The federal rules that will be most important as you make the investments discussed in this book are spelled out in Title 26, Sections 408A and 4975 of the Internal Revenue Code. These rules— which can be found on pages 229 to 248 of this book—primarily focus on what you cannot do rather than on what you can do.Read more at location 249 • Delete this highlight
The IRA cannot transact business with you, your spouse, your parents, your kids, or your kids’ spouses. The IRA cannot invest in a corporation if 50 percent or more of that corporation is owned by you or your IRA. Moreover, you cannot commingle IRA funds with discretionary funds (cash).Read more at location 257 • Delete this highlight
Magazines such as National Real Estate Investor provide information on a cross-section of disciplines, including construction, development, finance/investment, and more. Publications like this can introduce you to the market and—just as important—help keep you abreast of trends.Read more at location 269 • Delete this highlight
Finally, if you’re interested in acquiring the skills needed to analyze your real estate investments, consider taking a class. Al -though many investment groups offer courses, my favorite is the CCIM Institute, which offers both an introductory course in commercial investment real estate analysis and four graduate-level courses. I took several CCIM classes many years ago, and they have paid for themselves over and over again. (For information on the CCIM Institute, see the Resource List on page 225.)Read more at location 274 • Delete this highlight
The gain from a Roth IRA is tax-free. You will therefore want to build the Roth account as quickly as your comfort level allows.Read more at location 429 • Delete this highlight
I liken the attorney to the ship’s cook. The cook is told what to prepare and when to prepare it, and then produces the desired dishes according to existing recipes. Similarly, you choose your investment moves, and it is your attorney’s job to prepare the proper documentation according to the law. The attorney must make sure that all documents surrounding the investment—both those already in existence and those that he drafts himself—are sound in the view of the court. In some states, attorneys have other functions, as well: They are responsible for having the title to the property researched and for closing the transactions.Read more at location 584 • Delete this highlight
If you are interested in adding rental houses to your IRA, look for a broker specializing in houses. If, instead, you want to add apartments to your investments, look for someone who understands that area.Read more at location 613 • Delete this highlight
The CCIM designation—Certified Commercial Investment Member—indicates that the realtor has successfully completed an extensive course of study, and has had actual experience in commercial real estate transactions and consultations. (See the Resource List on page 225 for contact information.)Read more at location 617 • Delete this highlight
The National Council of Exchangors (NCE) can also help you find a real estate expert in your area. NCE members who have obtained the EMS (Equity Marketing Specialist) designation have achieved a high level of education in real estate counseling, real estate taxation, real estate financing, and other important areas of the field. These professionals will be able to find the investments you want, and to perform the research you need to safeguard your retirement income. (Again, see page 225.)Read more at location 619 • Delete this highlight
Now that you know what a title company does, it’s important to understand that title searches are handled differently in different states. In abstract states—found mostly on the East Coast and in the Midwest—the buyer’s attorney is responsible for having the title search completed. In these states, the attorney prepares an abstract of title, which is a historical summary of the property’s title that goes back to the first owner. Neither the buyer nor the seller works directly with a title company. On the other hand, in title states—typically found on the West Coast and in the Rocky Mountain region—the buyer of the property works directly with the title company, which researches the property only to the last time title insurance was issued. In these states, by the way, title companies can also act as escrow agents, meaning that they can hold earnest money pending fulfillment of contract conditions. They can also conduct closings—a task that must be performed by attorneys in abstract states. If you live in an abstract state, you don’t have to worry about finding a title insurance company, as your attorney will take care of that for you. If you live in a title state, you’ll be glad to learn that title insurance companies are relatively easy to find, and that most of them do a very good job. Any experienced real estate broker should be able to provide the names of a few reliable title insurance companies. An Internet search for “title insurance” will also give you the names of several companies from which you can choose.Read more at location 638 • Delete this highlight
Some custodians will not allow you to manage the property owned by your IRA. However, as you’ll learn on page 76, even when this is the case, a number of options are available to you.Read more at location 834 • Delete this highlight
