Private Lending Basics – An Introduction

August 13, 2014

Guest article by Augie Byllott:

In the world of investment real estate there are myriad ways to buy, sell and finance real estate. The following information is about a particular segment of the business, private lending and most specifically targeted toward the financing of non-owner occupied real estate. With the enactment of the Wall street Reform Act more commonly known by the name of its authors, Dodd-Frank, lending to owner occupants has become a potentially hazardous business fraught with, as of this writing, many unknowns that could negatively impact small lenders.

For many years, private individuals seeking better returns have provided the fuel that keeps investment real estate viable for many small developers, builders and those who buy, fix and sell foreclosures, short sales, probate properties and junkers that are not considered financeable by banks. Their funds have facilitated the acquisition and renovation of literally millions of single family homes, helped small builders to create new housing stock and kept many trades people employed. In a nutshell, private money lenders help the economy while earning above market returns on their capital.

During my first 15 years in the banking industry I had never even heard the term private lending let alone knew what it was, then, I was approached by a talented young builder who had acquired enough property to build 15 houses but needed capital. His plan was to build and sell one house at a time and use the proceeds to repay the loan plus interest that was at least 5 percent more than I could earn at my bank. After reviewing his plan, some of his previous work and the blueprints of what he was going to build I developed a comfort level.

We documented the arrangement and he was off and running. I am happy to report that a formerly vacant piece of dirt now has 15 families living in homes each worth over $500,000 today! That was about 20 years ago. Oh, I more than doubled my original investment in a few short years so I was pretty happy too!

Private individuals seeking to avoid the volatility of the stock and bond markets may find the safe haven they are looking for in the world of private lending. This is sometimes called hard money lending though the two can be somewhat different. If you are prudent and diligent, you can earn solid returns while minimizing risks as a private lender.

Like any business venture private lending requires specialized knowledge; higher and more predictable returns can result when investing in private money loans but it also requires more effort and patience than that needed to push a button and execute a buy or sell order for a stock.

WHAT’S INVOLVED?

At its core, investing in private loans is a lot like investing in a bond that pays a fixed rate of return and pays off at maturity. If you make a loan to a borrower for $100,000 at 8% interest, and require interest-only payments, you’ll earn $8,000 income each year. And when the borrower fulfills their obligation, the loan will pay off at or before maturity and the original principal will be returned.

Liquidity – Do not consider becoming a private lender if you need the money before the maturity date. Even though most loans payoff, many do not pay off as expected. You can sometimes sell loans using an online loan exchange, or broker them to another private investor via a hard money loan broker. But even performing private money loans are typically sold at a discount. If you want to sell notes, even if they are performing, be prepared to take a little haircut.

Collateral Valuation – The underlying collateral for a private loan is very important to the overall security of the transaction. Lenders should carefully evaluate the value of the collateral and use several sources to confirm their valuation. A common practice among private lenders is to “drive the comps yourself.” That means do not just look at photos on an appraisal and assume you have an accurate value.

With the appraisal in hand get in your car and drive to the subject property as well as each comparable property and confirm for yourself that the property value is realistic. Consider multiple sources of value. In addition to an appraisal and driving the comps yourself, consider using an automated valuation model or a Broker Price Opinion (BPO) as well. Some properties are easier to comp than others.

Advances On occasion loans require the investor/lender advance additional funds for a variety of reasons. Advances may be required to cure delinquent property taxes, cure a senior lien position, hire an attorney, pay to defend bankruptcy claims, or even remodel a property if a foreclosure takes place.

Title Be sure your borrower obtains a lender’s title policy that will insure your lien position as a lender and offers fraud protection against forgery. Title insurance is not like homeowners insurance. If you suffer a loss with your homeowner policy, you submit the claim and get a quick reimbursement. Title insurance is an indemnity policy and as such you are reimbursed for a proven loss only and not the potential for a loss. The result may be that even though you will eventually lose money due to a title issue, you may not receive reimbursement for months, or even years later.

Borrower Credit – Carefully reviewing the borrower’s credit application and capacity to make monthly payments is the key to a successful loan investment. Private money loans are often made based on the collateral, but the best loans are those that give equal weight to the borrower’s past credit track record and capacity to make payments and repay the loan when a balloon payment is due, or when the loan matures.

Private Lender Insurance You will need to make sure the property owner has appropriate hazard and liability insurance in the amounts you desire as an investor. The insurance company must also be notified to include the private lender as an additional insured on the policy so in the event of loss, the check is sent to you first.

