Archive for the ‘EDUCATION’ Category
Should You Use an IRA LLC or Solo 401(K) to Invest in Real Estate?
by Phoebe Chongchua
Nobody would argue that there has been severe disappointment in the stock market performance. That has a lot of people looking for other options such as taking their retirement investment accounts into their own hands. Using the self-directed IRA allows you to enjoy the benefits of contributing to your retirement account while also being able to self-direct those funds into alternative assets such as real estate.
“The simplest way to invest in real estate with retirement accounts is with a self-directed IRA. An IRA has to have a custodian such as a bank or trust company that will hold the assets for the accountholder,” says Jeff Nabers, founder of IRA Association of American and CEO of Nabers Group.
“You can open a self-directed IRA and then roll your retirement funds into it and then you can ask the custodian to go out and invest based on your wishes,” says Nabers.
While this method of using your self-directed IRA to invest in real estate is becoming increasingly more popular, it has its downside. “It can become cost-prohibitive,” says Nabers. He says the fees that custodians charge can add up very quickly. And he adds, “The custodians can be slow to react to an accountholder’s needs. Sometimes they might not let you do an investment because of their policies.”
But Nabers says investors can create an IRA LLC (Limited Liability Company) which allows more freedom to invest in what and when they want. “You can pair your IRA with an LLC. The LLC is created and the IRA accountholder directs the custodian to invest some or all of its funds into the LLC. The accountholder then manages the LLC,” explains Nabers.
He says this method doesn’t require accountholders to get approval from a custodian to purchase real estate—with the IRA LLC the accountholders have complete checkbook control over their funds.
However, Nabers says another retirement vehicle that investors are turning to is the Solo 401(k). This investment vehicle provides checkbook control, allows 10 times higher contribution limits than the IRA, and provides the ability to borrow money from your retirement account, and, generally, it helps you avoid the UBIT (Unrelated Business Income Tax) — a tax that is often created through leveraged real estate ownership.
Unlike a self-directed IRA or IRA LLC, the Solo 401(k) allows you to be the actual trustee of the retirement plan directly. You manage the funds and you invest them in what you want.
“In an IRA everything about how it works is laid out in a section of the Internal Revenue Service code. With a Solo 401(k), the section about how it works describes how it can work, but how the Solo 401(k) actually works is determined by the plan documents. So, all IRAs work the same but Solo 401(k)s can vary a lot from one plan to the next depending on how the plan documents are written,” says Nabers.
“You can set up a Solo 401(k) anywhere; what it comes down to is how flexible and capable the plan will be. You could set up a Solo 401(k) with a stockbroker and then you’ll invest only in stocks, bonds, and funds. Or if you decided to invest in a less restrictive platform, then you open a Solo 401(k) at another company but all that company does is send you a binder on your account and doesn’t offer any real help,” says Nabers.
Here are five things to look for before deciding to open a Solo 401(k):
- Expertise and knowledge. It is extremely important to find a company that is highly experienced in setting up a Solo 401(k). As the stock market plummets, the industry of self-directed investing is growing rapidly. Companies are popping up all over the Internet. It’s crucial that you find a company that has expertise and knowledge in this highly technical field. Without the expert support and financial intelligence, your retirement funds could be in jeopardy.
- Additional services provided. Make sure the company that you use to create your Solo 401(k) plan documents offers you additional resources. Some companies will set up your Solo 401(k) but not offer any additional educational information on important issues such as prohibited transactions.
- Make sure the company provides an IRS opinion letter to ensure the Solo 401(k) will receive favorable tax treatment as a qualified plan.
- Review the Solo 401(k) plan documents. Don’t just open the account without understanding the limitations of the plan documents. Remember, these plan documents can vary drastically so it’s critical to discuss your specific needs with the company before you elect to set up a Solo 401(k).
- Look for document provider rather than custodian. Custodians are not required for Solo 401(k)s. In order to have direct possession of your assets, you will want to make sure the plan documents offer more flexible terms than a custodian’s. If you use a custodian you will likely not have direct control of your assets and may have to go through the custodian in order to execute a transaction.
For more information on self-directing your retirement funds to invest in real estate, visit; nabers.com.