When buying a house with your IRA, you must keep certain rules in mind. You cannot live in the house until you retire. You cannot use it as collateral for any loan—not even a loan on the property you’re buying with your IRA.Read more at location 851 • Delete this highlight
And in many cases, you can buy a house with relatively little money down. Of course, houses have some drawbacks as well. While they hold their value, they don’t appreciate as readily as some commercial real estate properties do. And, of course, there is the hassle of maintaining the property and finding renters. Nevertheless, as the following scenario shows, the house can be a superb investment vehicle.Read more at location 855 • Delete this highlight
Remember that your tax bill is based on the value of your home, and may be very different from that of the seller. Many tax authorities refer to the sales price to adjust the market value. If the previous owner bought the house for $80,000, but you are buying it for $150,000, your tax bill may be almost double the previous one. You’ll also want to find out if the government is planning improvements to roads, sewers, and parks. These upgrades could result in a new assessment and higher taxes.Read more at location 885 • Delete this highlight
out. Also keep in mind that if your IRA has inadequate funds to cover expenses, you can put new cash in your account to make up for the shortfall. But if this addition increases your contribution beyond your maximum annual limit, the IRS will slap you with a 6-percent penalty that will remain in effect until the excess cash is removed from the account.Read more at location 895 • Delete this highlight
You crunch the numbers and find that the returns are similar. But your research isn’t over yet. You also read through each property’s Condominium Declaration to determine if there are any restrictions on the title. For instance, some state that no more than 50 percent of the project can be rented. You don’t want to find this out after making the purchase. You also check the condominium association’s books to see if they have enough reserves to take care of anticipated common area costs. A lot can happen between now and your retirement, and you want it to be for the better.Read more at location 938 • Delete this highlight
IRA. In any of these cases, you will have to fill out a promissory note, agree to a specific interest rate, and pay the lender back out of your IRA. And if you fail to make the monthly payments as agreed in the note, the lender will be able to foreclose.Read more at location 1071 • Delete this highlight
If you must borrow money to buy real estate with your IRA, do so only within your means. Of course, this is good advice not only when using IRA funds, but also when using discretionary funds.Read more at location 1079 • Delete this highlight
Eventually, you and your crew may find a piece of property that promises to build enormous IRA wealth, but that costs far more money than your IRA has to offer—or that your IRA can borrow. If this occurs, one possible solution may be tenancy-in-common ownership.Read more at location 1081 • Delete this highlight
Tenancy-in-common ownership also allows you to use both IRA funds and discretionary funds to buy a single investment. For instance, if your savings are adequate, you can buy part of the property with your savings, and part of it with your IRA.Read more at location 1090 • Delete this highlight
In another scenario, you can buy an interest in the desired property with your IRA, and friends and family can buy interests with their discretionary funds. The possibilities are endless—and totally legal. (To learn more about tenancy-in-common ownership, see the scenario on page 145 of Chapter 7.)Read more at location 1091 • Delete this highlight
Limited Liability Companies When your IRA doesn’t provide sufficient funds for the purchase, and neither loans nor tenancy-in-common ownership provides a solution, another excellent option is the limited liability company, or LLC. The limited liability company is a combination of a corporation and a partnership in which each party buys shares or membership interests in the LLC—which holds title to the property—according to the funds he has available. The term “limited liability” refers to the fact that like a corporation, the LLC limits personal liability to each of the parties involved, so that members cannot lose more money than they contributed. In other words, their other assets can never be touched. However, an LLC is taxed not like a corporation, but like a partnership, in that earnings are taxed only once, with the taxes being paid individually by the members. Chapter 7 provides a scenario about using LLCs to make IRA investments with family members, and Chapter 9 is devoted to the LLC. For now, suffice it to say that the limited liability company can allow you to use your money in conjunction with the money of friends and family—as well as that of land developers— and buy properties ranging from small office buildings to sprawling shopping centers.Read more at location 1130 • Delete this highlight
