Re investment news april 2017

N E W S L E T T E R F O R
M I D - A M E R I C A A S S O C I A T I O N O F
R E A L E S T A T E I N V E S T O R S
T H I S M O N T H A T M A R E I
A P A R T M E N T H O U S E
I N V E S T I N G W I T H
A N T H O N Y C H A R A
N E W S
INVESTMENT
April2017
RE

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P A G E 0 8 T A S T E M A G A Z I N E . C O M
"Stop
waiting for
somebody!"
SOMEBODY MAY DO
SOMETHING SOMEDAY, BUT
NOT UNLESS YOU STEP UP
AND TAKE ACTION TODAY!

04 RE INVESTMENT NEWS WWW.MAREI.ORG
SELLER FINANCING
legislative
update
Missouri HB 848 was introduced to require a
tenant who is claiming a defence of breach of
implied warranty of habitability, who continues to
live in the premises, to deposit any then-owned rent
into the court’s depository and to continue to
deposit any rent due in accordance with the lease
during litigation unless otherwise ordered by the
court. A vote is expected April 4th, please reach
out to your legislators to support HB848.
CONSTRUCTIVE EVICTION
Missouri HB 1189 was introduced in Jefferson City
in May by Representative Gary Cross from Lees
Summit. This bill prohibits interior inspections on
privatly owned residential property without the
consent of the lawful occupant. Proposed as an
answer to rules similar to the Rental Ready program
in Independence.
There is a hearing at Noon on Wednesday April 5th
in Jefferson City. All Missouri property owners are
urged to attend the hearing or to reach out to the
committee to show your support of HB1189.
INTERIOR INSPECTIONS
The Seller Finance Coalition has worked hard to
reintroduce the Seller Finance Enhancement Act.
HR1360 would amend the Dodd/Frank to allow up
to 24 seller-financed transactions per year without
the need for the seller to be licensed as a mortgage
originator. We urge you to visit to do your part to
support HR1360 in your state, learn how at the
SellerFinanceCoalition.org.
RENTAL REGISTRATION
Missouri SB 286 and SB 365 propose to change the
registration rules in Kansas City and Independence
to further require that a Natural Person be
registered along with entity when an LLC is listed
as owner. SB 365 further proposes a $500 fine for
failure to comply. While registration rules are
currently on the books, they don't currently require
an "affidavit" and don't seem to be enforced very
well, so further regulations on them seem to be a
waste of time. We do not support either bill.
Photo from JL Johnson on Flikr

05RE INVESTMENT NEWS
Supported by Home Away and Airbnb, MO HB 608
on the surface seems to protect Short Term Rental
Owners by prohibiting further regulations that
would limit nightly rental. However by putting this
bill on the books, with a cutoff date legitimizes all
restrictions imposed before the cutoff date and
incentivizes municipalities to get restriction laws
written before the cutoff date. HB608 will further
treat larger properties like hotels with cost
prohibitive regulations that could eliminate larger
home rentals in the state of Missouri. HB 632
proposes new taxes on short term rentals without
giving the short term rental owners any say in how
those taxes would be spent. Please reach out to
your legislator to ask them to say now to HB608
and HB 632.
As April is Fair Housing Month, please take time as
a property owner, seller, landlord, manager or
Realtor to review fair housing rules and regulations.
Investors can also find an in depth online course on
Fair Housing that qualifies for your Professional
Housing Provider Credits. Go to
www.NationalREIAU.com to acess these online
classes now.
SHORT TERM RENTAL
REGULATIONS
THE SIGN POLICE IN KC
Each city has their own rules and regulations
pertaining to the placement of signs. In order to
avoid fines and/or the loss of signage as a result of
removal, it's important to be aware of the sign
ordinances for each city.
Kansas City Regional Association of Realtors has
created a resource for their members for each of
the metro area cities and their rules.
Please visit www.KCRAR.org/SignOrdinance to find
the rules on signs in your area.
APRIL IS FAIR HOUSING
MONTH
JOIN YOUR LOCAL LANDLORD
ASSOCIATION OR GROUP
Your local landlord group is going to be your first
line of defense when it comes to state and local
regulations. If you own rentals or invest in a
particular city, it is advisable to join the local group
to stay abreast of local issues, regulations and to
#DoSomeThing when action is needed.

