I was checking out my various IRAs the other day and was struck by how much better I feel about my self-directed IRA than I do my traditional (stock-based) IRAs. Most people’s retirement savings are invested in the stock market (including the majority of mine). But when I compare that with my self-directed IRA which is investing in hard money lending, I can’t help but notice how differently I feel about them.
Yes, stocks historically have risen over the long term. I know this. But I also am acutely aware that I have no control over the prices of the stocks I hold. About the only control I have is which stocks to buy and whether or not to reinvest any dividends they might pay. So each month, I check the value of my stock portfolio and I’m fairly detached from the experience. Stocks went up in value? Yay. But I know they could drop again tomorrow. Gains are transitory, at least in my mind. As the adage says, you’ve never made (or lost) money until you sell.
But with my hard-money lending IRA, I get a check each month for a couple hundred dollars. That’s real money I see coming in each month. It can’t be taken away again by a news report of a product recall, class action lawsuit, or some other random event outside my control. It’s cash in hand. Now the possibility exists that my loan might be defaulted on, but with the loan-to-value limits I use for my lending criteria, I know even if that happens, I’m still pretty well protected.
I know there is no such thing in investing as a sure thing or a guaranteed return, but the returns my HML-based IRA are generating feel much more real to me than my stock-based returns.
Showing posts with label alternative RE investments. Show all posts
Showing posts with label alternative RE investments. Show all posts
Self-Directed Roth IRA
Does anyone have any experience working with a self-directed IRA (Roth or otherwise)? I'm looking to head down this route and I have questions about the day-to-day operations - does it need a custodian (other than me), does the custodian write the checks and sign contracts, etc.
I've heard about using self-directed IRAs for several years, mostly about how they can be used for investing in real estate. I was always intrigued by this, but never really was in a position to set one up. A couple of changes going into effect in 2010 have made now seem like a good time to get going with this. In 2010, the income limits for who could convert a traditional IRA to a Roth IRA are going away. Additionally, if you convert in 2010, you can spread the taxes you'll need to pay over 2 years*. When I was laid off of my job over a year ago, I took my 401(k) and converted it into a rollover IRA. With the stock market down, now is good time to convert since I will have a lower amount I'll have to pay taxes on. (I should note that the current law applies to traditional IRAs converted to a Roth IRA. It's unclear if the IRS will decide that the law also applies to rollover IRAs converted to Roths. After talking to my CPA, I've decided that to be safe, I'll convert my rollover IRA to a traditional IRA and then convert it to a Roth.)
My point for doing this is to use the self-directed IRA funds to make hard money loans, which I have been doing for the last couple of years, earning between 10% and 12%. Getting that return tax free would be very nice.
* If you declare the conversion in 2010, you'll have to pay taxes on the converted amount in 2010. But if you don't, you must declare one half of the contributions in each of 2011 and 2012. What I will do in those years is calculate how much I will owe in taxes and simply adjust my W-4 withholding at my day job to spread the tax burden out over the entire year. Of course, it's likely that tax rates in 2011 and 2012 will be higher than 2010, but of course, that's anyone's guess. Lots can happen between now and then and I'm a fan of delaying paying taxes as long as you can.
I've heard about using self-directed IRAs for several years, mostly about how they can be used for investing in real estate. I was always intrigued by this, but never really was in a position to set one up. A couple of changes going into effect in 2010 have made now seem like a good time to get going with this. In 2010, the income limits for who could convert a traditional IRA to a Roth IRA are going away. Additionally, if you convert in 2010, you can spread the taxes you'll need to pay over 2 years*. When I was laid off of my job over a year ago, I took my 401(k) and converted it into a rollover IRA. With the stock market down, now is good time to convert since I will have a lower amount I'll have to pay taxes on. (I should note that the current law applies to traditional IRAs converted to a Roth IRA. It's unclear if the IRS will decide that the law also applies to rollover IRAs converted to Roths. After talking to my CPA, I've decided that to be safe, I'll convert my rollover IRA to a traditional IRA and then convert it to a Roth.)
My point for doing this is to use the self-directed IRA funds to make hard money loans, which I have been doing for the last couple of years, earning between 10% and 12%. Getting that return tax free would be very nice.
* If you declare the conversion in 2010, you'll have to pay taxes on the converted amount in 2010. But if you don't, you must declare one half of the contributions in each of 2011 and 2012. What I will do in those years is calculate how much I will owe in taxes and simply adjust my W-4 withholding at my day job to spread the tax burden out over the entire year. Of course, it's likely that tax rates in 2011 and 2012 will be higher than 2010, but of course, that's anyone's guess. Lots can happen between now and then and I'm a fan of delaying paying taxes as long as you can.