This tax, known as the Unrelated Business Income Tax (UBIT), was actually designed to affect the income of charitable organizations. It may therefore seem that the tax should not apply to IRAs. However, it does.Read more at location 1149 • Delete this highlight
If the idea of paying taxes on your tax-exempt or tax-deferred investment bothers you, and if you have both the time and the means, simply pay the loan off twelve months prior to selling the property. (Since the IRS goes back twelve months in its calculation, you must pay off the loan prior to that date.) No debt, no UBIT.Read more at location 1205 • Delete this highlight
There are two avenues you can take to acquire notes for your IRA. You can originate a note, or you can purchase an existing note. Let’s look at each of these options.Read more at location 1372 • Delete this highlight
Originating a Note When you originate a note, you deal directly with the borrower and actually create the loan. Because the note is not already in existence, you have the opportunity to negotiate the conditions so that the amount of the loan, the interest rate, and the length of the loan are a good match for your resources, and promise both security and a healthy return. How do you go about finding an interested borrower? A number of possibilities are open to you.Read more at location 1374 • Delete this highlight
Just keep in mind that even though these people are professionals, you should not assume that every deal they find is a good one. That’s why the broker should provide a credit report on the potential borrower. If the supplied information doesn’t satisfy you, ask for more. If you are still not satisfied, pass it up. There will always be another deal.Read more at location 1389 • Delete this highlight
The blanket mortgage has definite advantages for both the developer and you. The developer will benefit because it costs less to draft one document than it does to draft five. But the blanket mortgage will benefit you most. When you put a blanket mortgage on the five lots, the developer is going to require that you put a release clause in the note so that if he sells one of the lots, he can pay a certain sum toward the principal, releasing the lot from the mortgage. So you have your attorney draft a release clause that allows the release of one lot when 125 percent of the principal attributed to that lot is paid. ($20,000 × 125 percent = $25,000.) Here comes the advantage: By the time the fourth lot is released, the loan will have been paid back. You see, the last thing you want to do is be fully involved in the very last lot in the subdivision. That is obviously the least desirable of the lots, and will be the hardest to sell.Read more at location 1466 • Delete this highlight
Let’s say that friends or non-blood relatives are living on a fixed income—an income fixed by the government, and fixed far too low. The only asset they own is their house, but they don’t want to sell it because they’ve lived there all their lives and want to continue doing so. They don’t want a mortgage because they are afraid that if they miss a payment, the bank will take the house back. Besides, with their income, who would loan them money? You have your real estate broker verify the value of your friends’ house at $100,000, and offer to option their property at $500 per month, with the payments reducing the principal amount. You state in the option agreement that the owner will have a life estate in the property, meaning that he and his spouse can continue to live there for the remainder of their lives.Read more at location 1686 • Delete this highlight
While it’s true that prohibited transactions should be carefully avoided, it’s also important to understand that as long as the transaction is not with a disqualified person and not a specifically prohibited transaction, it’s a perfectly acceptable investment.Read more at location 1924 • Delete this highlight
There are three parts to a prohibited transaction, and all three elements must be in place to make the transaction forbidden. First, the transaction must take place as part of your IRA retirement plan, including traditional IRAs, Roth IRAs,Read more at location 1928 • Delete this highlight
Education IRAs, Keogh plans, SIMPLE IRAs, and SEP-IRAs. Second, the transaction must involve a disqualified person, which you’ll learn more about a little later in this chapter. And third, there must be a transaction between a disqualified person and the plan.Read more at location 1930 • Delete this highlight
(You’ll also learn about this later in the chapter.) Without the presence of all three, you do not have a prohibited transaction.Read more at location 1931 • Delete this highlight
Internal Revenue Code Section 4975, paragraph (c) (1) states that you cannot make IRA transactions with your “spouse, ancestors, lineal descendants, and spouses of lineal descendants.”Read more at location 1937 • Delete this highlight
Who’s left? Your brothers and sisters, your spouse’s brothers and sisters, your spouse’s parents, your spouse’s grandparents, your grandparent’s spouse (if not your natural grandparent), your stepchildren, your spouse’s stepchildren, your aunts and uncles, and your cousins. (For a fast look at “who’s out” and “who’s in”—the people with whom you can’t and can make IRA investments—see Table 7.1 on page 132.)Read more at location 1944 • Delete this highlight