WHAT IS IT & HOW DOES IT AFFECT VALUE
CAP RATE
There are 3 figures that go hand-in-
hand when trying to determine a
commercial/apartment property's
value. They are; Net Operating Income
(NOI), Cap Rate (CR) and Asking Price
or Purchase Price (PP). If you know 2 of
the figures you can always figure out
the third.
Here I'll be talking about the Cap Rate
of a property. More specifically, how
the Cap Rate works in conjunction with
the Net Operating Income (NOI).
Let’s get started. First off, Cap Rate is
short for Capitalization Rate. In short,
Cap Rate is, “The process of converting
anticipated future income into present
value” according to the American
Heritage Dictionary. It’s also your rate
but the Purchase Price stayed the same.
Knowing the Cap Rate allows us to
accomplish several things.
First, it allows us to determine the value
of the property. Second, it allows us to
compare our complex to other similar
complexes in the same geographical
area. Lastly, it allows us to compare the
‘Cost of Money’
In our example, our complex had a Cap
Rate of 10%. If I research the average
Cap Rate in a market, I want to make
sure our complex falls within the
average or slightly above the average
Cap Rate. Let’s assume we’re
purchasing a complex in Dallas. We
research the area and find the average
Cap Rate to be between 9%-10% for
similar complexes. How does our
complex compare? It’s on the high end
of the average. This is potentially a good
thing assuming the number’s we’re
analyzing are accurate. I’ll get into that
topic in another article on Due
Diligence. But, for right now, let’s
assume they are accurate.
One quick thing to remember, since
Cap Rate is relative to the Income being
generated by our complex, the higher
the Cap Rate the better, when we’re
buying. Think of it this way, if you had
$100,000 to invest and you chose to
put it into a bank savings account or
CD, would you rather make 10% on
your money or 8%? If both banks were
equal in quality, reputation and safety,
you’d probably pick the one paying
10%.
Now, let’s assume our Cap Rate was at
8% in the same market. The average
of return if you bought your property
using all cash.
Here’s an example: If I purchase an
Apartment Complex for $1M and it
generates a Net Operating Income at
the end of 1 year in the amount of
$100K, then my Cap Rate is 10%. The
formula for Cap Rate is:
CR = NOI / PP
Cap Rate (CR) = Net Operating Income
(NOI) divided by the Purchase Price
(PP) of the complex. Therefore, if we
plug in these numbers: $100,000 /
$1,000,000 = .1 or 10%. If this same
complex generated $90K in NOI, its
Cap Rate would be $90K / $1M = .09
or 9%. Lower income, lower Cap Rate,
by Anthony Chara

market Cap Rate was 9%-10%. Is this a
good deal? Probably not. You may be
over paying for this complex. Would
you want to purchase a $1M Apartment
Complex and generate $100K a year or
only $80K a year? You’d pay the same
purchase price, but get a lower return.
A question you’re probably asking
yourself right now is, “How do I learn
what the average Cap Rate is in a
market”? Good question. And the
answer is, “Ask”. Contact 3-4
commercial RE Brokers and/or
commercial financiers in that market
and ask them. Tell them the type of
complex, geographical area and quality
of the complex and they should be able
to give you a one half to one point
average. In other words, they’ll tell you
that Cap Rates range from 8%-8.5% or
9%-10% or 7.75%-8.25% or 6.5%-7.5%
and so forth. Most, if not all of the
people you speak with should be in the
same ballpark. However, you may find
that after you speak with 3-4 people,
the overall range maybe slightly
broader than one half to one point. i.e.
7%-8.5% or 7.5%-8.75%. You’re just
looking for an average. There are other
sources available to research the Cap
Rate in a market too, but this is a quick,
efficient way to get your bearings.
In our first example, we used our NOI
and our PP to determine the Cap Rate.
Then, we used the Cap Rate to
compare
our complex to other complexes in the
area. But how about this; what if we
want to refinance the complex or figure
out the value for our own personal
balance sheet, what then? Easy, we just
swap two parts of the equation to solve
for the third.
As you recall, the formula for Cap Rate
is CR = NOI / PP. If we know 2 of these
values we can figure out the third. In
this second example, we want to
determine value. To do this we just
modify the formula slightly to
NOI / CR = PP
Using our first example, let’s look into
the future to see how we’re doing. After
5 years our NOI has increased from
$100,000 to $127,600 per year
assuming a modest 5% increase each
year. The Cap Rate in the area is 9.5%.
