HELOCs in Hawaii

The following downloadable cheat sheet was made for Hawaii residents but the concepts discussed are typical as it is a confusing game.

What is a HELOC (Home equity line of credit)?
A line of credit where the collateral is the existing equity in your home. Think of a credit card where your max limit is a portion of your equity in your home with some actually good rates.

Pros:
It’s a line of credit where if you don’t use it there is no interest being accrued.
Low-interest rate because it is seen as a low risk loan from the banks perspective
A good way to get access to liquidity in a pinch. Especially when starting a new investing strategy and need proof of concept.

Cons:
There is a possibility of the bank calling a loan due or changing the terms as the economy changes
Its not the best way of using equity because you should just sell the asset and be deleveraging into more fixed debt (very counter-intuitive I know but most things are)

What is LTV?
Loan to value. So if your home is worth $100,000 and you have $50,000 left on your mortgage then your LTV is 50%.

I’m confused… this all sounds great but just tell me what to do
Option 1: Initiate a HELOC with Aloha Pacific CU for 1yr @ 0.5%. Then either go with ASB or CPB. They both will cover up to $500 for early termination with Aloha Pacific (which would be some of the closing costs that were waived) and no annual fee. For ASB, as long as you have $2500/month in direct deposits then there are no other fees – setup an automatic transaction from another bank recurring every month to take care of that, extra credit if you send that same $2,000 right back a few days later (that’s almost like money laundering). At the time of origination, can check rates to see if you go with another 1 yr (with ASB) or 2yr (with CPB). If you need to do a third time – a few years out, then go with whichever one you didn’t go with for the second HELOC. These rates change and so do the fee structures so try to learn this stuff and connect with other investors. A good way to do that is come to have a beer with other sophisticated investors at ReiAloha. Notice CPB is put in the 2nd order because they will waive the cancellation fees from the host bank prior. Yes, we thought this out like the Sunday arm chair quarterback strategies-out the running back rotation of the Denver Broncos.
Option 2 (for the lazy): Although this is not optimizing the rates this method is a little simpler if your time is so valuable like you are coming up with the cure to some rare form of cancer. Take the lowest of the 2-3 year HELOCs and just go with them. This minimizes movement and makes your life simpler. Perhaps it makes your life so simpler that you free up time and mental bandwidth to invest in real assets such as rental real estate or passive syndications?

I’m still confused… walk me through a real-life example
Someone who just did this with a credit union… for a $200k loan, the closing cost was about $1200 (which were covered by the cu) and he paid $700 for an appraisal. He intends to hold for 3 yrs, so he didn’t get much details on how much of the closing costs he would have to pay back…. for this scenario, we estimate that all $1200 and would have to be paid (which $500 of that would be covered by the new lender).

Thoughts about appraisals
In order to cut costs some banks will do a desk review to determine the value of your property. This usually is more conservative figure and hurts you because you want your home to appraise for the most that it can in order to qualify for the biggest loan. These desk reviews utilize the tax assessed value which usually lower than if you paid $500 for a real appraisal or a cheaper “drive-by” appraisal. Sometimes it might be worth it to pay the extra fees to get a real appraisal instead of the lazy man method. It might be obvious but have a conversation on which appraisal is being used or be disappointed like when Coke switched your C&H sugar for corn syrup.

What about for a high leverage option (above 80%+) and low leverage option or will all of them not touch higher than 80%?
Higher leverage HELOC are available but not openly published. The author of this guide did not want to waste their time finding such fringe data since it changes so much and did not want to wait of a consultation from another bank employee. The collaborator did note that Hawaii State FCU was one of the few Credit Unions that openly published a higher LTV (up to 95%). Note – Hawaii banks are much more conservative on appraisals and terms than on the mainland. You may want to have a bank on the mainland if they will give a HELOC out of state. Typically anyone can get into most Credit Union after all they just want your money to sit in their bank paying you 0.01%. Sometimes you just have to donate $10 to some friends of the library account to gain membership.

Thoughts about fees
Be cognizant of closing costs are. The credit unions don’t have an early termination fee, however, you got to pay back closing costs. For the banks, there is a $500 termination fee and rates are higher, but maybe a better route if you got to pay back waived closing costs with the credit unions… especially since ASB and CPB will cover up to $500 early termination.