For some of you, this information alone is worth the price of this book.Read more at location 1947 • Delete this highlight
Your IRA cannot do business with any disqualified person. While some investors try to find loopholes, years of experience have taught me this important fact: If someone is on the list of disqualified people (see “Who’s Out” in Table 7.1), you cannot make any IRA investments that involve their doing business with your IRA.Read more at location 1953 • Delete this highlight
You cannot use your IRA funds in an investment whose primary purpose is to benefit you or another party—whether a total stranger, a friend, or a qualified or disqualified relative— rather than your IRA. To put it another way, the primary purpose of any IRA investment must beRead more at location 1956 • Delete this highlight
You cannot use your IRA funds to make a loan to a corporation, including a limited liability company and a limited partnership, when 50 percent or more of the stock ownership in that company is held by you or by another disqualified person— your spouse, your parents, or your children, for instance—or by any combination of disqualified persons.Read more at location 1967 • Delete this highlight
SEP-IRA or a SIMPLE plan, and more than one employee is involved, you are subject to the Prudent Investor Rule. This rule states that before making an investment, you must consider alternative investments that are similar to the one being considered, and choose the best investment in terms of return and risk. If you make an investment despite the fact that another one is obviously better in terms of having less risk and higher returns, you will be subject to the wrath of the IRS. However, since most IRAs are not employee benefit plans, this is not a concern for the vast majority of IRA investors. Moreover, if you are the only employee involved in a SEP or SIMPLE plan, the Prudent Investor Rule doesn’t apply to you.Read more at location 1972 • Delete this highlight
TABLE 7.1. WITH WHOM CAN YOU MAKE IRA INVESTMENTS? WHO’S OUT WHO’S IN You Your brothers and sisters Your spouse Your spouse’s brothers and sisters Your natural parents and/or your adoptive parents Your spouse’s parents Your natural grandparents Your spouse’s grandparents Your natural children and/or your adopted children Your stepchildren The spouses of your natural children Your spouse’s stepchildren Any fiduciary of your IRA—such as an employee of the company that serves as your IRA custodian—as well as his spouse, ancestors, and descendants. Your grandparent’s spouse, if not your natural grandparent Any people providing services to your IRA—such as your stockbroker—as well as his employees and both his and his employees’ blood relatives Your aunts, uncles, and cousinsRead more at location 1984 • Delete this highlight
But as you might remember from the beginning of this chapter, there are three parts to a prohibited transaction: it must take place as part of your IRA, it must involve a disqualified person, and there must be a prohibited transaction between the disqualified party and the plan. To understand how these rules work in action, let’s consider the following examples.Read more at location 1998 • Delete this highlight
Buying Options With Relatives—A Scenario Let’s say you own a farm or several parcels of land, which you’ve always planned on passing on to your children when you die. But instead, you are now inspired to gift the land to your kids during your lifetime using your $10,000 per year gift exclusion, which allows each of them to receive annual gifts of $10,000 or less without paying taxes. Bill gets the north forty acres, and Jane gets the east forty acres. It really doesn’t matter because each parcel looks just like the next. The parcels are worth a thousand dollars per acre as farm ground now, and someday will be developedRead more at location 2100 • Delete this highlight
into subdivision lots worth tens of thousands. Four years later, each of your children owns a 40-acre parcel. Together, they own eighty acres of contiguous, path of progress ground. It’s not worth a lot today, but it will be someday. Now comes the fun part. Bill takes an option to purchase Jane’s forty acres with his IRA. (Remember, brothers and sisters can deal directly with one another’s IRAs.) The IRA’s option is for fair market value today ($40,000). It will pay an option price of $1,000 per year to maintain that option for the next ten years. Now, Jane does the same for Bill. Seven or eight years go by. The property has increased tenfold and is now worth $400,000 per parcel, or $800,000 altogether. A developer comes to the table wanting to buy the property for development into single-family houses. If he buys the property from the children, the $400,000 that each child will receive will be regarded as capital gains. What to do? Instead of selling the land to the developer, Bill and Jane sell their IRA-owned optionsRead more at location 2105 • Delete this highlight
to the developer. He buys the options for $360,000 each, and the money goes directly into the kids’ IRAs. If Bill and Jane used Roth IRAs, the gain is tax-free. If they used traditional IRAs, the gain is tax-deferred. The developer now owns the options and pays each of the children $40,000 for their parcel of land. The only gain reportable is the $40,000.Read more at location 2112 • Delete this highlight