Published: February 6, 2009
Phoebe Chongchua is an award-winning journalist, an author, customer service trainer/speaker, and founder of Setting the Service Standard, a customer service training and consulting program offered by Live Fit Enterprises (LFE) based in San Diego, California. She is the publisher of Live Fit Magazine, an online publication that features information on real estate/finance, physical fitness, travel, and philanthropy. Her company, LFE, specializes in media services including marketing, PR, writing, commercials, corporate videos, customer service training, and keynotes & seminars. Visit her magazine website: www.LiveFitMagazine.com.
Phoebe’s articles, feature stories, and columns appear in various publications including The Coast News, Del Mar Village Voice, Rancho Santa Fe Review, and Today’s Local News in San Diego, as well as numerous Internet sites. She holds a California real estate license. Phoebe worked for KGTV/10News in San Diego as a Newscaster, Reporter and Community Affairs Specialist for more than a decade. Phoebe’s writing is also featured in Donald Trump’s book: The Best Real Estate Advice I Ever Received and The Complete Idiot’s Guide to Buying Foreclosures. She is the author of If the Trash Stinks, TAKE IT OUT! 14 Worriless Principles for Your Success.
Contact Phoebe at (858) 259-3646 or phoebe@livefitmagazine.com. Visit PhoebeChongchua.com for more information.
Creating a Tax Strategy for 2009
by Peter L. Mosca
[Note: To follow is an excerpt of an interview with Peter Jeppson, co-founder of Money Mastery, a financial literacy and coaching program designed to help individuals and families get in control of their finances. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/010709.]
Mosca: We know the goal of tax planning is to arrange financial affairs so as to minimize taxes. The good news for income property owners is that tax planning for rental property opens up many opportunities for sizable tax deductions. The bad news of course about being a landlord is that all the income you earn from your rental units is subject to Federal and State income taxes. Can you discuss ways real estate property investors can reduce their taxes in 2009?
Jeppson: When people have income of any kind, earned or passive, that dictates how it’s going to be taxed. When a person approaches real estate they need to approach it like a business, not a hobby but a real full-blown business. To do that, it’s important to keep track of your activities. Start a diary. For example, if I’m going to do something in real estate, it’s important that I have a meeting with everybody involved. Even if you have a meeting with yourself, keep an agenda and notes. If you have planned in advance what you need to be doing on the tax side, you can set up your real estate holdings inside of an entity.
Mosca: Do you do this to have of an exit strategy?
Jeppson: Yes, whenever you enter you must have an exit. Taxes are not everything; it’s just one part of the whole piece. So, pushing it around and pushing it into a new year is important. When you fail financially, let it come straight down and not go out laterally and hurt your credit, lose money in other areas, and then like the domino affect effect so many more things. It’s so important to be organized properly so that you have it in such a way that it doesn’t bump in to everything else and destroy it.
Mosca: What are some of advantages of creating an LLC?
Jeppson: You can set up the LLC to be managed by a member. A manager that’s not even an owner can also manage it. Say, for example, I have five children and they each own a fifth of the LLC, or 20 percent. I can manage that LLC and not even own any part of it. I can take a management fee, I can control everything, I can enter into all types of contracts, and I can market the company, whatever I wish as a manager. Now, let’s bring that home. If you were to total your personal assets, home, car, and savings, most people would have more money in the personal side than they would in the business side. Let’s say the business is really tiny. It’s a small circle. But on the left side is your personal and that’s a bigger circle, not to put any numbers with it. So, if someone is going to sue you, which circle are they going to sue? The bigger one on the left is your personal assets, home, car and savings or the one on your right, your business that doesn’t have very much in it? The goal is to create this business. You want to invest in real estate and grow your real estate business on the right side so it would be huge compared to your personal assets. In an LLC I can be a manager and not even own any of it. So none of the assets of the LLC are available to any creditors.
Mosca: Why don’t investors hear about ideas like this from financial planners or CPAs?