Why are you doing this?
Equity in your home is lazy money. It is not yielding a return and in fact it is a liability for lawsuits. The wealthy try to control everything and own nothing (encumber their assets with debt). In addition, typical investment yields range from 12-25% for stable, cashflowing assets, that hold their value even if the economy weakens.

Fine tuning:
“At some point you are going to ask the following: Assuming the delta between the one and two year helot is 1% and we are talking about a 200k loan… That’s 2k. Is it worth it to run around one afternoon and move stuff around online???

Are you going with the one year one first then get the two year from the next one? At this point it may make sense to get on a coaching call for 30 minutes to get an expert opinion.

Also it is possible to get a HELOC on a non-owner occupied home (rental property) but if you are considering so read this… simplepassivecashflow.com/roe”

Conclusion
Overall the process is pretty painless. You might have to run around looking for your mortgage files, HOA documents, or insurance but once setup it works just like another checking account.

Download link

117 – Assisted Living Facilities with Loe Hornbuckle

Edited audio version: https://youtu.be/r2O7mQ_g4Ug

YouTube Link: https://youtu.be/LOORnE1rWFk? sub_confirmation 1

Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

Different types of Assisting living

The boutique ALF method

How Loe got started investing

10 percent higher than average rents of 5500 a month in TX

ALF business plans

How to find a home for mom and dad

Find Loe at http://thesageoak.com/

116 – Jay Papasan from the One Thing

YouTube Link: https://youtu.be/4K4VFnGpfJo? sub_confirmation 1

Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

Jay Papasan is a bestselling author, vice president and executive editor at Keller Williams Realty International, and co-owner, alongside his wife Wendy, of the Papasan Properties Group in Austin, Texas. His most recent work with Gary Keller on The ONE Thing has garnered more than 200 appearances on national bestseller lists including #1 on the Wall Street Journal bestseller list. Before joining Keller Williams Realty, Jay served as an editor at HarperCollins Publishers, where he worked on such bestselling books as Body-for-Life by Bill Phillips and Go for the Goal by Mia Hamm.

Jay serves as Gary Keller’s co-author and executive editor on best-selling titles including: The Millionaire Real Estate Agent, The Millionaire Real Estate Investor, SHIFT: How Top Real Estate Agents Tackle Tough Times, FLIP: How to Find, Fix, and Sell Houses for Profit,HOLD: How to Find, Buy, and Rent Houses for Wealth, and The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results. He also co-authored SHIFT Commercial.

Best investing books Simplepassivecashflow.com/books

The domino theory – momentum

18-25% total return for SFH

Start small – and go small first fast

Co pairing tasks

Focusing question – what is the one thing I can do that will make everything else go away

411 – annual goals

Work a maze backwards – begin with the end in mind

Counter balance not balanced

When do you stop pushing and start living?

Don’t buy your primary residence

Involving your spouse

Short segments:

 

 

Podcast #115 – Flipping to passive rentals with Mark Ferguson

YouTube Link

Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

Aside from blog, owns 15 rental properties in Northern Colorado generating $7K/mo passive income.

Harder to cash flow around Denver. Looking out-of-state.

Since Sept 2015, has not purchased new SFH. Focusing on commercial, flipping, which was best use of time.

Always demand for low-end flips (less risk v. high-end).

Write own goals, don’t rely on other people, and think differently to develop himself.

Don’t C.E.F. – especially if you’re not a contractor.

Some opportunities in purchasing primary residential properties, but not going to stay there forever.

If you want to be creator and sell houses full-time, get a real estate license. If part-time, not really recommeneded unless you own a couple properties already and can expend time.

Goals for more passive income ($100k/mo) and freedom = happy.

Change your mindset and try. Otherwise, you’re stuck where you are (ex: frugal). What’s your motivation and dreams?

Let people drink their haterade.

Tough to let go, but happier to save time by hiring out on blog, website, e-mail, property management, etc.

Not a tech-savvy guy, but build blog and all that SEO!

Wished more good people to hire directly instead of 3rd parties.

Don’t force yourself to buy something – especially in a sellers market.

Are you taking action that’s getting closer to your goals or treading water? Take time for yourself.

Always lot of stuff to do, but don’t stress about it. A couple mistakes or not getting things done will not ruin you.