You can grow your IRA by buying options on anyone’s property, gifted or not, as long as the property’s owner is not a disqualified person.Read more at location 2118 • Delete this highlight
BUYING PROPERTY WITH RELATIVES Believe it or not, you and your relatives can get together and use your separate IRAs, and discretionary funds as well, to purchase property. This may be done using any one of three different types of ownership, including tenancy-in-common, a limited partnership, and a limited liability company.Read more at location 2120 • Delete this highlight
A limited partnership is a form of ownership in which there are two types of partners. Limited partners provide financial backing, but have little role in the management of the property and no personal liability for its debts. But general partners, who are responsible for managing the property, have unlimited personal liability. In other words, if someone is a general partner in two or more limited partnerships, and one partnership fails and creates a liability, the generalRead more at location 2131 • Delete this highlight
What tenancy-in-common ownership, limited liability companies, and limited partnerships all have in common is that they allow you and other people—including disqualified persons—to join forces and make profitable investments. Why? Because when you buy interests in any of these arrangements, you are dealing with the company or the seller—not with the other members. However, while these partnerships are created all the time, doing so safely and correctly requires the assistance of an attorney.Read more at location 2136 • Delete this highlight
individuals, you must make sure to avoid certain situations that could lead to a prohibited transaction. (Note that this same risk is not posed by tenancy-in-common ownership.) Your attorney is the best person to handle this.Read more at location 2141 • Delete this highlight
The developer has more than $1.2 million equity in the project, and is attempting to raise an additional $400,000 to complete the deal. You obtain his prospectus, pass it on to your accountant for review, and get your accountant’s blessing. The accountant likes what he sees—especially the fact that the cash-on-cash return to investors will be in the 13-percent range. Better still is the anticipated overall return, which is almost 25 percent annually. (To learn about cash-on-cash and overall returns, see the inset on page 180 of Chapter 9.)Read more at location 2159 • Delete this highlight
“But what about doing business with your IRA?” you ask. “Isn’t that taboo?” Well you are not doing business with your IRA. Remember, I said that all three parts of a prohibited transaction must be in place to create a violation. Your IRA plan must be involved, which it is. There must be a disqualified person, which there is—you. And there must be a prohibited transaction between the plan and the disqualified person—which there isn’t. You see, the transaction is between the LLC and the plan, and the LLC and the disqualified person—not between the plan and the disqualified person.Read more at location 2166 • Delete this highlight
investment. Let’s say that while your accountant was crunching the numbers, word leaked out that you were on to a good thing, and your brother decided to buy a share of the LLC with his IRA. Again, we don’t meet the requirements of a prohibited transaction because we don’t have a prohibited transaction between the plan and a disqualified person. In this case, we don’t even have a disqualified person. You, your IRA, and your brother’s IRA are all doing business separately with the LLC.Read more at location 2170 • Delete this highlight
You call your real estate broker and describe what you’re looking for, explaining that you want the investment to provide a minimum annual return of 12 percent on the $500,000 invested. You emphasize theRead more at location 2183 • Delete this highlight
that you are not looking for a high leveraged (large mortgage) property. Your primary goals are cash returns and security. The broker is given no limitations other than these. The world is his oyster!Read more at location 2184 • Delete this highlight
Because your broker is most familiar with his local market, he looks there first. Nothing of any significance is found, though, so he broadens the search and is able to find three properties that fit the bill. After reviewing all three properties with your group, you decide to pursue a 10,000-square-foot retail/office building in a small town in upstate New York. It is a well-located building in a town of about 12,000 people. The broker’s due diligence reveals that it is a stable area of slow growth. He advises you that buildings in small towns do not appreciate at the rate they do in urban areas, because small towns do not provide the high turnover in property sales needed to drive prices upwards rapidly. The flip side, though, is that you will pay less for this small-town property than you would if it were located in a city, and will enjoy an identical cashRead more at location 2186 • Delete this highlight