Jeppson: Let’s take a typical experience. Most people put their receipts in a shoebox of some kind, and walk into the accountant. Can you imagine how the accountant feels having to go through all the receipts and to do all the detail on that accounting? What happens is these accountants will hire people for $15 an hour to put all that detail together and charge you maybe $50 an hour for their services to cover overhead and their time. Bottom line: they don’t like seeing a shoebox with receipts. Are they going to stand up to you and say, “you’re an idiot and by the way I’m not going to do your taxes anymore?”
Mosca: No, not really because it’s to adversarial.
Jeppson: Well-said Peter. So, what happens is they never come to you before the end of the year. Notice that when you see them the year is done. The door is shut. You’re not going back and you can’t do one thing about it.
Mosca: What can we do?
Jeppson: Get organized. Control spending, eliminate debt, maximize your savings, and reduce taxation. That starts with a spending plan, and that starts with a tax plan. If you start with the end in mind, it helps. If you get some knowledge and information, then you know how to direct your accountant. That’s what we do. Accountants have a way of doing accounting. They have a system. Say to your accountant, “Set me up, set my books up and tell me how I should keep them and I’ll keep them your way and when I bring them to you then you can do them in minutes and charge me a whole lot less than I can take every advantage of all the tax savings.” [For a free consultation with peter, go to IncomePropertyInvestmentTalk.com/010709 and put in FREE OFFER.]
Mosca: What is your take on the Obama administrations plans as they relate to capital gains taxes. I believe he is going to leave them alone for the next 12-18 months. What do you see?
Jeppson: I agree with you Peter. I think he is going to leave them alone. If he jimmies them too much, I think they are going to fall off the edge. I don’t think he can afford to make too many more changes. When the Federal government puts a certain money supply out there and then the banks do not loan it out or to each other, the money is not moving in the economy. Until the confidence level comes back, we are not going to see money moving. When Lee Iacoca took charge of Chrysler Motors and they needed a loan and the government bailed them out, at the last moment the government said I want to buy stock in Chrysler instead of giving a loan. When Chrysler solidified, the government sold their stock for seven times more than they paid for it.
Mosca: What is your golden nugget?
Jeppson: Put a spending plan together. Tie it to the way you are personally organized. An annual review is important. See where you are, where you are going, what has happened well, and bad, and do the comparisons.
Published: February 5, 2009
Peter L. Mosca is president and founder of BAK Communications, Inc. He has over 22 years of communications and media consulting experience, serving a variety of nonprofit organizations, including the CCIM Institute and the REALTOR Association on all three levels – national, state and local. He is the Spokesperson Trainer for the CCIM’s Jay Levine Academy and trains hundreds of residential REALTORS nationwide to be effective industry spokespeople. He is consistently ranked as "excellent" by about 90% of those who attend his presentations.
While his principal consulting focuses are public speaking and media relations development and content delivery and management, Peter is also the host of the Voice America Network’s weekly radio program, "Income Property Investment Talk," a one-hour program that brings the powerhouses of commercial and residential real estate to property investors every Wednesday at 11 a.m. EST.
Peter is married 17 years to his wife Barbara. They have two children: Ashley, 15 and Kelli, 12. Hence, the name BAK Communications, Inc.
Success with Short Sales
by Phoebe Chongchua
It may truly be the choosing of the lesser of two evils — short sale or foreclosure — but, if you have to get out of your home, finding a way to complete a successful short sale may provide the best outcome for a distressed homeowner.
Since I’ve covered short sales in previous columns, see Short Sale: May be Solution for Delinquent Homeowners, I am not going to focus on what they are but rather how to make them successful. Short sales are typically more difficult than a regular real estate transaction but they are better than simply walking away from a home and letting it foreclose.
These days, with foreclosures and short sales comprising nearly 40 percent of recent home sales, the National Short Sale Center (NSSC) is receiving more than 3,000 calls per month from homeowners across the nation. The company has already handled more than 1,000 short sales in all 50 states.
Nearly 12 million homeowners are upside down with their mortgages — owing more than their home’s value — and the number is growing. It’s estimated that number will increase to 15 million within a year’s time.
Travis Hamel Olsen and some partners opened the NSSC a few years ago. He says the short sale is a "win-win" situation. The bank ends up losing less money than if it ended up taking back the property and the homeowner’s credit is not damaged as much as from a foreclosure.