Documentation Documenting the loan, creating the appropriate security documents and disclosures to the borrower can be complicated and time consuming. There are a myriad of state and federal regulations to be followed, and a violation of these regulations could invalidate the loan and result in lost interest and/or fees. Consulting an attorney or mortgage professional can help you do things right.

SERVICING YOUR LOAN

Once a loan has been originated, payments need to be collected from the borrower, and various tax, regulatory and informational statements need to be sent regularly to the borrower. Lenders can do this themselves or hire a loan servicer to collect payments and provide reporting for a fee.

PRIVATE MONEY AND FORECLOSURE

If a borrower fails to pay as agreed, lenders must be prepared to foreclose on their collateral. This can be an arduous and time-consuming process that requires a significant amount of expertise and expense.

There are also alternatives to a foreclosure; among then are for the lender to accept a deed-in-lieu of foreclosure or a short sale of the property whereby the lender agreed to allow the property to be sold for less than the loan balance.

GETTING STARTED

As you can see, investing in loans is not as easy as it may seem on the surface and certainly more involved than buying a publicly traded security like a stock share or a bond. So, how do you invest in private money loans? How do you get started? How do you take the plunge?

The answer is: very carefully. Learning the private money lending business takes time. But once you understand the nuances and study the business, it can provide returns substantially greater than other investment choices.

There are professionals in the business of helping investors make loan investments. In the past, they have been referred to as hard money lenders, loan brokers, or mortgage loan originators. These are professional business people who are skilled and in most cased licensed by their state at originating private money and conventional loans.

The best part about using one of these sources of assistance to invest in loans is that the fees are typically paid by the borrower and therefore you get the expertise without paying for it directly. You pay for it because of the additional fees you would likely have collected had you originated the loan yourself.

For example, if the borrower was willing to pay 3 points up front for a $300,000 construction loan, you may earn the entire $9,000 fee up front as the sole investor and originator. If you use a loan originator instead, you may still get a piece of that commission; typically 1 point they keep the remainder.

If you’re just starting out, the services of a loan originator can be invaluable and they will help walk you through the transaction. Many investors who are not real estate professionals maintain life-long relationships with their loan originators just as a corporate executive might maintain a relationship with an investment advisor.

 

Augie Byllott is a full time real estate investor who specializes in all facets of residential real estate investing.  He is also a nationally recognized Author, Trainer, Coach and Speaker who teaches creative real estate investing to people from all walks of life.  Augie believes in creating win-win scenarios through the use of Intellectual Capital and Transaction Engineering. Visit him at www.PACTProsperity.com

 

Engaging Client Networking Opportunties

August 7, 2014

Thanks to all our clients who turned out to our cookout this past weekend on August 3rd, despite some foreboding weather. While our event did start with a bit of rain, in 15 minutes it was all clear and the temperature was much cooler after the sprinkle.

We had a great time catching up with our clients and getting to hear about their newest endeavors, and hopefully they were able to connect with a few like-minded individuals over burgers and live music from Keith Eaton.

collage-01Every quarter we strive to bring together client networking opportunities, from more formal dinners after work with engaging speakers to casual weekend networking cookouts. Not only does it give clients a chance to get together with other self-directed investors, but it gives us the chance to actually meet the people behind the paperwork we process.

The rain might have deterred some from joining the recent festivities, but don’t worry there is an even bigger opportunity on the horizon – our second annual alternative investment symposium, Planning for Prosperity. Last year, we brought in a mix of national speakers and local experts to discuss different aspects of alternative investing including syndication, hard money loans, tax deed investing, and more. With more than 125 attendees all asking for more, we knew we had to do it again.

For 2014, we’re flying in the hosts of The Real Estate Guys radio show, Robert Helms and Russell Gray, who have been offering real estate investment advice on air since ’97 with a downloadable podcast garnering tens of thousands of listens. Joining these great guys is the self-proclaimed Pitbull of hard money lending, Leonard Rosen, who was so well-received last year we invited him back again. We are also bringing in experts on angel investing, checkbook control IRAs, and more.

This is a jam-packed, day-long seminar you won’t want to miss, so remember to sign-up today as early bird pricing will only be in effect until Sept. 15th (prices will increase from $99 to $129 on 9/15). All proceeds from P4P will be donated to the Hero Games charity event, which is fundraising for the Wheelchair Foundation.

Serving at Ronald McDonald House of Central Florida

July 2, 2014

A few years ago, NuView employees and management sat down to determine what they felt were the most important tenets of the company, its core values. Included among those values was a desire to constantly be serving others. To this end, NuView challenged its staff to find unique ways to get involved in the community both locally and abroad.