flow. You tell your broker to bind the property with a purchase agreement (contract) subject to verifying all of the due diligence he has collected. You make your offer. You then call your accountant and turn the package over to him for verification of the numbers. Your group decides to take title as tenants-in-common. This arrangement was chosen because it will allow each of you to invest the amount of money he has available, rather than a prescribed share; and because it will allow the participation of disqualified individuals without risking a prohibited transaction. There will be no debt, the tenants will pay all the expenses, and the tenants have several years left on their leases. You hire a local real estate company to keep an eye on the building and collect and disburse the rents to the owners. The attorney draws title as tenants-in-common, completes the IRA custodian’s paperwork, and sends it on to the title insurance company. Then the money is sent to the seller, and title passes to theRead more at location 2192 • Delete this highlight
individual “tenants” based on the percentage of ownership purchased by each one. Your family members’ IRAs and those members who used discretionary funds start receiving an annual return of 12 percent. Because of this healthy return, most will probably hold this property for years. What if your family wants to gain wealth instead of developing a steady cash flow? Simply tell your real estate broker what you’re looking for, and he’ll find the investment that does what you want it to do. If necessary, you may have to split your family into different groups, each of which looks for a property that would help them meet their goal.Read more at location 2199 • Delete this highlight
In an earlier scenario, you learned that you can gift land to your children in $10,000-a-year increments. Your kids can then use their IRAs to buy options on one another’s property, and eventually reap the benefits of appreciation. This is one way in which you can make their IRAs grow.Read more at location 2207 • Delete this highlight
Buying High-Risk Property—Scenario 1 Your real estate broker tells you of an opportunity inRead more at location 2377 • Delete this highlight
Montana. A developer in Boseman has finished one phase of a two-phase subdivision. The first phase of twenty lots has almost been sold out, and it is time to get the second phase of thirty lots ready for marketing. In the second phase, the roads, which were roughed in, need finishing; power has to be brought in; and a water system has to be developed. The developer requires $90,000 to get the additional thirty lots up and running. The lots in Phase I sold for $25,000 each. Several homes have already been built on the lots, and others are getting started. Your broker is convinced that this is an opportunity to make some money. After your accountant reviews and analyzes the figures from Phase I and the projections for Phase II, you, too, decide that this is a promising investment. The problem is that you live in Canton, Ohio, and know absolutely nothing about Montana law. What if the developer goes under? How will you go about foreclosing? How long would it take? What will it cost? Your intuition tells you thatRead more at location 2379 • Delete this highlight
don’t want to make the loan. Yet, you believe in the project. Rather than loaning money to the developer, you decide to purchase the property. You will give him $90,000 for the thirty lots. While they will be worth $25,000 apiece when the infrastructure goes in, they are probably worth only about $10,000 apiece now. With $300,000 of security for your $90,000 investment, you have eliminated a lot of the risk. You offer the developer a first option on the property. (To learn about options, see page 107.) The option will allow him to buy back the property for $103,500 total. To keep the option current, he must pay a monthly option price of $1,125 per month, which will apply to the purchase price. He has the option for twelve months. You will now receive 15-percent interest on your investment. Had you structured a straight loan instead of the sale option, the financial result would have been identical. You would have received $1,125 per month, just as you will now. The difference is thatRead more at location 2386 • Delete this highlight
The owner holds the building free and clear of debt. He has found another investment opportunity, and needs the equity out of this building to use on the next transaction. He would go to the bank and borrow the money, but alas, the bank doesn’t want to make a loan on a vacant building. The owner’s only choice is to sell. But, considering the soft market, who will pay a decent price? You offer to purchase the property with your IRA for the asking price of $300,000, subject to the owner’s leasing the property back for a period of time. How long? However long you think it will take for the market to firm up. The seller now has to pay you $2,500 in lease payments per month. More important, he has justRead more at location 2402 • Delete this highlight
freed up $300,000 in cash for his next investment. If you are concerned about his credit, you can have him pay the lease up-front— say, one year’s worth, or $30,000.Read more at location 2407 • Delete this highlight