First blog comment was fulfilling. Drives motivation on how to help give back to others.

Check out www.investfourmore.com and podcast. 453 articles and 117 podcasts.

Contact info: Mark@investfourmore.com

 

Podcast #114 – Jennifer Beadles – Turning Active income into passive income in a Primary market

YouTube Link: https://youtu.be/KrOhA6xv6rc? sub_confirmation 1

Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

Income has a cap
Bought first house at 21
Take business profits into buy and hold rentals
Say out of Seattle
Mount Vernon WA
Tell the agent in super simple terms
Comments on meetups
Should i get started now?

Time is the most important thing… If not now when?

Time is the most important resource. You can trade time for money and vice versa. It is pretty rare that you can not throw money at a problem and make it go away.

I stumbled upon a great visualization of your time.  Basically, the yellow below is the time we sleep, blue is leisure, and light blue is at work. See the diagram here http://flowingdata.com/2017/05/09/adulthood-days/

Two takeaways:

  1. If you have not started investing… when the heck when? Get a mentor and compress the learning curve, decrease costly mistakes, and get on with your life!
  2. There is only a limited amount of time to create a legacy… VAs or Virtual Assistants I use.

Fiverr is the world’s largest marketplace of talented online freelancers who pride themselves on
getting things done for you. On time, on budget. Designers, developers, writers – everything you
need for your next project is here. Now let’s tackle your to-dos, today!”

Here is more from Fiverrs website:

“Fiverr’s global community of freelancers have delivered tens of millions of
high-quality Gigs from over 150 service categories across 190 countries.

Fiverr is a global online marketplace offering tasks and services, beginning at a cost of $5 per job
performed. Freelancers use Fiverr to offer services in more than 150 categories, to customers
worldwide. Currently, Fiverr lists more than three million services on its site.
Fiverr is the world’s largest marketplace of talented online freelancers who pride themselves on
getting things done for you. On time, on budget. Designers, developers, writers – everything you need
for your next project is here. Now let’s tackle your to-dos, today!
Join over 11M businesses who use Fiverr’s freelance services.
Fiverr is the world’s home for digital, creative and professional services, providing a one-stop shop
for millions of digital services, all at your fingertips.
Fiverr is a digital marketplace that allows you to make your business better, stay on budget and get
things done in just a click.
Fiverr is the easiest way to get everything done, at an unbeatable value.
Need something now? As the world’s home for digital, creative and professional services, Fiverr
provides one-stop shopping for millions of digital services, all at your fingertips.
Fiverr gives you instant access to millions of Gigs from people who love what they do, in just a click.
Need something done? Let someone else take care of it! Get everything from resume help, to
designed invitations, to cool gifts, all at an affordable price. Whether you’re building a business, or
just looking for something unique, find it on Fiverr!”

Some of you had questions about Virtual Assistants which I have had some growing pains with…

Take 1: I went to various countries/regions Craigslist where I heard there was cheap virtual labor such as the Philippines, Ukraine, Latin America, Eastern Europe, Etc. I created a generic posting for a Virtual Assistant and a link to a Google Form that I created that was supposed to farm data of willing workers and ask binomial questions such as if they had experience with graphics, audio editing, Excel, English, and how much their hourly rate was. This was a success and the idea was that I would create a database that I could BCC the emails to competitively bid projects. Unfortunately, when I sorted my list for the desired skill I was looking for, I discovered that many of the potential candidates sent generic resumes back. They did not even read the job description. I guess as the saying goes “shit in shit out.” Tim Ferriss talks about giving strange instructions to potential job candidates such as a requirement to fax in their application (in an age of limited fax access) to see which candidates follow directions and can overcome minor Resistance of not having fax machines.

Take 2: It seems like the tasks are taking a lot more time than it should. To some respect, that is to be expected. What I am trying to wrap my head around is the cultural differences not to mention the language barrier. In some of these Asian cultures, honor and face are utmost importance and sometimes it is culturally the normal to lie to save face. In America, we preach stepping up and admitting fault and moving on which I believe is a true demonstration of high value. So it’s a little frustrating… I know the internet sucks at these places but give me a break. I am just surprised they are not telling me their dog ate the GoogleDoc. Successful people take ownership and I accept this as MY fault in terms of me not having my job scope defined and linear instructions for the virtual assistant to carry out. If my virtual assistant misses on the deliverable or takes too long I take full responsibility.

