2. almost all investments have risks , but the thing about these investments is that you could not affect
the results of the business/your return. You are a spectator, viewing the game. Also, you can't use
leverage (among using leveraged is going to be discussed later). Also , with stocks if any little blip in
market happens , like oil, battle , scandal, etc. Your value could drop. Real estate does go up and
down but generally you don't lose all of your profit worst case scenarios. REal-estate appreciation has
kept 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, should
you talk to any economic planner, they will let you know to always be diversified inside your
investments. This is what SDI does for you. Ideally you should have SDI, stocks and shares , bonds
etc.
SDI has been a well kept secret. Why? i think it is because of ignorance, and that i also the folks upon
Wall Street don't benefit. A broker with an investment company will not tell a person regarding it ,
because they can't earn money off of the transaction (not to mention having them understand how it
functions ). The last reason happens because there are "professionals" who don't have a clear
understanding upon its use.
To get a SDI, you'd either have to go via an Administrator, or a custodian.
What is an administrator ? Banks, brokerage firms (like Charles Schwab) and insured credit rating
unions.
What is a Custodian?
There are incredibly few self-directed IRA/401k custodians in the United States. To be a custodian
regarding self-directed products, the custodian is known as a "unaggressive custodian." This simply
means that they are obligated for legal reasons to provide only custodial and administrative services
for the qualified plan. They can provide absolutely no investment advice. This tremendously reduces
the fees connected with traditional investments as you , the investor, help make all of the investment
selections. They are also FDIC covered by insurance.
What is the part of the custodian
oHolds your IRA assets
oPerforms almost all IRA transactions
oKeeps almost all IRA records
oProvides almost all IRS required reports
oKeeps IRA plan in compliance
oProvides access on the internet access
There are only 3 things your SDI can't invest in and so they are
oCollectibles/antiques
oLife insurance
oStock of the sub-chapter "S" corporation (these are companies that are traded publicly on the stock
market)
As long as the transaction is for investment purposes and you have not created a "banned
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 SDI
oForeclosures, options , Pre-construction, raw terrain , apartments, offices, remove malls, mobile
properties , public storage, any kind of investment property
oTrust deeds/mortgage notes
oPrivately held C-Corp stock, LLC regular membership
.
The rules on prohibited transactions
oCant buy from or sell to a disqualified/prohibited person
oCant make personal utilization of property
oCant use SDI as collateral for personal loan
Personal use prohibitions
You can't personally make use of a vacation home. Even though you rent it out for 354 days and
spend one day in it, this really is illegal. You can't execute maintenance on the property. You can hire
a maintenance crew while using money coming out of your SDI, but you cannot physically work on
the property. You also can't hunt on raw terrain , dock boat with a SDI owned boat slip. There was
someone , who worked with Pensco, that bought a certain area of a water fishing spot in Alaska. The
person, could hardly fish there, therefore she leased out the area to other anglers and received profit.
More on disqualified persons
You can't obtain a person providing services to the investment. It has to be a clean standing. It can't
be enterprise between employer and also employee. If you have your SDI in an LLC and you want to
buy property , you will not be able to should you own more than 50% of the company. You can't
buy/sell to a member of your family including spouse, ancestor, lineal descendant and also any
spouse 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 can't be a sale/exchange/leasing of any property or
providing a loan between a plan plus a disqualified person. Lastly , you can't buy some thing you
already own (SDI can't be useful for funds to pay off your mortgage. There should be no identified
direct or roundabout personal benefit to the account owner).
Basic rules
oCan't involve the account holder, his/her spouse a lineal ascendant/descendant of family nor the
spouses of your children and also you can't use SDI funds to pay off an individual mortgage
oCan't make individual use of property (should be for investment functions only)
oCan't personally guarantee the loan for the SDI nor make use of the SDI as collateral for a personal
loan
oCan't work for or take income from a good SDI investment
oCan't have got your spouse, nor your family members (your siblings are ok) own the property prior to
its purchase by your plan
oCan't have your business hire or be located in or even on any part from the property while it is in
your plan. You might receive any property like a distribution from your plan as a retirement benefit
4. What transactions are banned ?
The following are defined as prohibited purchases when they involve the account holder:
oBorrowing money from the SDI
oSelling property to the SDI
oReceiving unreasonable compensation regarding managing assets for that SDI
oUsing the SDI as security for a loan
oBuying property for individual use with the SDI
oCollectibles/antiques
oLife insurance
oStock of a sub-chapter "azines " corporation
50% rule
If a disqualified person(azines ) owns 50% or maybe more collectively of an entity , then the SDI
cannot engage in a transaction with the entity since the company is considered a disqualified person.
Using IRA as collateral
You can't use your SDI as collateral for a loan. If you will get a loan it must be an unsecured loan. If
you go into default in paying the loan , the lender can't go get the money from your IRA, nor can they
go after individual assets.