You give the seller the option of subleasing the property. This will secure your investment further, since when the seller sublets the property, you will end up with not just his signature on the lease, but also that of the subtenant. You now not only have your real estate broker looking for a tenant for the building, but you have a very motivated lessee looking, as well. The sooner the seller/lessee gets you a tenant, the sooner he will be off the hook. Nothing will take your risk completely away, but this will greatly limit it.Read more at location 2408 • Delete this highlight
What if the property were laden with $200,000 debt? Would the seller be willing to complete the same transaction? If he needed the $100,000 equity in cash, he would. If the current $200,000 was payable to the bank at 8-percent interest over twenty years, his payments would be $1,673 per month. For anotherRead more at location 2412 • Delete this highlight
$827 per month ($2,500 lease less $1,673 · $827), he would solve his problem. Not only would he have the cash he needs, but he would reduce a long-term liability ($1,673 per month for twenty years) to a short-term liability ($2,500 per month only until he sublets the building).Read more at location 2414 • Delete this highlight
You have enough money in your IRA to buy all three properties. The problem is that if they all go sour, you will have had $215,000 invested for several years without a return. You may make a couple of bucks on the resale if the projects fail, but not much more thanRead more at location 2426 • Delete this highlight
inflation—and you know that that won’t get you far. On the other hand, the possible returns are enormous. You decide to share both the wealth and the risk. After talking with your crew and some family members about the investments, you find that both your father and your attorney want to play. Using tenancy-in-common ownership (see page 142), your IRA buys a third of each of the properties separately; your dad, another third; and your attorney, another third. If all of the investments go sour, you will now have put up only $71,666 instead of the whole $215,000.Read more at location 2428 • Delete this highlight
Once the agreement has been approved by your custodian and signed by all parties, it can then be sent to the custodian for funding.Read more at location 2529 • Delete this highlight
companies. Instead, you’ll make certain that several clauses are, when appropriate, made part of your LLC contracts.Read more at location 2539 • Delete this highlight
A great way to do this is to follow the cash-in-cash-out rule.Read more at location 2541 • Delete this highlight
The LLC agreement should state that the LLC members who put in cash for their equity should get the first cash resulting from the sale of the investment. Once these members have received their principal back from the investment, the soft equities will be paid proportionately. After that, the profits will be split based on each member’s percentage of ownership.Read more at location 2545 • Delete this highlight
I have even structured the contract so that, although the developer had hard equity in the property, he had to wait until all of the investors received their principal back before having his own cash returned. I call this an incentive clause, as it gives the developer a good deal of incentive to complete the project in a timely and efficient manner.Read more at location 2548 • Delete this highlight
Be aware that although opt-out clauses are a must in long-term investments, you may want to use them even in three- or four-year deals. Consider critical time frames to determine when an opt-out would be advisable. When does the developer expect the project to be at a break-even point? When will the limited liability company be in the best position to buy your shares? The answers to these questions will help you decide if and when you want this clause added.Read more at location 2558 • Delete this highlight
Finally, the LLC’s operating agreement must include a clause which states that its shares are transferable. This will allow you to transfer these assets to another entity if and when you decide to change IRA custodians.Read more at location 2562 • Delete this highlight
One of the aspects of this project that appeals to both you and your accountant is the profit margin. Because there are so many unknowns in land development, you wisely insist on seeing a 100-percent profit margin going into the development.Read more at location 2577 • Delete this highlight
And this is exactly the profit margin offered by this project. ($1 million for land purchase and development, and $1 million profit.) You decide to go forward with the investment.Read more at location 2583 • Delete this highlight
In this very simple example, the developer has put up $500,000 and you have put up $500,000. You might think that the profit would be split the same way: 50-50. However, that’s probably not how it will work. As discussed earlier, you, as an investor, may choose to pull out of the investment at some point, but the developer will have to oversee the project and take it to its completion. He therefore has quite a bit more at stake than you. So what type of split is reasonable? For your investment of $500,000, the developer may beRead more at location 2587 • Delete this highlight