Afterthoughts: A great discussion at a recent Mastermind I attended around this topic. Seems like a lot of people are backtracking from cheap (sub 8 dollar an hour labor) and opting for higher quality workers. I believe the vision of an employee is to get something done cheaper than your personal hourly rate, also get it don’t faster, and with a “Sir… I was completing task X and I found this wrong in our process so I took care of it and wanted to discuss this with you.” I don’t know if I will ever achieve this level of initiative in any person trading their time for money but one can only dream. Until then I will try to switch to a more project-based system as opposed to having a VA on call for a 10-40 hour set time. The cons of this project-based methods are that it requires more touch points for me to keep micromanaging each project and this is the exact reason I am looking for help in the first place. Time is the most important thing Jelly Bean. https://www.youtube.com/watch?v=BOksW_NabEk

The Random list of tasks to outsource:

1. Organize your travel (including learning your travel preferences). This includes making all your travel arrangements,
organizing all your flight info into your favorite travel app, and even remotely monitoring your travel to be ready to deal with
any missed flights or oversold hotels.
2. Handle billing disputes.
3. Help setting up bills onto auto payment on your credit card.
4. Address and mail cards, letters, and packages. Sure you may still handwrite the thank you, but do you really need to look up
the address and post the letter?
5. Update your contact manager (or CRM database).
6. Screen your e-mail and handle low-level responses. This includes deleting or archiving things you don’t even need to see.
7. Update your blog and social media accounts.
8. Organize and manage your filing system, both paper-based and scanned e-files.
9. Take dictation (either live or via recordings, perhaps using Voxer, one of my favorite apps).
10. Set up appointments and hold your schedule.
11. Gather all the needed data and prep information for all your appointments. For example, I ask my assistant to put to the
memo of any appointment she posts to my calendar any recent email exchanges and the contact information of the person
I’m meeting with. This saves me untold time when you compound this service over 15-20 meetings I hold each week.
12. Daily clean-up of your office, including refilling items.
13. Screen phone and e-mail so you don’t get the interruptions.
14. Take notes at key meetings and follow up with attendees on key deliverables.
15. Keep a master chart/list/calendar of your projects and deadlines and set reminders.

16. Tickler all birthdays and anniversaries, holidays, or other important dates, and even arrange for gifts, cards, or phone calls
that make you look good.
17. Update his or her own “Project List” so that all the tasks and deliverables they are responsible for in one place for you to
review.
18. Get, open, sort, forward, handle, and if need be shred your mail.
19. Coordinate with outsourced vendors when you have an IT issue. You just work from a back-up computer for the day and let
him or her troubleshoot it with your IT vendor.
20. Order things online for you and handle any product returns or service issues.
21. Handle any personal errands or schedule any household repairs. Yes this is perfectly reasonable as it saves you time that
you can reinvest in creating value for your company.
22. Notarize your documents by becoming a Notary Public in your state.
23. Help you to streamline your office—filing, sorting, and systematizing wworkflow
24. Basic updates to your Web sites.
25. Create and continue to refine the “expert system” for how to be your assistant (this one should be part of their job function
right from the start). This way if you promote your assistant they have created the core system for your next hire. If they leave
you to work elsewhere, the transition is much less painful.
26. Dealing with tech troubles on your phone or tablet computers. They can do this during the day when you’re in the office doing
other more valuable work.
27. Any parts of your projects that he or she is capable of doing for you. Constantly be on the lookout for things to try them out
doing. For example, my assistant helped expand the syndication reach of my business articles by over 100,000 annual
readers.
28. Download movies or audiobooks
29. Search for contacts of people you need to meet
30. Bookkeeping with a CPA or without one
31. Edit videos
32. Make calls
33. FInd sellers
34. Take Calls from leads
35. Call banks to find a portfolio lender
36. Assemble a list of podcast guests to contact

Podcast #113 – Buck Joffrey – Medical Surgeon gets fired and goes into freefall

For the limited offer coaching from Buck and program: Simplepassivecashflow.com/buck

Video Version: https://youtu.be/jq0MhXDEzzA

Audio Version: https://youtu.be/TUmVLqNNtlE

 



Text “simple” to 314-665-1767 to download the Hui Google Drive files and the  2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

 

We heard you on podcast 17 and you told your story – http://simplepassivecashflow.com/podcast-17-serial-entrepreneur-dr-buck-joffery-wealthformula-podcast/

Hearing your story high paid doctor. Describe yourself as an employee?