In the second quarter of 2014, NuView was able to secure a sponsorship spot at the Ronald McDonald House. With two houses in central Florida, the charity aims to be a home away from home for families with extremely ill children staying for extended periods in nearby hospitals.

The Ronald McDonald House invites volunteers to help supply, cook, and serve lunches and dinners for the families staying on site, and, after checking the company calendar, NuView signed up to provide both a lunch and a dinner on a recent Saturday.

Group at Ronald McDonald House

For lunch, our volunteers chose a theme, “Classic American,” and decked out the dining hall with red, white, and blue. From burgers hot off the grill to chocolate chip cookies fresh from the oven, the NuView team took it upon themselves to provide not just another meal, but an experience that might help the families forget for a minute the difficulties they have lying ahead.

SHK_7490

At dinner, NuView transformed the dining hall again, but this time with a south of the border flavor – serving up DIY tacos and homemade churros. The best part of the dinner was the kids. NuView made a special announcement inviting all the kids back to the dining hall for a whack a colorful donkey pinata. When the last kid took his final swing, the pinata burst, candy went flying everywhere and with it the kids collapsed to the floor to chase down every last piece. The laughter and smiles through the fake moustaches made the volunteer efforts worth every second.

Is Venture Investing Right for You?

July 1, 2014

Guest article by Blaire Martin:

Investors around the world are allocating a percent of their assets into early-stage companies in order to access opportunities for exceptional returns. “Angel investing is a legitimate part of an alternative asset class investment portfolio,” says David S. Rose, founder and chairman emeritus of New York Angels, in his new book, Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups. “A rational person can be an investor and not a gambler.” In the book, Rose explains that more people can and should become angel investors and that a few big wins make up for all the losses.

study by Wiltbank and Boeker estimates that the average return on venture investing by sophisticated angel groups is 27% IRR or 2.6 times the investment in about 3.5 years. Research shows that investing in multiple seed and startup companies is a key angel strategy. Many sources agree that a portfolio of 10-12 angel deals is adequate diversification to assure a reasonable ROI and that 6 or less angel investments is too risky. Investors can create a portfolio of investments by picking deals in FAN’s pipeline or by venture investing into a cross-collateralized fund.

Joining a sophisticated angel group is very helpful for investors interested in breaking into angel investing. Benefits often include: access to quality deal flow, collaborating with diverse investors and subject-matter experts, and assistance with due diligence, investment paperwork, and post-investment monitoring and support. Angel groups also encourage venture investing best practices and promote angel education from sources like the Angel Capital Association and the Angel Resource Institute.

There are many reasons that accredited investors write checks for angel investments. The possibility of getting in early with a company like WhatsApp excites investors looking for higher returns than possible with more traditional investments. Many investors also want to be significant in the lives of entrepreneurs with high potential ventures; angel investing is a way to incite opportunities with mentorship, networking connections, and capital. It may feel like philanthropy, but when done systematically through a sophisticated channel, it is a valid way to invest while giving back in your community, with an added benefit of upside potential.

The Florida Angel Nexus (FAN) is a statewide initiative to unite Florida’s investment community. FAN’s mission is to offer a disciplined and rewarding investment approach for Florida’s accredited investors. Investors are joining existing and newly formed angel chapters and funds across the state. These investors are exposed to exciting new technologies and startups; they enjoy meeting to discuss these investment opportunities and evolving markets. Membership is very diverse, from realtors to serial entrepreneurs, doctors to accountants. All accredited investors are welcome.

The UCF Center for Innovation and Entrepreneurship provided the leadership and resources to research and launch FAN. Key supporters include: UCF, Florida High Tech Corridor, Florida Institute of Commercialization of Public Research, Gainesville Chamber of Commerce, Gray Robinson, and BioFlorida.

Blaire is the founder of Florida Angel Nexus. Interested parties can contact FAN for more information at www.FloridaAngelNexus.com or blaire@FloridaAngelNexus.com.

10 Tips for Successful Real Estate Investing

May 30, 2014

Guest article by Marco Santarelli:

I came up with the following rules of successful real estate investing over my many years of successes and failures. These are the same rules I follow today and share with our clients at Norada Real Estate Investments.

1. Educate Yourself

Knowledge is the new currency. Without it you are doomed to follow other people’s advice without knowing if it’s good or bad. Knowledge will also help take you from being a “good” investor to becoming a great investor, and that knowledge will help provide a passive stream of income for you or your family.

2. Set Investment Goals

A goal is different from a wish; you may wish to be rich, but that doesn’t mean you’ve ever taken steps to make your wish come true.

Setting clear and specific investment goals becomes your road map and action plan to becoming financially independent. You are statistically far more likely to achieve financial independence by writing down specific and detailed goals than not doing anything at all.