Any kind of prohibitions have fines , if you violate all of them. SDI is no various. Here are the
consequences if you do not comply:
oLoss of IRA status caused by prohibited transaction
oLoss of tax exempt status
oIncome tax on account value
oPenalties and interest
oPossible audit to determine degree of prohibited transactions
If you really want more information on the rules check out:
oIRS code 4975
oUDFI/UBTI: internal revenue service code 598
oDepartment of training (DOL) 2004-8
Tax court docket cases
oSwanson 1997
oRollins 2004
oRousey v. Jacoway 2005
Ways to invest by using your SDI
oProperty purchase almost all cash
oProperty purchase employing a loan (NOTE it has not always been the truth where you can get a
loan from a bank for the SDI. These previous couple of years a few establishments are offering loans
in 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. oAs somebody in a joint venture
oAs a Tenants in accordance T.I.d. Member (if the terms I use are unfamiliar to you, look them up on
the 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 school
oCypress tree farm in Costa Rica
oFish farm in Salinas, CA
oInterests in movies, plays
oCondo in Lithuania
oHouse on the private lake in Colorado
oThoroughbred race horse
oNudist resort in virgin Islands
oOver 35 you.S. Banks
oNapa valley B & B
oBiotech company
Pensco's top trader success story will amaze you on the possibility your SDI may have. In March of
1999, four guys opened up SDI accounts. They each invested independently and through their IRA's
in a organization they were starting. These people brought in other not related investors. That
organization 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 scientist
made $22 million. CFO help make $17 million. Marketing VP makes $8 million (4,000 return) What is
much better than that? They all put in $2,000 through their IRA's besides the CEO who invested
$1,800. Pensco explained the characteristics of the 1 year Roth IRA and they almost all chose to
invest 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 right...show me the money !
Let's compare
Real Estate Investing : with SDI
oTax deferred growth on revenue and cap gains
oNo 1031 requirement!
oNo annual tax reporting
Taxable investments non SDI
oTax deferred cap benefits (if 1031)
oTax on net earnings
oAnnual reporting required
How that works
You have an account with Pensco (it is possible to roll over your current IRA account to them) you tell
them what you want to invest in , they do all of the paper work , make out the check and now it is
inside your trust account. Almost all money that is required for expenses and all income go into/taken
6. out from the trust account. The title of the property in your IRA is going to be held with Pensco Trust
as follows: "Pensco Trust Custodian, FBO (client name) IRA, (Acct #). Almost all documents will be
examined 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 sole
proprietors, small enterprises with no employees (other than part timers working less than 1,000
hours per year or even their spouses).
Roth contributions can improve tax free $15,000 to %20,500 per year or 30k to 41k per married
couple (for 2007 ). Unlike a Roth IRA, there are no revenue limitations placed on the contributor. You
could be a zillionaire and it would not matter! Currently a single person making over 110k can't
contribute to their Roth married couple is actually 160k.
Who can usually benefit from Solo (401)k
oReal estate brokers
oConsultants
oContractors
oLawyers
oElectricians
oAny single practitioner
oEven if you function full time for an boss and have a business on the side where you are a single
proprietor you can establish a solo K
The difference is...
oYou can borrow up to 50k (or up to 50% of balance, if less) from your solo 401 k
oYou can invest in life insurance
oYou can invest in "azines " corporations
oYou can avoid UDFI and money gains UBIT (UDFI and UBIT is going to be discussed later) when
using leverage to buy genuine estate
oA portion of your savings can increase tax free for life
oYou can put away more money faster with larger contributions
oNo income cover on contributing to the Roth component
oAbove fifty year old employee has the option to put up in order to $20,500 annually away, to grow
tax free
Why appealing
oAllows the only real proprietor funds to grow tax free
oWhile 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 year
oYou 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 Pensco
regarding details)
oA husband and wife in business together can put up to $51,000 ($25,500 each ) per year of after tax
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 tax
deferred. 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 $100,000
oAnd there's no income limit upon contributions
oMay roll before existing plans and also IRAs into it
Types of purchases of SDI
All cash
Your SDI buys one property all cash. Absolutely no debt, LLC, and also partners. When you do that
your SDI needs to have enough funds to cover purchase price, all high closing costs , custodial fees
and 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 "tenants
in accordance." Ownership percentage should be identified and all costs and proceeds prorated
correctly according to these kinds of percentages.
Multiple events - IRAs & People all funds T.I.d.
Same as several IRAs, as long as there's no loan (as an almost all cash deal) it doesn't matter who
the SDI belongs to, or who the people are. Almost all names must be upon contract and title for
unique proportions.
All cash
Buy/sell, with/without, friends/family is by far the easiest and most common transaction. When this
happens 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 investment
related expenses are paid out from the SDI.