Great butt kisser

Lane’s getting fired story

So you were fired what gave you the security to not go back?

Lane’s getting fired story

 

http://richhabits.net/catastrophes-reveal-inner-greatness/?mc_cid=610082b2da&mc_eid=a129173ca3

 

Why professionals are trained to go through the system

 

The two excuses why not to leave the professional system

 

Wealth formula – Mass (money) x Velocity (Leverage) = wealth

 

You need to make money

 

What happen to assisted living project?

 

Taking shots and trying things out? Where is the transition point from taking singles to going to homers?

 

We are talking about Jorge from Simplepassivecashflow.com/ahp

 

SPC listeners are usual creatures. Get me in a room with a bunch of W2 workers talking about their frequent flier miles and their cars and I’m completely turned off. What are your thoughts on coping with this?

 

What are some ways you teach the entrepreneurial spirit with your kids?

 

What if they just want to work for the man or do peace corps?

 

Simplepassivecashflow.com/buck to get the free 1-hour coaching offer from Buck.

—————————————————–

 

Our worst W2 moments which were our Han Solo Moments

 

How to make it as a medical professional? – Kiss Butt 😁

 

We are robots.

 

For more content go to Simplepassivecashflow.com/buck

Apartment Video Walk-Throughs on YouTube Channel

Check out all the videos on our YouTube channel. Subscribe to get the latest and hidden videos.

Des Moines, Iowa – 52-unit C+ Class Apartment (April 2018) – Video

San Antonio, TX – 192-Unit Class B+ MFH (March 2018) – https://youtu.be/-5h2GKZ3I58

San Antonio, TX – 253-Unit Class B+ MFH (March 2018) – https://youtu.be/vj8ZMteppfg

Oklahoma City, OK – 170-Unit Class C MFH (March 2018) – https://youtu.be/3n4Kan6fmAw

Podcast #112 – #LaneHack – Fear + How much risk to take + KProxy!

YouTube Link: https://youtu.be/8K4AY4oOAUs? sub_confirmation 1

Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

The two biggest enemy of success is fear.

It inhibits you from taking action. And nothing happens without that.

Fear, never goes away, no matter how successful you become. Same thing is said about CrossFit workouts… they never get easier. You just plateau to a new level of suck.

The same fear exists for the successful, why don’t they hold them back from taking action?

It made me push to busy my first out of state rental in Birmingham from Seattle, sell my Seattle rentals to 1031 into a dozen out of state properties, and lately moving toward a portfolio of syndicated private placements. I don’t know what’s next?

Successful people simply make a habit of taking action, despite the fear. They have gained the habit/muscle or mental six pack of taking action.

By taking action do you gain the experiences of facing obstacles and overcoming them, facing mistakes and learning from them, taking risks and surviving failure. Gained muscle or even a crazy mental eight pack. You draw upon these experience in times of hardship or difficulty.

Obstacles always change but your ability and track record to move around it is what is most important. When we evaluate people to work with Track-record is always important. Obvious we want to work with someone who is proven but realistically every situation in the future will be different and we are really looking for someone who can deliver despite the obstacles. We are not looking for who is a genius (although it helps) or even with some competitive advantage but mostly good character and ability to overcome obstacles… dare I say turn obstacles to opportunities.

There are a couple leads that have had touch times in their deals lately due to circumstances outside their control. What I know of their mindset is that they are freaking resilient that they will overcome the obstacles.

When crap happens we want say:

“we’ve faced a similar uncertainty before and this was the mistake we made and need to avoid”

“we’ve taken a similar risk before and we survived”

Do not mistaken brazen courage with competence/confidence. There are a lot of people who fake it till they make it.