But the short sale process is not easy or financially pain-free. Some lenders will absorb the difference between what the outstanding mortgage is and what the home sells for in a short sale. However, other times the lender will seek to collect the difference from the homeowner.
If you’re considering a short sale, here are some tips that you should consider.
Get expert help.
This is a must. Short sales are difficult and negotiating through the process can be very stressful. You need guidance and the best available information that you can find. "There’s no charge for our services to the homeowner," says Travis Hamel Olsen, President of National Short Sale Center. That’s because the NSSC is paid by splitting commission with the listing agent and the lender pays the company a closing fee that is authorized by the homeowner. For those fees, the company will help the homeowner navigate through rocky waters. "We will guide the homeowners, letting them know all the documents that they need to collect for their specific lender," says Olsen.
Start the process as soon as possible.
Contrary to what some homeowners believe, you do not have to be delinquent to start or complete a short sale. "Don’t sign title over to anybody else to conduct a short sale for you," cautions Olsen. He adds, "A lot of people will sign the deed of the property over to somebody to negotiate the property — that’s not needed."
Submit a hardship letter.
Even though you’ll utilize the services of expert agents and short sale specialists, you’ll still need to do your part to help convince the lender that the short sale is the best outcome for all. The hardship letter explains to the lender why it is impossible for you to pay the full amount of the loan. It demonstrates your true financial hardship. Experts say you have to be careful if there is a big gap between your current income and the income you used to get the initial loan to buy the property. A large gap could point toward possible mortgage fraud, unless your financial circumstances have drastically changed.
Price the short sale competitively.
Usually, it’s best to price the property at or near market value. Keep it competitive says Olsen. He says a lot of people want to list the property at what the debt is but that is not usually successful. The good news is that Olsen says banks are more willing to negotiate. "We are seeing more approvals and consequently more closings every single month," says Olsen.
The short sale can be a lengthy process, have, patience, quality experts on your side, and stay on top of what is needed from you to help close the deal. For more information on short sales visit: shortsalecenter.com.
Published: December 19, 2008
Phoebe Chongchua is an award-winning journalist, an author, customer service trainer/speaker, and founder of Setting the Service Standard, a customer service training and consulting program offered by Live Fit Enterprises (LFE) based in San Diego, California. She is the publisher of Live Fit Magazine, an online publication that features information on real estate/finance, physical fitness, travel, and philanthropy. Her company, LFE, specializes in media services including marketing, PR, writing, commercials, corporate videos, customer service training, and keynotes & seminars. Visit her magazine website: www.LiveFitMagazine.com.
Phoebe’s articles, feature stories, and columns appear in various publications including The Coast News, Del Mar Village Voice, Rancho Santa Fe Review, and Today’s Local News in San Diego, as well as numerous Internet sites. She holds a California real estate license. Phoebe worked for KGTV/10News in San Diego as a Newscaster, Reporter and Community Affairs Specialist for more than a decade. Phoebe’s writing is also featured in Donald Trump’s book: The Best Real Estate Advice I Ever Received and The Complete Idiot’s Guide to Buying Foreclosures. She is the author of If the Trash Stinks, TAKE IT OUT! 14 Worriless Principles for Your Success.
Contact Phoebe at (858) 259-3646 or phoebe@livefitmagazine.com. Visit PhoebeChongchua.com for more information.
Five Key Areas to Pay Attention to When Buying a Home
by Phoebe Chongchua
Looking for a new home can be exciting and frustrating. You can help alleviate the frustration by paying close attention to five key areas of the homes you’re considering buying; it may save you money in the long run.
Don Walker is an inspector and owner of Ace Home Inspections. He says there are five areas in homes that he frequently reports problems with. They are electrical, foundation, plumbing, the attic, and landscaping.
Electrical Walker says sometimes homeowners assume with newer homes that all will work just fine but that’s often not the case. "I [inspected] a brand new house — four years old but the electrical was all done incorrectly," says Walker.
Having a complete home inspection will help to rule out any problems and point out any areas of concern. However, even as you’re browsing homes, buyers can start to make note of the key areas that Walker mentioned, such as the foundation.