Your goals can include the number of properties you need to acquire each year, the annual cash-flow they generate, the type of property, and the location of each. You may also want to set parameters on the rates of return required.

3. Never Speculate

Always invest with a long-term perspective in mind. Never speculate on quick short-term gains in appreciation, even in a heated market experiencing double-digit gains. You never know when a market will peak and it’s usually 6 to 9 months after the fact when you find out. Don’t chase after appreciation. Only invest in prudent value plays where the numbers make sense from the beginning.

4. Invest for Cash-Flow

With few rare exceptions, always buy investment property with a positive cash-flow. The higher, the better. Your cash-on-cash return is directly related to the before-tax cash-flow from your property.

Cash-flow is the “glue” that keeps your investment together. Your equity will grow over time (through appreciation and loan amortization), while the cash-flow covers the operating expenses and debt service on your property.

5. Be Market Agnostic

The United States is a very large country made up of hundreds of local real estate markets. Each market moves up and down independently of one another due to many local factors. As such, you should recognize that there are times when it makes sense to invest in a particular market, and times when it does not. Only invest in markets when it makes sense to do so, not because you live there or you bought property there before. There’s an element of timing and you don’t want to buck the trend.

6. Take a Top-Down Approach

Always start by selecting the best markets that align with your investment goals. Most investors start by analyzing properties with little to no regard of its location. This can be a big mistake if you don’t consider the investment in light of the market and neighborhood it’s in.

The best approach is to first choose your city or town based on the health of its housing market and local economy (unemployment, job growth, population growth, etc.). From there you would narrow things down to the best neighborhoods (amenities, schools, crime, renter demand, etc.). Finally, you would look for the best deals within those neighborhoods.

7. Diversify Across Markets

Focus on one market at a time, accumulating from 3 to 5 income properties per market. Once you’ve added those 3 to 5 properties to your portfolio, you would diversify into another prudent market that is geographically different than the previous one. Typically that means focusing on another state.

One of the underlying reasons for diversification within the same asset class (real estate), is to have your assets spread across different economic centers. Every real estate market is “local” and each housing market moves independently from one another. Diversifying across multiple states helps reduce your “risk” should one market decline for any reason (increased unemployment, increased taxes, etc.).

8. Use Professional Property Management

Never manage your own properties unless you run your own management company. Property management is a thankless job that requires a solid understanding of tenant-landlord laws, good marketing skills, and strong people skills to deal with tenant complaints and excuses. Your time is valuable and should be spent on your family, your career, and looking for more property.

9. Maintain Control

Be a direct investor in real estate. Never own real estate through funds, partnerships, or other paper-based investments where you own shares or other securities of an entity you don’t control. You always want to be in control of your real estate investments. Don’t leave it up to corporations or fund managers.

10. Leverage Your Investment Capital

Real estate is the only investment where you can borrow other people’s money (OPM) to purchase and control income-producing property. This allows you to leverage your investment capital into more property than purchasing using “all cash”. Leverage magnifies your overall rate-of-return and accelerates your wealth creation.

As long as you have positive cash-flow and your tenants are paying off your mortgage for you, it would be foolish not to borrow as much as possible to buy more income property.

 

Marco Santarelli is an investor, author, and the founder of Norada Real Estate Investments — a provider of turnkey investment properties in growth markets around the United States.

The Alphabet Soup Of Estate Planning

May 8, 2014

Guest article by Todd C. Ganos, JD, LLM (Taxation), CFP®:

A/B, GST, APT, QTIP, GRAT, IDGT, DING, NING, BDIT, NIMCRUT, . . M . . O . . U . . S . . E.  These are just some of the types of trusts that wealthy and high-income families use to help reduce estate and income taxes as well as provide for asset protection.

We all know that the Internal Revenue Code is complex, and state-level tax rules are just as complex. In some cases, though, this complexity has created opportunities for tax reduction, and these trusts are the tools by which that tax reduction might be realized.

Certain types of trusts – such as generation-skipping transfer trusts or simply “GST” trusts – have been around for decades. GST trusts “skip over” the Internal Revenue Service’s ability to estate tax a family’s wealth as it passes down the generations. For families who are exposed to the estate tax, a 40 percent tax at each generation seems punitive. GST trusts can eliminate it. However, trusts follow state property law and most states require a trust to terminate after a certain number of years. As such, in time, the IRS would regain its ability to estate tax the family’s assets. The good news is that a handful of states allow trusts to remain in effect permanently or at least for a substantial period of time. In such cases, a family’s wealth would sidestep the estate tax permanently or at least for many generations. To take advantage of this, a trustee in one of those states must administer the trust.