Fell Out Of Escrow
The property that is the collateral for hard money loan #6 fell out of escrow and is now back on the market.
Nothing much new to report. I've been working on getting my paperwork together for my taxes. The four flipping LLCs I am invested in in California all reported losses last year. The amount ranged from 1% to 3% of my investment. I'll be taking the losses as deductions on my taxes. On the positive side, the people running those have some other LLCs they recently started that are showing profits now. Perhaps the California real estate market is starting to turn around. Either that or they are able to buy at serious discounts.
I just finished reading The Snowball: Warren Buffett and the Business of Life, a biography of Waren Buffett. I recommend it to anyone interested in business or investing. The first one-third was somewhat hard to get through for me because it dealt mainly with Buffett's ancestors and how they came to America and what they did. The latter part of the book was much more interesting, especially since, having been a Berkshire shareholder since 2000, I was reading about events I had heard about through Buffett's annual letter to shareholders.
I am also about 2 chapters into The World Is Flat 3.0: A Brief History of the Twenty-first Century and I can already tell this is another must-read book for anyone interested in business. My wife is taking classes for her MBA and this was one of her textbooks. I'm glad she convinced me to read it.
Nothing much new to report. I've been working on getting my paperwork together for my taxes. The four flipping LLCs I am invested in in California all reported losses last year. The amount ranged from 1% to 3% of my investment. I'll be taking the losses as deductions on my taxes. On the positive side, the people running those have some other LLCs they recently started that are showing profits now. Perhaps the California real estate market is starting to turn around. Either that or they are able to buy at serious discounts.
I just finished reading The Snowball: Warren Buffett and the Business of Life, a biography of Waren Buffett. I recommend it to anyone interested in business or investing. The first one-third was somewhat hard to get through for me because it dealt mainly with Buffett's ancestors and how they came to America and what they did. The latter part of the book was much more interesting, especially since, having been a Berkshire shareholder since 2000, I was reading about events I had heard about through Buffett's annual letter to shareholders.
I am also about 2 chapters into The World Is Flat 3.0: A Brief History of the Twenty-first Century and I can already tell this is another must-read book for anyone interested in business. My wife is taking classes for her MBA and this was one of her textbooks. I'm glad she convinced me to read it.
This Is Why I Like Passive Income
Last Friday, I was driving back from lunch and my co-worker noticed steam and liquid coming out from the front passenger side of my car's hood. A check of the temperature gauge showed my car was close to overheating. Luckily, there was a Toyota dealership nearby, so we pulled in there and dropped it off for repair. Turns out, I need a new radiator and some other repairs. The estimated cost is just over $1,200.
Yesterday, I came home from work and picked up the mail. I had three checks waiting for me - one was the second payment of hard money loan #4 and the other two were from two of the four flipping LLCs in California that I am invested in. The three checks more than cover the amount of my car repair. Nice!
Yesterday, I came home from work and picked up the mail. I had three checks waiting for me - one was the second payment of hard money loan #4 and the other two were from two of the four flipping LLCs in California that I am invested in. The three checks more than cover the amount of my car repair. Nice!
Another Investment Made
Today I made another real estate investment. I'm a hard money lender in a first mortgage on a single family home in Oakland, California. This was a property the buyers picked up at a foreclosure auction. The amount owed on the defaulted mortgage was $495,000. The bank set the opening bid at $202,000 and the buyers got it for one cent more than the opening bid. There is probably about $25,000 worth of repair work to be done to it and three independent people have appraised the property at $325,000 to $350,000 after repairs. The buyers are contractors and each is a multi-millionaire. Les, the guy who I partnered with on my previous hard money deal in Louisiana, has known the buyers for over a decade and has found them to be very honorable.
The loan is for 1 year with interest only payments at 12% with a balloon payment for the entire principle due at the end of the term. No prepayment penalties, standard late fees. The net to me is 10% since 2% is taken for the servicing of the loan. The first mortgage is for $156,000, so the loan to value ratio is between 45% and 48%, depending on which appraisal you use.
I'll refer to this investment as Hard Money #3, with #2 being the Louisiana deal and #1 being the small loan I did about three years ago.
The loan is for 1 year with interest only payments at 12% with a balloon payment for the entire principle due at the end of the term. No prepayment penalties, standard late fees. The net to me is 10% since 2% is taken for the servicing of the loan. The first mortgage is for $156,000, so the loan to value ratio is between 45% and 48%, depending on which appraisal you use.