Foundation Walker says a four-year-old home he inspected recently was already showing trouble signs which could result in a costly repair project. "It was a model home. What [the homeowners] did was plant trees for shade to make it look really nice, but they planted the wrong trees and they’re going to crack the foundation and it’s going to cut the property value down by $50,000," says Walker.
Walker says in the case of that home, the trees were causing micro-fractures in the tile in various locations of the home. "As you walk through the house, 21 feet in and 30 feet deep, there’s just too much root invasion and it’s going to ruin their tile," explains Walker.
He says some tell-tale signs with this home were the minor cracks in the foundation that were causing a lifting and separation of the foundation. Also, the windows were not opening and closing properly, "which means the foundation is moving."
However, just because you see cracks doesn’t mean there is a foundation problem. "Most people don’t understand that there are natural cracks in a house. That’s why when we do an inspection report we have to look at it and say ‘Okay, this is a typical crack and this one is an untypical crack,’" says Walker. He says some cracks may lead to other problems while others won’t.
Plumbing Walker says another big area of concern is the plumbing. It’s an area that you can’t always spot as easily but it can create expensive repairs if plumbing issues go either undetected or are not properly fixed. "Mold forms underneath sinks when people have a leak and they fix the pipe but they don’t take care of the mold," says Walker.
He says things like caulking the sink can help prevent mold. "That’s my number one thing I always find — bad sinks," says Walker.
He says that when you look at the sink, look behind it and most of the time you will discover a little crack. "What happens is, when you wash dishes or you wash your hands in the bathroom or the kitchen, the water gets in that crack and seeps down. Once the water gets behind the cabinet it’s in a perfect position to create mold," says Walker. The dampness, humidity, and lack of light can turn that area beneath the sink into a mold-breeding ground.
Attic "You can tell everything about the house by the attic," says Walker. He says other areas of the home can be covered up if a repair had occurred. For instance, if there was a leak and it damaged a wall, with the right contractors and repairs it can be made to look like new and, hopefully, function like new. But Walker says the attic is sort of the eyes to the soul of the home. "In the attic you can tell where all the damage has been," says Walker.
"If you’re in a 20-year-old house and you see that the insulation is brand new, you know that there was a water leak because it had to be replaced," says Walker. He adds, "You can tell if the roof is good because you can look right at the wood."
Landscaping "There should not be moisture or plants next to your house," says Walker. He says there should be a 12 inch barrier between the landscape and the house. Walker says otherwise you run the risk of having the foundation crack and affect the home. What happens is, as the landscape that is too close to the home is watered, the foundation and soil expand. Then, when no watering occurs, the foundation dries up and shrinks and this can cause it to crack.
Remember, knowledge is power, so learning about the home before you close the deal on it will keep you from making a mistake that may cost you extra out-of-pocket money later.
Published: September 26, 2008
Phoebe Chongchua is an award-winning journalist, an author, customer service trainer/speaker, and founder of Setting the Service Standard, a customer service training and consulting program offered by Live Fit Enterprises (LFE) based in San Diego, California. She is the publisher of Live Fit Magazine, an online publication that features information on real estate/finance, physical fitness, travel, and philanthropy. Her company, LFE, specializes in media services including marketing, PR, writing, commercials, corporate videos, customer service training, and keynotes & seminars. Visit her magazine website: www.LiveFitMagazine.com.
Phoebe’s articles, feature stories, and columns appear in various publications including The Coast News, Del Mar Village Voice, Rancho Santa Fe Review, and Today’s Local News in San Diego, as well as numerous Internet sites. She holds a California real estate license. Phoebe worked for KGTV/10News in San Diego as a Newscaster, Reporter and Community Affairs Specialist for more than a decade. Phoebe’s writing is also featured in Donald Trump’s book: The Best Real Estate Advice I Ever Received and The Complete Idiot’s Guide to Buying Foreclosures. She is the author of If the Trash Stinks, TAKE IT OUT! 14 Worriless Principles for Your Success.
Contact Phoebe at (858) 259-3646 or phoebe@livefitmagazine.com. Visit PhoebeChongchua.com for more information.