What’s the current value of our
complex?
$127,600 NOI / .095 (9.5%) CR =
$1,343,000 PP
Therefore, the value of our complex is
now approximately $1,343,000. Not a
bad return. What if the Cap Rate had
remained steady at 10%? It’s the same
formula. $127,600 / 0.1 (10%) =
$1,276,000. That’s still not a bad
return.
If our complex were generating an NOI
of $108,555 per year and the Cap Rate
in the area where this complex is
located ranges from 8%-8.5%, what is
this building worth? Break out your
calculator; you should be a wiz at this by
now!
NOI / CR = PP
$108,555 / .08 = $1,356,938
$108,555 / .085 = $1,277,118
This building’s value ranges from
$1.277M on the low end to $1.357M on
the high end. Did you notice that as the
Cap Rate increased, the value of the
building went down? That’s why you’re
looking for a higher Cap Rate when you
purchase. However, you want a lower
Cap Rate when you sell. It’s not like you
can just decide to lower the Cap Rate
when you want to sell your complex
though. The Cap Rate is driven by the
sales averages in that market which are
driven by the type of return buyers
want for their investment.
It’s not uncommon to find Cap Rates in
the 3%-4% range in San Francisco or
New York City or 8.5%-9.5% in Kansas
City. In larger metropolitan areas such
as San Fran or New York, buyers pay
higher prices because there isn’t
anywhere left to build. They can
command top dollar for rent in those
markets. If the buyer wants to increase
the value of their complex, they just
increase the rent because they know
they literally have a captive audience.
In places like Kansas City or Dallas,
there’s room to build so it’s much more
difficult to raise rents. Once the
vacancy in an area drops below a
certain level, a developer just comes in
and builds another complex. There’s so
much competition, it’s difficult to raise
rents. The only way a buyer can get
more bang for their buck is to pay less
for the complex up-front. Thus, the Cap
Rate is higher.
There are several things Cap Rate is
used for. First, it is to determine the
07RE INVESTMENT NEWS • PAGE
How to get wealthy with
Apartment Investing.
Saturday, April 22nd
9am - 5pm, Includes Lunch
Overland Park, KS
Register MAREI.org
Apartment
Workshop

value of the property. Second it is to
compare our complex to similar
complexes in the same market. The
third is to compare the Cap Rate to the
Cost of Money. Many people don’t
know about this concept, but you’re
about to find out and it could save you
thousands or tens of thousands of
dollars a year.
The Cost of Money in a nutshell is,
“How much is the money you’re
borrowing to purchase this complex
costing you”? The true Cost of Money,
also known as the Loan Constant, is
NOT the interest rate by itself, but for
this example I will only talk about the
relationship between the Cap Rate and
the Interest Rate. This is where a lot of
novice buyers get into trouble. If you’re
purchasing a complex with a Cap Rate
of 7%, but your loan is at 8% interest
per year, you could still have positive
cash flow, but you’re literally losing
money on the money you’re borrowing.
This is called ‘Negative Leverage”.
We recommend that whenever you
purchase a complex you almost always
want to look for a minimum 2 point
spread between the Cap Rate and the
Interest Rate on your loan. In other
words, let’s say you find a great
complex with a Cap Rate of 7.5%. That
means the Interest Rate you are
borrowing money at should be no
higher than 5.5%. Not an impossible
rate to find, but there may be some
prohibitive terms connected to it. We’ll
save that for another article.
Let’s look at this from another
direction. What if you find your
financing first and the Interest Rate is
set at 6.5%? Using this information,
what’s the minimum Cap Rate you want
to look for when trying to find a
complex to purchase? I hope you said
8.5% or higher! The larger the spread
the more money you can make.
Again, if you find a good complex with a
Cap Rate of 9%, what is the maximum
Interest Rate you want to pay? That's
right, 7% or lower. If you only
remember one thing about Cap Rate
after reading this article, I hope it’s this
part about maintaining a 2 point spread
between the Cap Rate and the Interest
Rate on your loan. 1
This concept also comes in handy when
trying to negotiate the interest rate on
a seller carry-¬back loan. Many sellers
will want you to pay top dollar in
interest, maybe 8%-10%. I’ve used this
concept to explain to sellers why I can
only pay them 6% interest. It’s because
I’m buying their complex at an 8 Cap
and if I pay them more than 6% I’d be
losing money. Many of them are
understandable at that point, many are
not. But, as an Apartment Investing
mogul, it sure adds to your credibility
with the seller when you can explain
this to them.