The potential tax benefits of other types of trusts have come into focus more recently. Periodically, attorneys – on the behalf of clients – will submit a trust strategy to the IRS before implementing it to see whether anticipated tax benefits are valid. Recent rulings by the IRS have affirmed the validity of certain types of trusts that can potentially reduce or defer state-level income tax. For example, consider a family who lives in a high income tax state and who has a large position in a particular stock. The family learns that the company will be bought out with an all-cash offer. The family anticipates a large capital gain on the sale, which they can’t avoid. Knowing that Nevada imposes no income tax on trusts, the family might transfer the stock to a Nevada Incomplete-Gift Non-Grantor (NING) Trust prior to the sale and sidestep state-level income tax. The family would defer income tax payable to their own state until they take a distribution from the NING trust. However, if the family became a resident of a different state – perhaps a lower or no income tax state – and then took a distribution, the family would only pay state-level income tax (if any) to the new state of residency.

Beyond tax savings, there is asset protection. We know that we live in a litigious society. Wealth and high-income families use certain types of trusts to protect themselves from opportunistic plaintiffs. As with tax planning, key to implementing these asset protection strategies is having a trustee in a favorable jurisdiction. Alaska, Delaware, Nevada, South Dakota, and New Hampshire are five states that have enacted laws that are “trust friendly.” They impose no income tax on trusts and they have strong asset protection laws. Delaware and Nevada are the most favored among the five.

So, what might all of this alphabet soup of estate planning mean to your IRA? For individuals with larger IRA accounts, there is the Qualified Terminable-Interest Property (QTIP) Trust. While its name is not sexy, its tax result can be.

Normally, distributions from a retirement plan – whether an IRA, 401k, or another plan – are income taxed at the recipient’s ordinary income rate. For individuals in the highest marginal income tax brackets, the tax imposed seems almost punitive. Might there be a way for a family to reduce the ultimate tax burden on retirement plan assets and maximize the after-tax proceeds it receives? Yes.

Every owner of a retirement plan account designates a beneficiary who will receive the account’s remaining assets should the owner die. For a number of complex tax reasons, one would not normally designate a trust as the beneficiary of one’s retirement plan. In this strategy, there will be an exception. In this strategy, a QTIP trust will be used. It will be a stand-alone trust whose only function is to be the beneficiary of a retirement plan account. With a QTIP trust, the surviving spouse receives income for life and – upon the death of the surviving spouse – the remaining assets pass to children (or whomever).

However, rather than going the “income for life” route, one year after the retirement plan owner dies, the surviving spouse sells her interest in the QTIP trust – not the IRA, the trust – to a qualified charitable organization at a slight discount. (The discount is done for a specific tax reasons.) Because the surviving spouse is selling her interest in the trust – and not the IRA – it is a sale of a “capital asset” and proceeds of such a sale are income taxed as capital gains and NOT at the surviving spouse’s ordinary income rate.  The net result can be as much as 17 percent greater after-tax wealth to the family and a handsome donation to the family’s favorite charity.

Proper use of trusts – even in conjunction with IRAs – can yield very attractive tax results. You can never be too educated in all the possibilities trusts offer. Perhaps it is time to do some more research.

 

Todd Ganos is a professional trustee and the principal of Integrated Wealth Counsel, LLC, whose divisions provide family office, wealth management, trustee, and trust protector services.  He is also a contributor to Forbes magazine online and focuses on the management and preservation of family wealth. Todd can be reached at 866-898-1860.

Funding Your Own Pension Plan

April 29, 2014

For those that closely follow political and financial news, one of the biggest issues to face local and state governments has been underfunded pension liabilities.

Simply stated, the employers made a promise to their employees to provide certain lifetime payments during their retirement years, yet did not adequately fund those obligations year after year. The result is a mad scramble for political cover, and necessary yet painful reductions in pension payments for many retirees.

Evidently, the pain of employer pension funding is not limited to governmental entities. A recent Orlando Sentinel article regarding Walt Disney World union negotiations said that Disney wants the union to give up pensions for new hires, who would instead be enrolled in a 401(k) investment plan. Similar negotiations and changes are becoming commonplace across all industries.

In today’s environment, the obligation to prepare oneself for retirement rests on the individual, rather than their employer. Through 401(k)s, 403(b)s, 457s, Thrift Savings Plans and other such alphabet soup, the heavy lifting of saving and investing is on the individual.  Employers often simply provide a small match, if anything at all.

