIt is IRRELEVANT if real-estate out performs additional IRA investmentsoIGNORES the facts that 44% of net worth in US is in genuine estateoDoes not notice that after tax deliver is the primary aim of the investorUnrelated enterprise Taxable Income (UBTI)If your SDI produces income coming from activity not "considerably related" to the exempt statusUBTI is needed. The purpose of UBTI ended up being to alleviate unfair competitors by exemptorganizations with taxable businesses. Basically when you conduct business and it is not reallypassive income, you come across UBTI. Further explanation; if the SDI is going to open up arestaurant, you are going to have got ordinary income. The IRS feels that is fair that you pay tax onthe funds you make everyday. Since it is not fair so that you can open up a restaurant and then forsomeone else to open up a restaurant down the street, but you dont pay tax. If its "ordinary income"UBTI applies. If it is a second income UBTI does not utilize , such as rent, interest and capitalacquire.Unrelated Debt funded Income (UDFI)Income generated by exercise that had debt funding. Tax is put on that portion of gain/income that isdebt funded. Most "passive" assets income such as rents from a property are usually excluded fromfees , but such investment income is going to acquire taxed if based on debt financed property(UDFI). Basically, if you purchase a property for 5 million. You have your SDI, put up 2.five millionand you get yourself a loan for the additional 2.5 million. Well the gains you get from the borrowedtwo.5 million in the bank will get subject to taxes (UDFI). You will not acquire taxed on the portion thatcomes out of your SDI.retiring in Costa Rica