This article is part of a 4 part series on
calculating values on apartment house
investments. Be sure to visit the Blog at
www.MAREI.org to review all 4 articles to
get you up to speed on determining the
value of your apartment building.
07RE INVESTMENT NEWS • PAGE

WinVestor's
Hosted by Brian & Michelle Winberry
Wednesday Mornings at 9 am
Lucky Brewgrill
5401 Johnson Drive, Mission
1st Saturdays
Hosted by Jim & Beth Kasper
1st Saturday of the Month 9 am
Networking Coffee / Denny's
9001 Shawnee Mission Pkwy, Mission
Landlords of Johnson County
First Wednesday of the Month
Matt Ross Community Center
8101 Marty, Overland Park, KS
Cass County Landlords
3rd Tuesday of the Month
Carnegie Village
103 Bernard Drive, Belton
Landlord Inc of KCK
3rd Tuesday of the Month
Loan Star Steak House
1501 Village West, KCK
Blue Springs Real Estate Investors
3rd Thursday of the Month
Perkins
3939 S Bolger, Rd, Independence
Landlords Inc.
4th Tuesday of the Month
Central United Methodist Church
5144 Oak Street, KCMO
Landlords of EJC
4th Thursday of the Month
Allen's Banquet Hall
11330 E Truman Rd
Independence, MO
Jackson County Real Estate Investors
Last Wednesday of the Month
4 West Monroe Street
Buckner, Missouri
Join us Saturday April 22nd to learn how Apartment House Investing
works in the Real World with Anthony Chara
Wouldn’t you like to know why some people find it easier to buy an
Apartment Complex than a single family home? Come learn how
they did it and get in on some terrific cash flow. Be sure to bring
a calculator and pen and paper.
Workshop is from 9 am to 5pm. Lunch is Provided.
Saturday April 22nd, Overland Park, Kansas
We have already sold out 1/2 the room. MAREI.org
WORKSHOPFROM OTHER GROUPS >
Whether you are wholesaling a house, rehabbing a house or buying a
house to hold you need to know and understand a few basic building
and permitting rules that can save you $1000's if you know about them
in advance or can cost you big if you miss them in the analysis.
At the May 9th MAREI meeting, General Contractor, Rehabber,
and Real Estate Investor Robert Massey is joing us to go over
the Top Ten Screw Ups Investors Make when they
invest in a property.
This is a must attend for landlords and rehabbers,
wholesalers and anyone who ever intends to own a
property. See MAREI.org for more details.
CODES & REHABBING
M A R E I . O R G / C A L E N D A R
THE CALENDAR
See full day
workshop
page 5
MAY
APARTMENTINVESTING
MEETING
WHY BUY JUST 1 UNIT
“Why not take the time and energy you’re putting into finding,
negotiating, and buying a single family home and buy a 10 unit
instead? Or a 50 unit?” Join us to learn how to get started investing
in Aparments, even if you have never done a single deal. Guest
Anthony Chara tells us how to find, analyze, fund and finish !
The MAREI Monthly is Tuesday April 11th from 6pm to 9 pm at the
Holiday Inn at 8787 Reeder Road in Overland Park. The Vendor Hall
opens & Networking starts at 6pm and runs till 7:00. The meeting
starts at 7:00. Members, 1st Time Guests attend this meeting at no
charge when they pre-register. All others pay $25 at the door or $15
when they pre-regsiter at MAREI.org. Memberships start at $12.

GREY AREA
IRS GETS ITS WINGS CLIPPED ON ROTH IRA’S
AND “SUBSTANCE OVER FORM” DOCTRINE
The 6th Circuit recently released a case that is good news
for taxpayers on several levels. In Summa Holdings, the
Court ruled that a Roth-IRA-owned Corporation to which
the Roth owner fed business and used to stuff his Roth IRA
with around $5 million was legitimate. Bear in mind that no
income taxes will ever be paid on the $5M or the income it
generates.