How healthy is your pension plan?  You have the ability to rollover most any employer plan into a NuView self-directed IRA and fully self-direct, once you have left the company. Now you have the opportunity to invest in anything the IRS does not prohibit, an extremely short list at that, rather than just a handful of trustee-selected mutual funds.

It’s inspiring when NuView clients feel an 8% return in their self-directed IRA isn’t good enough, and that through their own hard work, they found investments that built their retirement much faster. A second-generation private lender recently shared that she lends out of both her IRA and her friend’s for 12-15%, plus points. Real estate rehabbers are taking advantage of the foreclosures and rising prices to profit their IRAs, while still others take advantage of what they feel are low prices on gold and silver.

Whatever your passion, your retirement may be closer than you think, and your ability to retire isn’t someone else’s responsibility – it’s yours.  So fund your retirement plan until it hurts, invest wisely, and stay involved. If you need help, give us a call. Through local investor clubs and the right education and research, you might exceed your goal yet.

Making Sense of Crowdfunding

April 18, 2014

Guest article by Mark Mohler:

You are already accustomed to enduring TV commercials for everything from noisy car salesmen to ambulance-chasing lawyers, but are you ready for a TV advertisement prompting you to invest in a new private startup? Well get ready, because it is only a matter of time before it happens. By now, you have probably heard terms like “crowdfunding,” “peer-to-peer lending” and maybe even “general solicitation.” As more and more rules are implemented allowing different groups to solicit your money in connection with funding their own private business, it is important to understand the changing landscape. “Crowdfunding” is defined by Wikipedia as “the collection of finance to sustain an initiative from a large pool of backers—the “crowd”—usually made online by means of a web platform.” Crowdfunding as a fundraising tool is already everywhere and, through recently enacted changes to US Securities laws, crowdfunding will likely be even bigger in the future.

In its earliest iterations, crowdfunding in the US was limited to non-investment offerings in order to avoid running afoul of state and federal securities laws. That meant that you could be asked to put up the money for a business or a project, but you could not own an interest in the success of that business or project. Accordingly, the vast amount of crowdfunding to date has been requests for donations or pre-purchases of a product to be created at a later time. Crowdfunding has been very successful and billions have been raised but imagine your chagrin if you were one of the 9,500 crowd backers that provided an aggregate of $250,000 in donations to startup Oculus VR only to see the company sold for $2 billion less than two years later. We can all understand why the providers of this early capital are a bit peeved to be receiving little more than a thank you note in return for funding the meteoric company. As it turns out, some backers now feel used or even scammed by the crowdfunding project. Sensing this unfairness, the JOBS Act enacted in 2012 sought to democratize private equity by allowing companies to use existing technology tools, such as the Internet, to solicit actual investments from everyday Americans. Two years later, the Securities and Exchange Commission has still not fully created the rules for how this can happen but, little by little, you may be noticing the changes.

Some of these changes relate only to Internet-based crowdfunding and apply to all Americans–regardless of net worth. Other changes apply to solicitations through any distribution channel–including Super Bowl commercials or billboard advertisements and are applicable only to investments by certain “accredited investors.” In these cases, everyone can be solicited, but only accredited investors may actually invest. All told, these changes reflect the most dramatic changes to US securities laws since investor protections were first implemented in the early 1930s. The changes are coming to your TV screen, email and direct mail and it is important to understand what you are being asked to do with your money and what to expect in return. If you are using these new rules to find investors for your own business, you need to understand the legal requirements.

For those of us who have been supporting the updating of US securities laws, it is an exciting time but one of frustration as regulatory rules are slow in coming and, at times, overburdensome. The promise is that many ordinary Americans will for the first time have the opportunity to directly invest in private companies in ways that were never before possible. Regular people may be the early investors in the next Facebook, Google or Oculus VR–rather than exclusively institutional investors such as venture capital firms. Even more exciting to some, these laws will permit opportunities for easy and direct “impact investments” such as local investment in small “Main Street” businesses like coffee shops, bookstores and restaurants and behind passionate causes like clean energy, “Made in the USA” manufacturing or natural/organic companies.

The potential bad news is that these changes will bring a whole new category of risk for investors that may not fully appreciate the inherent risks or the illiquidity of early stage investments and may open the doors to the type of fraud that caused lawmakers to heavily regulate the sales of securities in the first place. It probably goes without saying, but “let the crowdfunder beware.”

All told, I see these as positive changes reflective of a modern era where not only wealthy people understand the fundamentals of investing. After all, it should be much harder sell snake oil at a time when you can easily “google” not just technologies but the people who are promoting them. It has also never made sense to me that people of modest means are legally permitted to lose their entire retirement savings at a casino in Las Vegas but cannot invest a small percentage in a private tech company. Which is actually riskier?