I'll refer to this investment as Hard Money #3, with #2 being the Louisiana deal and #1 being the small loan I did about three years ago.
Flipping LLCs Having Hard Times
Time for another update on the four LLCs I am invested in that flip foreclosures in the San Fransisco area.
Times are indeed hard in the California real estate market. I received a letter from the LLC manager stating what everyone already knows - the market sucks. Prices are depressed due to a flood of inventory, especially REOs and short sales. The LLCs have not been able to sell any properties. Since the companies are paid by taking 25% of the sales profits, no sales means no profits which means no income for the companies.
They have now exhausted their working capital. They are laying off about 60% of their workforce and those that remain will be taking a pay cut. They will also be moving to smaller, less expensive offices. They are asking the members to vote to change the operating agreement of the LLCs to allow the collection of a 4% annual maintenance fee to fund their ongoing operations. In return, they will forego their 25% stake in the profits. This will allow them to continue servicing the properties and give them additional time to seek alternative sources of income.
Personally, I'd like to refuse this request. One of the LLCs I am invested in was supposed to have closed a year ago and the investor's principle have been returned. That LLC is still operating because the properties left in inventory have not yet sold. I know they market is bad, but I have a hard time believing it can take a year to liquidate their inventory. I suspect they are still holding out for top dollar or close to top dollar. These properties were all bought at big discounts, so they should have some room to drop the prices for a quick sale. Of course, that's easy for me to say when I am not in the area and don't know all the details...
So despite my feelings, the reality is I have to approve this request. They currently have about 70 properties in their inventory, spread over 5 counties. It is in my best interests to allow them to continue to use their knowledge of the properties to get them sold.
Times are indeed hard in the California real estate market. I received a letter from the LLC manager stating what everyone already knows - the market sucks. Prices are depressed due to a flood of inventory, especially REOs and short sales. The LLCs have not been able to sell any properties. Since the companies are paid by taking 25% of the sales profits, no sales means no profits which means no income for the companies.
They have now exhausted their working capital. They are laying off about 60% of their workforce and those that remain will be taking a pay cut. They will also be moving to smaller, less expensive offices. They are asking the members to vote to change the operating agreement of the LLCs to allow the collection of a 4% annual maintenance fee to fund their ongoing operations. In return, they will forego their 25% stake in the profits. This will allow them to continue servicing the properties and give them additional time to seek alternative sources of income.
Personally, I'd like to refuse this request. One of the LLCs I am invested in was supposed to have closed a year ago and the investor's principle have been returned. That LLC is still operating because the properties left in inventory have not yet sold. I know they market is bad, but I have a hard time believing it can take a year to liquidate their inventory. I suspect they are still holding out for top dollar or close to top dollar. These properties were all bought at big discounts, so they should have some room to drop the prices for a quick sale. Of course, that's easy for me to say when I am not in the area and don't know all the details...
So despite my feelings, the reality is I have to approve this request. They currently have about 70 properties in their inventory, spread over 5 counties. It is in my best interests to allow them to continue to use their knowledge of the properties to get them sold.
Flipping LLCs Update
Anonymous asked for an update on the four LLCs I am invested in that flip properties in the San Francisco area. There is not much news that is different from my last update on these. Three of the four are now ended and the fourth one ends in the next six months.
The real estate slowdown has really put the brakes on these investments. Although the terms of the LLCs are over, they are still operating. Why? Because the properties they own have not yet sold. They are being rented out now to generate some cashflow, but the return of my principle is being delayed until the properties sell. Not all of it though. Last month, the latest LLC to end distributed 20% of my initial investment. The rest is still tied up in properties.
The company that runs these LLCs has offered investors a new program where you earn 9% on your money, paid monthly. You can roll your original LLC investments into this new program. However, the program requires a two year commitment. I can earn more than 9% and I don't want to tie up my money with them for another 2 years, so I've opted to skip that investment. Now I just have to wait for the properties to sell. The way things are going, it might take two years anyway..
Hopefully, I'll have an update on the Louisiana deal later today...
The real estate slowdown has really put the brakes on these investments. Although the terms of the LLCs are over, they are still operating. Why? Because the properties they own have not yet sold. They are being rented out now to generate some cashflow, but the return of my principle is being delayed until the properties sell. Not all of it though. Last month, the latest LLC to end distributed 20% of my initial investment. The rest is still tied up in properties.