What Happened, Simplified Version:
Summa Holdings is
the parent company of a number of large manufacturing
companies. The Benesons own Summa. While several
Benesons were involved in the case, let’s simply this
discussion and pretend that only one Beneson was
involved.
Beneson established a small Roth IRA and made about
$7,000 in total contributions. Beneson then formed a
special kind of C-Corporation, known as a DISC. DISC’s get
special tax breaks for exporting goods. The Roth paid
$3,500 for the DISC’s shares. The DISC was named JC
Export.(1)
Summa then paid commissions to JC Export.(2) Summa
took a tax deduction for the commissions, probably at
about a 35% rate. JC Export paid taxes on the commissions
at about a 33% rate, so these taxes netted out against the
deductions Summa took, making the transfer from Summa
to JC functionally tax-free. JC’s remaining cash was
distributed to the Roth IRA. Beneson funneled about $5M
to the Roth IRA in this fashion, tax-free. Clever.
The IRS audited and thought Beneson had been very
naughty. They argued that the true substance of the
transaction (which is distinct from its “form”, or what was
done on paper) was that the taxdeductible “commissions”
were really non-deductible “dividends” from Summa to
Beneson and a taxable “over-contribution” by Beneson to
his Roth IRA. Net result: The 33% tax paid by JC was no
longer offset by the 35% deduction by Summa, and the
$5M was subject to an annual 6% “overcontribution”
tax, plus various rather steep penalties.
Beneson sued in Tax Court and lost. In other words, the
Tax Court agreed that the transaction really should be
treated as a non-deductible dividend distribution from
Summa to Beneson and a taxable overcontribution by
Beneson to his Roth.
Beneson appealed the decision to the 6th Circuit Court of
Appeals. And to my personal surprise, Beneson won. The
6th Circuit said “No, no, no, this really was a set of
commissions paid by Summa to JC and the result is that
Beneson converted $5M or so of taxable income into tax-
free income and pumped up his Roth by the same amount,
all legal and legit. The IRS is entitled to not like the law,
but it is not entitled to change the law. That is Congress’
job”.
In other words, Beneson managed to get $5M+ into his
Roth IRA tax-free. That money and the earnings on that
money will never be taxed. In addition, under present
law, a baby-Beneson could inherit part or all of the huge
Roth and not pay taxes on distributions from the Roth.
(3)
The decision has major implications that go far beyond
DISCS, IRA’s, tax law, or the “substance over form”
doctrine, important as it is to all of those areas of the law.
This case goes to the heart of “who makes the law in our
Republic?” In this case, the Court’s answer is Congress – as
it should be, but often is not. Here are my fairly simplified
conclusions on this very important case:
1) Roth IRA transactions that are “grey” and “do not clearly
cross the line” will be easier to defend. Remember,
bureaucrats are not normally rewarded for producing
by Attorney John Hyre
(1) The structure was a bit more complicated than I have described it. I have simplified my description of it to make
this article easier to read and grasp for people who do not specialize in the field.
(2) Sounds incestuous as heck. Cause it is. And opened Summa up to attacks that the IRS was not sophisticated
enough to make….this time around.
(3) Google “stretch Roth IRA” for more info on inheriting IRA’s.

excellent results. (4) Rather, they
tend to advance on schedule if they do
not foul up, or at least can blame foul
ups on someone else. I am convinced
that this is one major reason behind why
IRS attorneys are reluctant to take grey
cases to court. (5) They do not want to
risk a loss, and so tend to take only
“black & white” cases to court.
This case took some of the edge off of a
major IRS weapon, and makes grey cases
riskier for the government. Risky cases
tend to get settled, often in the
taxpayer’s favor. I have provided some
beautiful “Roth IRA quotes” (towards the
end of the article) from the case that
will be useful in future spats with the
IRS, be it in an audit, with Appeals, or in
Tax Court.
Bottom line: If you have some Roth
transactions that were “close to the line,
not sure which side of the line”, you
should be able to sleep a bit better. Skip
to the Section entitled “Great Roth IRA
Quotes from the Case” for more on this
topic.