 

Mark Mohler is a business, tax and estate planning lawyer and founding member of Corridor Legal Partners as well as a founder of Sprigster, an online crowdfunding portal for veterans and military spouses. You can contact Mark by phone at 321-473-3337, or you can visit his website at www.corridorlegal.net for more information.

Critical Questions to Ask a Property Management Company

April 2, 2014

Guest article by Eddie Miller:

You probably already understand the amazing benefits of a self-directed IRA, you may even own rental property or are considering the possibility, yet you might not be sold on utilizing a property management company.

Why should you? Well, let’s first look at this from a technical and then a practical perspective.

Technically, the IRS stipulates “when purchasing rental property in a self-directed IRA you may not personally perform any repairs or maintenance of property held within your IRA. Doing so would be considered ‘sweat equity’ and a contribution to your account. Sweat equity cannot be properly measured in value, and the IRS only permits contributions to an IRA to be made in cash. Repairs and maintenance must be paid for at current market rates and must be performed by a third party.”

“Property management can be handled by the IRA owner. However, you must not perform sweat equity or pay for expenses out of your own pocket. You can decide who performs maintenance duties on your own. Or you can hire a third party property manager to perform these duties for you. Again, all income and expenses flow directly in and out of the IRA funds, not your own.”

Now, let’s look at a practical perspective…

When I started investing in real estate my partner and I purchased, rehabbed and sold property, then we also began holding and managing some of our own properties as rentals. As our business grew, we became advisory board members of our local Real Estate Investment Association and, as a result, we met other investors who were challenged with managing their properties.

We found that managing rentals can be a hassle! Yet, because it was a core aspect of our business we figured out how to overcome these challenges to create profitable investments.

Throughout the process we actually uncovered six key points to creating profitability:

  • Purchase the property that will provide the desired annual rate of return with consideration of the cost of the purchase, repairs, taxes, insurance, vacancy, management, etc.
  • Hire an efficient, effective and reputable property management company.
  • Have a sound lease agreement with clear rules and regulations.
  • Market for qualified tenants.
  • Conduct a thorough background screening.
  • Have effective, ongoing communication with tenants.

Quite simply attempting to manage your own property can be a daunting task, and a mistake at any of these points can be costly, which can dramatically lower your desired rate of return.

The core business of a property manager is managing property, which of course is logical, but easily overlooked. By selecting an efficient, effective and reputable management company, you will decrease stress and increase profits.

Below are the top 15 questions to ask property management companies during an interview.

  1. How long have you been managing properties?
  2. How many properties do you manage? Some companies have on-site mangers that manage a lot of doors, but few properties. These companies don’t typically make the decisions that can impact your profitability. Make sure the firm manages enough properties to know what they are doing, but not so many that you become just a number.
  3. Do you have a company website, and can I get the address? Websites are a minimum for management companies. The site should be informative, professional, and showcase properties.
  4. How many people do you have on your team? You don’t want a one-person shop that could be faced with trade-offs between accounting functions and showing functions. In addition, small offices can often lack the resources to immediately address any situation, causing a small problem to become big.
  5. Can I get references from at least 3 owners? Any reputable company that has been in business for a few years should have success stories.
  6. Where’s your office, and what geographic areas do you operate in? Office location is important when considering how frequently your property will be shown or what the travel charge will be for maintenance calls.
  7. How will you market my property? A full service marketing program will use professional signage, online advertising, MLS, etc. Ask how many websites they utilize – the more the better.
  8. What is your tenant screening process? This is a critical question to ask, and their process should be comprehensive. Inquire about the application process. All tenants over 18 years of age should be screened for verification of income, employment, credit, criminal history, eviction history, terrorism list, and sexual predator history. References should also be called.
  9. Can I review your lease agreement as well as your rules and regulations, and have these documents been reviewed by your attorney? A bullet proof lease is your best defense against a tenant that is trying to take advantage of a situation. Not all lease agreements are created equally.
  10. How do you handle maintenance requests? Someone should be available 24/7 to handle maintenance emergencies. After an issue has been reported to the management company, the company should dispatch a qualified technician to first determine whether the repair is general wear and tear or tenant neglect. Tenant negligence should be paid for by the tenant after the repair is complete. If the repair is no fault of the tenant, the owner will be responsible for the cost of the repair.
  11. What training and licensing do you have? Both the property manager and management company must be licensed/registered with the city and state (i.e. Real Estate Broker/Associate). In addition, inquire about other professional property management training and affiliations.
  12. What happens if a tenant does not pay rent? The delinquency process and eviction process should be explained; the company should have a clear, aggressive collection process for tenants who are not paying on time. Progressive companies will track their internal tenant delinquency rate monthly and should be able to share that information with prospective clients. Inquire about the eviction process and costs (this is why a strong screening process is critical to assist in preventing the need for evictions).
  13. What insurance do you carry and what should I carry? Inadequate insurance can leave the owner high and dry if a catastrophe happens. Most management companies are required to carry Errors and Omissions insurance, Workmen’s Compensation insurance (if there is an in-house maintenance team) as well as general liability. Minimum coverage should be $1 M. (For landlords Hazard, Liability and if necessary Flood insurance is suggested for each property.)
  14. How often will you inspect my property? Some type of walk through or inspection should be performed annually. Ideally, there should be a move-in inspection, a 6-month inspection, and an 11-month inspection prior to the tenant renewal or move-out. If a tenant is moving out, then an additional inspection is conducted after the tenant has moved out before the security deposit is returned.
  15. How often does the company send out financial statements and reports? This is the critical factor of your relationship with the management company. It is important to receive and review monthly financial statements and maintenance repair updates.