willing to sell you 30 to 35 percent of the ownership. That means that if all goes as planned, within a couple of years, you will receive a return of up to $350,000 on your $500,000 investment. Is this really possible? Yes, yes, yes.Read more at location 2590 • Delete this highlight
You and the developer settle on an ownership split of 35 percent to 65 percent, with your IRA owning the smaller share. You instruct your attorney to prepare an LLC agreement that reflects this split, and that makes the developer the managing member of the LLC. This means that, within certain limits, the developer will be calling the shots on this project. You know that because of the developer’s extensive experience, he is best qualified to make decisions about the development. Moreover, you know that in most cases, IRS rules prohibit you from managing an investment made with your retirement account.Read more at location 2592 • Delete this highlight
The only question is “How much more?” That’s where you’re taking a chance. Once the developer gets a return of his principal, the profits will be distributed, with 65 percent going to him and 35 percent going to your IRA. Do you add an opt-out clause to the agreement? Yes. The builder has indicated that it will take him two years to complete the project, so you have asked for a two-year opt-out date. At that point, you can choose to take whatever profits have been generated and move on to another investment. Of course, if the development is going well at that point, but not all the lots have been sold, you may very well decide to remain in the LLC past that date.Read more at location 2599 • Delete this highlight
Most likely, your principal will be safe because the developer won’t make his money back until you do. And I think you’ll agree that the potential rewards are well worth the risk.Read more at location 2615 • Delete this highlight
As you have seen, this type of investment can be quite profitable. But the following scenario will show that even more profit can be made by seeing a project through from beginning to end—from the purchase of the raw land, to the construction of the buildings, to the sale of the fully improved property.Read more at location 2621 • Delete this highlight
knack for finding and acquiring land packages with one-hundred-percent locations. In real estate lingo, a one-hundred-percent location is a site that is far superior to other sites in that area. It may be a corner of an intersection that has an extremely high traffic count, or it may be a site that has a commanding view or unusual access, but it is the best site in that vicinity.Read more at location 2626 • Delete this highlight
The language necessary to qualify for IRA membership was put into the formation of the LLC agreement.Read more at location 2638 • Delete this highlight
In the absence of such a recommendation, though, try contacting the International Business Brokers Association, Inc. (IBBA). (SeeRead more at location 2763 • Delete this highlight
First, in most cases, you should not buy more than 49 percent of a business. Second, you cannot control the business in which you are investing. Let’s briefly examine each of these regulations.Read more at location 2777 • Delete this highlight
What I didn’t mention in Chapter 7 is that a corporation can also be considered a disqualified person.Read more at location 2779 • Delete this highlight
Moreover, you and those family members who are considered “disqualified” should not own 50 percent or more of the stock combined.Read more at location 2781 • Delete this highlight
If you would like to know more about the subject of this book, feel free to visit my website at www.iraresource.com. This site provides a wealth of information about self-directed IRAs, as well as about investing IRA funds in real estate. Moreover, it will allow you to sign up for my newsletter, a monthly publication that will keep you abreast of IRA news and provide helpful investment tips. Tools like this can be invaluable as you build your retirement fund.Read more at location 3125 • Delete this highlight
http://uscode.house.gov/usc.htm This counsel prepares and publishes the United States Code, which is a consolidation and codification by subject matter of U.S. law. Visit the counsel’s website to view or download titles and chapters of the U.S. Code, including Sections 408, 408A, and 4975 of Title 26, which present those codes that govern the establishment and use of Individual Retirement Accounts.Read more at location 3338 • Delete this highlight
Institute Website: www.ccim.com The website of the CCIM Institute enables you to search for a CCIM (Certified Commercial Investment Member) by market area, property type, and specialization; or by city. Each member is a recognized professional in commercial real estate. CCIM also offers comprehensive courses in commercial real estate.Read more at location 3343 • Delete this highlight
Bay, CA 93443-0668 Phone: 800-324-1031 Website: www.nce1031.net/ This national nonprofit organization of real estate agents can, through its website, provide the names of Equity Marketing Specialists—agents who have achieved a high level of expertise in the field of real estate.Read more at location 3347 • Delete this highlight