2) Let’s Not Get Stupid, the IRS does
learn. Granted, they learn at the speed
of government, which is to say quite
slowly – but they do learn. While they
lost this case, their approach was much
more sophisticated than a very similar
case from 1996, the famous Swanson
case often cited by “checkbook LLC”
promotors. Further, I think there are
some arguments that the IRS missed in
this case that could have changed the
result. I will not list those arguments, I
see no need to do their homework for
them.
This case is reason for celebration, but
also for humility and care, for they shall
adapt and improve their approach. We
must be ready, anticipate their next
evolution, and structure our
transactions accordingly.
3) Substance over form doctrine is still
alive, well & relevant to all federal
income tax transactions. It was cut
down to an appropriate size, at least in
the 6th Circuit. To receive tax benefits,
relevant transactions have to be “real”.
The underlying “economic substance” of
a transaction much match what
is “on paper”. Transactions entered into
purely “on paper” can be re-
characterized to match reality by
the IRS. But the IRS cannot (at least in
the 6th Circuit, and likely other
conservative-leaning Circuits)
simply disregard a set of transactions
because it does not like the result.
Words once again mean things,
and if Congress permits a thing, then
the bureaucrats cannot simply “un-
permit” it because they do not like it. (6)
What a novel concept – and one that is
deeply offensive and threatening to
progressives. Here’s a quote from the
case that nicely explains the “substance
over form” doctrine:
“Professor Joseph Isenbergh put the
point well: “When someone calls a dog a
cow and then seeks a subsidy provided
by statute for cows, the obvious
response is that this is not what the
statute means. It may also happen that
rich people who would not otherwise
have cows buy them to gain cow
subsidies. Here, when people say (as
they do) that this is not what the statute
means, they are in fact saying
something quite different.” Musings on
Form and Substance in Taxation:
Federal Taxation of Incomes, Estates,
and Gifts, 49 U. Chi. L. Rev. 859, 865
(1982).”
Excellent way to put it. To avoid
issues with “substance over form”, do
not call a dog a cow. Do not paint the
dog black and white & attach a milk
bottle to its belly. Instead, to get the
cow subsidy (no matter how stupid
the reasoning behind the subsidy), be
sure to acquire a real cow. Or a
thousand of them.
Here’s an example from fairly recent
case law: An MD set up a C-
Corporation to provide admin
services to his medical practice. The
practice paid for the “services” and
deducted them from its tax return.
The C-Corporation included the
“services” in its income, which was
taxed at a much lower tax rate (15%)
than the MD’s income (40%). (7) The
problem was that the C-Corporation
never actually provided any services.
There was no consulting contract.
The employees who performed the
services were employed by the
practice, and not the C-Corporation.
In other words, the “corporate
services” existed only onpaper or “in
form”, and not in fact or “in
substance”. As such, the “services”
deductions taken by the practice
were disallowed and the tax was paid
at the higher 40% rate and not the
lower 15% rate. Penalties were also
imposed. Had the C-Corporation
actually provided the services in
question, the substance of the case
and its outcome would have likely
been different.
4) Supreme Court. I do not think the
IRS will appeal this particular case.
That is contrary to my initial
reaction. Going to the Supreme Court
risks the “substance over form”
doctrine being limited nationwide
in a clear manner. Here, the IRS can
(4) Whereas entrepreneurs get rewarded for good results and punished for bad ones, excuses/”reasons” notwithstanding.
(5) Another reason is that they are assigned far more cases than they can really litigate. Sheer numbers dictate large numbers of settlements. My
direct experience in audits and Tax Court in both SDIRA and non-SDIRA cases reflects these patterns: lots of good settlements for taxpayers, and
for the most part, only “slam dunk for the IRS” cases go to trial.
(6) For example: The President cannot use executive orders to subvert the law, ala Obama and immigration law, to name but one example.
(7) This is a very common tax planning technique. We assist clients with it frequently. But for it to work, it has to be done correctly.

(and will) argue that the Summa decision
only applies to Roth IRA’s that use
DISC’s (rare, so it would not apply in
many cases) and only in the 6th Circuit
(OH, MI, TN, KY). That’ll be their “public
face”. Privately (for example, when
negotiating settlements to other “grey
IRA” audits), they will be quite aware
that other courts may mimic the Summa
decision (especially the more
conservative Circuits) and will take the
Summa decision into account when
deciding whether to litigate or settle,
and how much they are willing to settle
for. That is good news for taxpayers.