By utilizing these targeted questions to interview the management company you are considering working with, you will ensure you have selected the right company to represent you, which should help to limit the risk of a low return on your investment.

 

Eddie Miller is the CEO of Pristine Property Management and Miami 4 Investors, co-director of the Miami Landlord Association, and two-time best-selling author of “Living Inside-Out: The Go-To Guide for the Overwhelmed, Overworked and Overcommitted” and “The New Masters of Real Estate: Getting Deals Done in the New Economy.”

Planning for a Longer Retirement

March 19, 2014

As far as the average lifespan goes, men have always been at a huge disadvantage. If you were born in 1967, males were to live until age 67, and females to more than 74, at least 8 additional unfair years.  However, 40 years later, males have closed the gap with an expected life span of 76 years, as females live to 80.5 years old, on average according to a Lancet article. But those nine extra years come at a huge cost: We now have to pay for eight more years of retirement, with women adding six years to their needs.

While Social Security continues to be underfunded, there are signs that the aging population has realized the fact that, as far as retirement is concerned, they will not be able to rely on the government.  More than 38% of US households now have IRAs, according to the Investment Company Institute. Combined with employer plans, more than 80% of households have accumulated some retirement funds.

The $5.7 trillion in IRAs today represent about $124,000 per household that has an IRA. Yet, IRAs tend to be more heavily used by older people (45% of those aged 55-64) and also, not surprisingly, used by the wealthier households (62% for those earning more than $100,000 per year).

Self-directed IRAs represent only a small portion of the $5.7 trillion, as little as 2% or $100 billion, according to the North American Securities Administrator Institute. If it’s such a great idea, why don’t more people use self-direction? The answer is simple: Self-directed IRAs are not meant for the majority of investors. If you listen to conventional financial advisors, many would caution against making your own investments in anything other than publicly offered securities. Most advisors would make the following points:

  • They are dangerous – you have to take the time to understand the investment and properly weigh the risk and the reward
  • It takes too much time – not just in studying the investments, but by staying involved throughout the lifecycle of the investment once it’s made
  • Investments may not be sufficiently diversified – true, if you invest in only one asset, but self-direction may also significantly expand your options
  • Too many choices – the drawback of choice is that it breeds complexity, and some investors are paralyzed by the myriad options
  • You may not be able to understand your investments – unless you understand your investments, with or without a financial adviser, you are just gambling
  • You have to stay involved – higher net worth individuals often get phone calls from their brokers when events happen that may be critical to their holdings, but self-directed IRA investors must stay aware of those issues on their own
  • You advisor is also thinking, but not saying, “My brokerage won’t benefit” – in many cases, self-directed investors receive all the benefits without the management fees and commissions that traditional investors pay through conventional brokerage houses

If conventional wisdom doesn’t dissuade you from self-directing your IRA, you are in the minority. You want to be involved, you want to understand your investments, and, most importantly, you want to incur the risk and reward afforded by alternative investments, such as real estate, notes, private mortgages, private placements, tax-liens, and precious metals.

So now that the population is living longer, the responsibility of providing a solid future throughout retirement falls fully on the individual. Break away from the herd, and be part of a group that wants to seize control of their retirement plan. The tax benefits secured by IRAs reduces the sting of income tax on investment growth. Take a look around our site to learn more about how a self-directed IRA can be used to expand your investment choices and reduce the drag of Wall Street on your earnings. After all, you have plenty of years ahead to reap the benefits.