Risk: If you are in aware of the risks and rewards (mentor/stage 3 of 4 of learning) then take the most risk as possible. The Shape ratio theory that I believe in that the more risk you take the more reward you get exponentially. Therefore take as much risk as you can to capitalize on the most reward. BUT… huge caveat here… only take the most risk that you are willing to take that if the worse that can happen you can live with.

This is why I don’t skydive.

This is why I stick primarily to non-recourse deals where the apartment is stabilized.

proxy service: http://kproxy.com/

QRP – Qualified Retirement Plans & Free Book

I personally don’t like these QRPs or qualified retirement plans (Roth-IRA, Solo 401ks, etc) if you are an active real estate investor. But if you have money locked up in an old IRA or 401k this is a great way to get that money out to invest in your deals or syndications.

 

If you are conservatively using prudent leverage and finding decent deals there is no reason you should not be able to retire in 10 years or less and thus negating the very reason for these accounts. I don’t know about you but I want access to this money to play with well before I am sixty-something.

When you have money in these accounts it sounds good that you are not taxed on gains but you are restricted from getting a Fannie Mae loan. Using the QRP loans get you the second tier financing options, for example, a Roth IRA can buy real estate on leverage, however, will need a non-recourse loan which is often a fraction high-interest rate and lower LTV. No Bueno!

Info on using retirement funds for syndication deals:

Question: I am considering investing in a 506c investment on a multifamily property. They are raising a 1 million from investors, then getting a loan and making improvements to the property and repositioning it over 5-7 years. I wanted to use my funds from my SEP IRA which is currently in a qualified intermediary trust. What is the UBIT tax? Will I be subject to that on this deal? Also, should I set up an LLC that then loans the money to their LLC? How can I structure this for tax and liability benefits?

Answer [Note: From CPA and not this is NOT legal or professional advice]: When you invest in a business (syndicate = business) with your IRA, the IRA will be subject to UBIT (unrelated business income tax) and UDFI (unrelated debt financed income).

For our purposes, UDFI is produced when an IRA uses debt to purchase real estate. Essentially, the portion of the property’s income considered UDFI is based on the percentage of rental income derived from debt.

For example, Property A is purchased for $100,000. You put down 25% of the purchase price as a down payment and finance the remaining 75% with a traditional mortgage from the bank. The property produces $10,000 in net income for the year. $7,500 (75%) of the net income is considered UDFI and is subject to UBIT.

There is a deduction for the first $1,000 of income subject to UBIT. Income subject to UBIT over $1,000 is taxed at trust rates. For 2017, trust tax rates start at 15% and max out at 39.6% after just $12,400 of income subject to UBIT.

UBIT is paid by the IRA account. If for whatever reason UBIT is paid directly by the taxpayer, the amount paid is considered a contribution to the IRA.

Follow up question: Is there any difference in how the UDFI will apply for these:
1) SD IRA
2) SEP-IRA
3) Solo 401K
4) SD IRA (operated as an LLC) so this one is confusing… My LLC owns an LLC (syndication) which owns a property such as 150-unit on 123 main street

Question: I’m trying to decide if one is better than another for tax purposes?

Answer: The solo 401(k) is not subject to UDFI but it subject to UBIT. The IRAs are all subject to UBIT and UDFI. Note that generally the passive income flowing back to you is very low and the, as a result, we don’t see a huge UBIT tax.

Another idea would be to take a debt position (lending) rather than equity. The interest you would receive is free of UBIT and UDFI tax.

(This suggestion of a “debt” position or note investment with the SEP IRA to avoid UBIT and UDFI tax is a creative one… but it’s a very low chance of happening because it’s just too complicated and honestly not worth the effort from the syndicators’ side. It’s a very similar case of to a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It’s possible but from the syndicator’s perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor)

Ask you can tell this is a really grey area. One CPA mentioned, the answer depends on how you structured the syndication, UBIT may or may not apply for the real estate holding for solo 401k. I would really try to toss the Operation Agreement to your individual CPAs to examine and determine ahead of time as I am not a CPA 😉

Caveat: If you are late to the game and already have a fat 401k then you should convert it to a solo401k. At that point, you should think about putting it into a syndication since you are restricted on how you can leverage it.

So if you are going to have one of these QRP accounts since you have an old 401K or old retirement accounts want to self-direct it in good investments and don’t want to take a huge tax hit right away set up a Solo401k or Checkbook control.

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