Great Roth IRA Language from this
Case, Worth Reading.
Act now. Use Roth IRA’s (and especially)
Roth 401k’s before Congress changes the
law. As this case illustrates, Roth’s are
one of the premier means of legal tax
reduction – in my subjective but
informed opinion, Roth’s are the single
best tax-avoidance tool in existence. Do
not delay, ACT! This is not the
time for delay. Some of the better
language from the case that touches on
Roth IRA’s:
“The Code authorizes companies to
create DISCs as shell corporations that
can receive commissions and pay
dividends that have no economic
substance at all. By congressional
design, DISCs are all form and no
substance, making it inappropriate to
tag Summa Holdings with a substance-
over-form complaint with respect to its
use of DISCs. The same is true for the
Roth IRAs. They, too, are designed for
taxreduction purposes. And that’s just
how the Benensons used them.”
“All IRAs are permitted to hold shares
of stock, some of which may
increase markedly in value over time
and some of which may generate
considerable dividends over time.
Whether Congress’s decision to permit
Roth IRAs to own DISCs was an
oversight makes no difference. It’s
what the law allowed.”
“When the Commissioner says that
the transaction amounted in
substance to a Roth IRA contribution,
all he means is that the purpose of the
transaction was to funnel money into
the Roth IRAs without triggering the
contribution limits. True enough. But
the substance-over-form doctrine
does not authorize the Commissioner
to undo a transaction just because
taxpayers undertook it to reduce their
tax bills.”
“And the Code authorizes investors to
avoid significant taxes on capital
gains and dividends by using their
Roth IRAs in all manner of tax-
avoiding ways,
including by buying
shares in promising new companies
whose share prices may rise
considerably over time or which may
pay out large dividends
over time. The point of these entities
is tax avoidance. The Commissioner
cannot place ad hoc limits on them by
invoking a statutory purpose
(maximizing revenue) that has little
relevance to the text driven function
of these portions of the Code
(minimizing revenue).”
“The Commissioner cannot fault
taxpayers for making the most of the
tax-minimizing opportunities
Congress created.”
“And Congress established Roth IRAs
and their authority to own shares in
corporations (including DISCs)
for the purpose of lowering taxes.
That these laws allow taxpayers to
sidestep the Roth IRA contribution
limits may be an unintended
consequence of Congress’s
legislative actions, but it is a text-
driven consequence no less.”
“The last thing the federal courts
should be doing is rewarding
Congress’s creation of an intricate
and complicated Internal Revenue
Code by closing gaps in taxation
whenever that complexity creates
them.”
John adds: Roth’s represent
one of those complex gaps in taxation
created by Congress. Use them!
_____________
This articles has been edited slightly
to fit into this format. You can reach
view the full article in the Blog
section of MAREI.org to read the full
and complete article.
Self-Directing Workshops
When you join us at one of our two-day workshops, you’ll learn how to make the most of your
self-directed IRA, protect your assets from the IRS, and learn which types of deals and
investments will benefit you most.
Next Events
- May 6 & 7 in Dallas,TX
- May 20 & 21 in Greenville, SC
- June 3 & 4 in Columbus, OH.
IRALawyer.com
To learn more visit website or email
help@realestatetaxlaw.com. Tell John
you saw his article at MAREI.org.

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Millions in the
Follow - Up
Let me ask you a question . . . Are you properly managing
your prospects? Are you taking the time to follow up with
the sellers who didn’t initially accept your offers, or the
sellers you still need to make offers to? Did you know that
you are leaving thousands of dollars in potential income
behind if you aren’t following up with sellers? One of the
easiest ways to make a fortune in the real estate business
and gain the advantage over your competition is to take the
time to follow up with motivated and semi-motivated
sellers. You’ve already got the seller in your pipeline, you’ve
already done the marketing and spent the money to find
this person, and now all you need to do is to follow up with
them until they either sell you their property or tell you to
go away. How much simpler could it be?
There are two types of sellers we are going to follow up
with, those we’ve already made offers to who haven’t
accepted our offer and those who have not made any
decision after our initial contact with them. Quite often,
you will need to make multiple contacts with sellers before
their situation changes and dictates that they sell their
property to you. When you stay in touch with these sellers,
you build credibility with them. When it comes time to sell
their home they will contact you first, even if they have
been contacted by someone else in the meantime.