The company that runs these LLCs has offered investors a new program where you earn 9% on your money, paid monthly. You can roll your original LLC investments into this new program. However, the program requires a two year commitment. I can earn more than 9% and I don't want to tie up my money with them for another 2 years, so I've opted to skip that investment. Now I just have to wait for the properties to sell. The way things are going, it might take two years anyway..
Hopefully, I'll have an update on the Louisiana deal later today...
Real Estate Slowdown Hurts My Cashflow
For the past four years, I've had some investments in four LLCs that flip properties in the San Francisco area. As you might have guessed, 2004 and 2005 were pretty good years for these investments and every couple of months, I was receiving checks for hundreds of dollars - and sometimes over a thousand. Now, however, the resale market has slowed down dramatically. Instead of the checks for $1,000 or more I was getting, the last check I received was for just under $20. And yesterday, for the first time since I've been invested in them, one of the LLCs did not distributed any money at all this period. The LLCs have not been able to sell some of their properties and so they have instead rented them out, so at least they are generating some positive return. But the particular one I got info on yesterday sold a property for a loss, so even the small rental income was offset by the loss.
I'm glad I decided to stop my investment at four LLCs. At this point, I think I can get a better return purchasing property and renting it on my own. (And, in fact, I bought Rental #1 instead of investing in another of these LLCs.) Now I just have to wait until the term of the LLCs is up (between one month and one year) so I can get my principle back for use in other investments.
I'm glad I decided to stop my investment at four LLCs. At this point, I think I can get a better return purchasing property and renting it on my own. (And, in fact, I bought Rental #1 instead of investing in another of these LLCs.) Now I just have to wait until the term of the LLCs is up (between one month and one year) so I can get my principle back for use in other investments.
Garage Town
Sorry it's been a while without any posts.. I was in San Francisco on business.
The other day, one of my co-workers was in my office talking about a new property development in Mesa, Arizona that she came across - Garage Town. It's a development consisting entirely of garages. Unlike a rental storage space, at Garage Town, you actually buy and own the garage, just like you would buy a home. The community is gated, you have 24/7 access. The garages can include cable, A/C, internet and just about everything a home has. They have a community clubhouse that has showers, bathrooms, and a mini-kitchen. (So while legally, you probably couldn't live there, in reality, you could stay for a couple days without being too inconvenienced.) My co-worker also said the garages vary in size from a standard one car unit, to huge two story spaces capable of sheltering an RV. Their website claims it is "the perfect starter real estate investment!" You get all the benefits of REI, including tax deductions,depreciation, and the ability to do a 1031 exchange.
The drawback? Here in Arizona, the smallest unit starts at $80,000. Prices vary across the country, but this seems pretty expensive for a garage - my Rental #1 in Tulsa cost as much. As for a real estate investment, I have my doubts. For a true investment, you'd need to rent this out. I'm not sure there are that many people who need to rent a garage. Further, I would think this would be pretty susceptible to economic downturns. Everyone needs a place to live, but when money gets tight, I think the extra garage payment would be one of the first things to go. Still, it's an interesting concept and I would like to know if any investor actually makes money renting one of these out. I have a feeling the investors who will make the most money are the builders who sell the units for the first time.
The other day, one of my co-workers was in my office talking about a new property development in Mesa, Arizona that she came across - Garage Town. It's a development consisting entirely of garages. Unlike a rental storage space, at Garage Town, you actually buy and own the garage, just like you would buy a home. The community is gated, you have 24/7 access. The garages can include cable, A/C, internet and just about everything a home has. They have a community clubhouse that has showers, bathrooms, and a mini-kitchen. (So while legally, you probably couldn't live there, in reality, you could stay for a couple days without being too inconvenienced.) My co-worker also said the garages vary in size from a standard one car unit, to huge two story spaces capable of sheltering an RV. Their website claims it is "the perfect starter real estate investment!" You get all the benefits of REI, including tax deductions,depreciation, and the ability to do a 1031 exchange.
The drawback? Here in Arizona, the smallest unit starts at $80,000. Prices vary across the country, but this seems pretty expensive for a garage - my Rental #1 in Tulsa cost as much. As for a real estate investment, I have my doubts. For a true investment, you'd need to rent this out. I'm not sure there are that many people who need to rent a garage. Further, I would think this would be pretty susceptible to economic downturns. Everyone needs a place to live, but when money gets tight, I think the extra garage payment would be one of the first things to go. Still, it's an interesting concept and I would like to know if any investor actually makes money renting one of these out. I have a feeling the investors who will make the most money are the builders who sell the units for the first time.