Getting a loan to buy
In yesteryear there were NO financial institutions lending to SDI. Only until lately a few banks within
the nation offer this particular service. The loan that is offered is a non-recourse loan. This is great
news, due to the fact now investors could use leverage.
When you get a loan for your SDI you:
oCan't ensure the loan personally.
oCan't 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 the
lending 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 property
is bad chances are they may require a larger down payment.
8. Non recourse loan process
oAfter setting up the SDI, it will typically close in 30 days.
oCash out refinance: money is distributed back into the SDI.
THERE isn't any PRE PAYMENT for any NON-RECOURSE LOAN!
Property Eligibility
oSingle family residential
oCondo's (100% complete, 33% or more sold, and also HOA turned over simply by developer)
oDuplexes
o4-plexes
oMulti-family (five or more)
oCommercial property : including retail, warehouses , and office buildings
Ineligible properties include:
oResidential with large acreage
oRaw land
oFarms
oManufactured homes
oHotels, condo-hotels
oCo-ops, timeshares
oSenior or assisted living facilities
oNon-franchise restaurants
oEntertainment properties
oMini-storeage
Requirements for financial debt financing must be confirmed for purchase along with supplies (10-
20% loan amount).
Documentation required for loan acceptance :
1.Completed loan application
2.Most latest asset statement making sure IRA assets for purchase and reserves.
3.Purchase sales contract
4.Acceptable real estate appraisal for the property being financed. The appraisal must come from
lender.
5.Copy of drivers license
6.Property insurance should browse the IRA/LLC as the insured
Income requirements for homes
oThe financed property need to generate sufficient net operating income in order to exceed debt
service payments by:10%single family (less then 10% or negative cash flow is suitable with sufficient
supplies on SFR). REgarding 2-4 unit properties it is 10-15%
oIRA property must be verified for purchase along with reserves
How the closing process operates :
1.Title organization prepares closing documents.
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 for
final.
5.Title organization forwards recorded offer deed to Pensco.
6.Through your trust, you now own the property.
Another way to invest using IRA
This is a true tale from a Pensco client. One investor wanted to buy a property in san francisco. They
buyer didn't have all of the funds for a down payment. Therefore , he approached uncle and asked
about him or her if he had been interested in earning a specific percentage return upon his IRA. He or
she agreed. So, the buyer took his portion and combined that along with his friends SDI, to purchase
the 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 is
happy, since they sold the property. The bank , is happy because they are making a return by giving
a 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 a
developer who was forming a residential area. The investor greeted the developer and also solved a
problem for the kids. Apparently there were several fall outs together with buyers. The trader , said
(paraphrasing) "i'll 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 fourteenth
2005. Investor utilized $195,000 to invest in property on Marco Island FL. Sold resulted in a $500,000
profit heading to IRA
Rental property purchases
Question:
I wish to purchase a rental property regarding $100,000 can i use:
oA. $30,000 of my IRA funds
oB. $65,000 of my own funds
oC. $5,000 loan from my friend to do this?
oD. Every one of the above
oAnswer: D
In the begging of this E-book, I expressed which using SDI may be kept a solution. One of the
reasons is because of misinformation from "professionals" is actually from CPA's. Several CPA's say
not 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 just
like any additional IRA investment)
Some CPA view items do not take into consideration the next :
10. oThey do not address need for diversification within the retirement portfolio in order to hedge against
additional assets
oBroadly implies that even though you know that you can get far better results investing in real-estate
through your SDI you shouldn't do it
oIt is IRRELEVANT if real-estate out performs additional IRA investments
oIGNORES the facts that 44% of net worth in US is in genuine estate
oDoes not notice that after tax deliver is the primary aim of the investor
Unrelated enterprise Taxable Income (UBTI)
If your SDI produces income coming from activity not "considerably related" to the exempt status
UBTI is needed. The purpose of UBTI ended up being to alleviate unfair competitors by exempt
organizations with taxable businesses. Basically when you conduct business and it is not really
passive income, you come across UBTI. Further explanation; if the SDI is going to open up a
restaurant, you are going to have got ordinary income. The IRS feels that is fair that you pay tax on
the funds you make everyday. Since it is not fair so that you can open up a restaurant and then for
someone else to open up a restaurant down the street, but you don't pay tax. If it's "ordinary income"
UBTI applies. If it is a second income UBTI does not utilize , such as rent, interest and capital
acquire.
Unrelated Debt funded Income (UDFI)
Income generated by exercise that had debt funding. Tax is put on that portion of gain/income that is
debt funded. Most "passive" assets income such as rents from a property are usually excluded from
fees , 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 million
and you get yourself a loan for the additional 2.5 million. Well the gains you get from the borrowed
two.5 million in the bank will get subject to taxes (UDFI). You will not acquire taxed on the portion that
comes out of your SDI.
retiring in Costa Rica