BY KATHY KENNEBROOK
There are a lot of investors in the market these days, and
most of them have a very limited knowledge of how the
whole follow-up process works, not to mention the inability
to create successful deals. What they don’t realize is that
many of the sellers you will be dealing with have a variety of
problems they aren’t sure how to solve until they are
contacted by you. Some of those may include divorce
situations, estates or health issues where there may be
emotions tied to the property. With these sellers it may
take a little longer before they make that final decision to
sell.
Most of your competitors will simply throw these potential
deals in the trash when they don’t get the property under
contract after the initial contact or offer is made. I have
made deals many months after the initial contact with the
seller was made simply because I took the time to follow
up. Not only did I build credibility with the seller, but now
they like me better and trust me more than the next
investor who may come along.
These are the types of sellers I will place in my follow-up
system and follow up with at least every thirty to sixty days
if not more often. I have made thousands of dollars on deals
other investors would simply have thrown in the trash

because I took the time to follow up with a semi-motivated
seller.
In addition, with the help of a fellow investor who is also a
software developer, I now have an incredible software
system that does all the work for me. It reminds me when I
need to redo my direct mailings, it reminds me when to
follow up with sellers, it has a section to track potential
buyers and build a buyer’s list, and it keeps all the
information on the properties stored including a photo. In
fact, once I have followed up and purchased the property,
my system will match the property with one of the buyers
on my buyer’s list, so now; even that part of my business is
automated. And once again, isn’t that the whole point to
this business, to automate as many things as you can so
you can work with the sellers and make the deals happen?
You don’t necessarily need software to get started with
this type of a system. You can simply use an auto-
responder and a folder system to begin following up with
motivated sellers.
Here is a recent example from my files- I contacted a seller
who had inherited a property in Florida where I live and he
lived in Michigan. The home belonged to his aunt who had
pretty much raised him his whole life. When she passed
away the home was left to him and he just couldn’t bring
himself to sell it right away. I actually met with the seller
and made an offer on the property. He had accepted my
offer, and then he decided to hold onto the property for
awhile and use it as a vacation home. After a year, he got
tired of having to deal with all the maintenance issues on
the property and ended up selling the property to me for
the initial offer I made because I took the time to follow up
with him every sixty days or so.
I actually ended up making even more money on this deal
than I would have in the first place because the house had
appreciated in value during the period of time that he kept
it and he did some remodeling during the time he had it.
Most investors would have thrown this deal in the trash as
soon as the seller said no to their initial offer, but because I
took the time to follow up, I purchased the property and
made a significant amount of money on this deal. I still get
holiday cards from that seller.
I’m sure you’re already aware of how important it is to
follow up with sellers. It only takes a few minutes each
week to follow up with these sellers if you have a good
follow-up system in place. I use my follow-up system to
follow up with sellers I have made offers to but who
haven’t said yes or no to my offer, and with sellers who
own homes in areas where I want to buy. I do this by using
both direct mail and e-mail to follow up with these sellers.
Sometimes if the situation warrants it, I will call them.
"Make more deals &
buy more properties
& no competition."
My software system reminds me when I need to do it. How
much simpler can it be? My system reminds me to contact
the seller and since the seller has already been getting
contact from me for a few weeks, when their situation
changes they end up selling to me. This is a pretty typical
scenario.
With sellers who specifically have properties in areas
where I want to buy, I do repeat mailings to a specific list
with specific parameters in mind such as out of state
owners, quit claim deeds or old sale dates. Each time I do
the mailings I continue to clean the list I am using by
taking out bad addresses, deals I have purchased or folks
who tell me not to mail to them again. The more I mail to
these folks, the more credibility I build with them. If you
are using a follow up system in your business it is very easy
to track these mailings. This is an absolute marketing
machine because not only are you doing deals day after
day, you are constantly planting seeds for future deals.
If you take the time to follow up with motivated and semi-
motivated sellers, you will make more deals and buy more
properties with absolutely no competition for these
properties whatsoever. It’s a win-win situation for you and
the sellers.
Real Estate Investor
MARKETING
Join us as MAREI welcomes
Kathy Kennebrook and
her marketing secrets
at the June 13th
MAREI Meeting.
If you need more deals,
you need to be at
this meeting.

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