How Do You Find Alternative Investments?

March 6, 2014

Finding and evaluating private placements, equity and bond hedge funds, and commodity based hedge funds and managed futures programs has always been a very ad hoc and inefficient process. The founding partners of FNEX faced the same challenges as every other investor in that they only saw a small number of deals from their brokers, investment advisors, and private bankers. Financial advisors from the large RIA and Broker Dealers can only recommend the offerings that have been through their internal research departments which limit them to a handful of the very largest funds. These are the same names that everyone recognizes because their CEOs are regular guests on CNBC.

It isn’t practical for an investment firm with thousands of advisors to review and approve private securities and hedge funds from mid-size and “emerging managers” because the size of the fund and the support staff managing the strategy aren’t large enough to handle the traffic those referrals would generate.

FNEX created a Private Securities Marketplace that is open to any accredited and institutional investor. On the FNEX platform, investors will find private placements being offered by a range of different sized investment banks. These are direct placements into companies raising growth capital in a wide variety of industries such as biotechnology, real estate, and clean energy, just to name a few. Fund managers with a broad array of different investment strategies in equities, bonds, forex, precious metals, stock indexes, agricultural, and energy commodities are also on the platform.

To assist in the evaluation of each offering, FNEX offers a variety of different diligence, valuation, and research partners that investors can engage on an as-needed basis. The FNEX Education Center is full of current research, white papers, and links to industry resources to help investors learn as much as possible prior to investing.

The FNEX Deal Room feature allows investors to view and download offering documents and subscription agreements as well as communicate directly with the investment banker or fund manager. As always, every self-directed investor should review the available materials with a trusted advisor or legal counselor prior to investing.

After an investor locates a deal and requests IRA funds from an administrator like NuView, the investor can upload all of the paperwork for processing and copies can be provided to the IRA administrator to make sure the documents are in good order before closing. Investors will also be able to complete a Buy Direct letter from the IRA administrator so the funds can be dispersed directly from a custodial account to the Bank or Fund Manager. It is important to note that FNEX is not a custodian and will never be in possession of funds at any part of the investment process.

Membership to FNEX is free and the registration process is very simple.  Because the offerings on the site are only available to accredited investors, investors must complete a brief investor questionnaire to ensure that the current SEC guidelines for investing in private offerings are met.  After investors complete the survey step, access to the site is granted. FNEX offers profiles to save personal investment criteria such as minimum investment amount, strategies, and risk profile.

FNEX offers a way to expand the alternative investment choices available to investors. If you would like more information, please visit FNEX at www.FNEX.com.

Please note, NuView IRA is also not a fiduciary and only provides services to self-directed accounts that are nondiscretionary and/or administrative in nature. The Account-holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account. NuView IRA has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein or on FNEX shall be construed as investment, legal, tax or financial advice or as a guarantee, endorsement, or certification of any investments or of  FNEX itself.

Pitbull Conference to Spur IRA Private Money Lending

February 26, 2014

Investing in real estate through a self-directed IRA might not be for everyone. For many, being a landlord is daunting – hassling with tenants, upkeep on maintenance, and all the other elements of owning rental property. Although IRA holders have the ability to hire third-party property managers, some do not prefer all the moving parts associated with owning investment real estate.

However, there are other investments that take advantage of the reemerging real estate market that don’t require the day-to-day involvement of property management. Last week in Ft. Lauderdale, we had the opportunity to address a packed room of eighty private money lenders at the Pitbull Conference, and from all reports, that business is booming.

The need for private money is significant, so much so that real estate-backed lending is one of the fastest growing self-directed choices in IRAs. The lenders, representing funds from $1-60 million, were eager to learn how IRAs could be put to use for financing buying, fixing up and flipping, and renting investment property. It just so happens that the time for their business couldn’t be better.

According to BankRate, current 5-year CD rates garner approximately 2%. At that rate, it would take about 36 years for an investment to double in value. It’s no wonder that people are looking for alternative ways to make their retirement funds work at a more efficient rate. Is the stock market better? It certainly has done well over the past two years, but how much higher can it go? And what type of gains can you make while you still hold the investment, or must you sell out to earn your gains?

When lending private money out of your IRA, the rate you charge is based on the outcome of your negotiation with the borrower. It can be a conventional 30-year mortgage, or a six-month loan to a rehabber. At NuView, IRA lending has had anywhere from 5 – 18% interest, depending on the client’s loan terms and collateral.

To seriously misquote Shakespeare’s Hamlet, “Either borrower or lender be.” An IRA can do both. Look through our site or give us a call to learn more. We will help you unlock your IRA and let you make all the decisions.

Great Returns on Secured Real Estate Loan Transactions

February 20, 2014

Guest article by Mark Fixler:

You have probably asked yourself, how can I take advantage of the real estate market? Before I answer you, let me share a little history: Lenders owned nearly 660,000 foreclosed homes in April 2008, up from 493,000 in January 2008 and 231,000 in January 2007, according to First American CoreLogic, a real estate research firm based in Santa Ana, California. This surge in defaults has increased the inventory of bank-owned homes, known in the business as REO, or real estate-owned, properties. For investors in distressed properties, never in American history has there been such an attractive buyer’s market.

And now, with a self-directed IRA, you can seize the opportunity to generate an 11% annual return secured by a private real estate transaction at a 60% LTV, or loan to value. Whether you participate in a real estate loan transaction with Jag Enterprises or another company, it affords you the interesting option to receive a monthly income stream of higher interest than what is currently available in CD’s, etc. This type of transaction allows your self-directed IRA to receive a great return without the need for you to do the work in the real estate market. These types of transactions are truly passive in nature, suggesting a rare win-win scenario.

Ask yourselves: Do I want my IRA to just invest in the stock or commodities markets with potential volatility, or is there room in my portfolio to self-direct my IRA for a great income stream secured by a private real estate transaction?

 

Mark Fixler is the owner of Jag Enterprises LLC. Through his company, Mark has participated in more than 400 real estate transactions since 2008. He has been in business for 15 years, living and working in the Cleveland area. Mark can be reached at 440- 951-2170.

New Case Answers Important Questions About IRA LLCs

February 13, 2014

Guest article by Mat Sorensen:

Can my IRA own substantially all of the ownership of an LLC? Can my IRA/LLC pay a salary to me for serving as the manager of the IRA/LLC? The U.S. Tax Court issued an opinion in the case of Ellis v. Commissioner, T.C. Memo 2013-245 and answered both of these questions.

In Ellis, the Tax Court resolved two questions posed by the IRS. First, did Mr. Ellis engage in a prohibited transaction when his IRA acquired 98% of the membership interest in CST, LLC? And second, did Mr. Ellis engage in a prohibited transaction when CST, LLC (owned 98% by his IRA) paid him compensation for serving as the manager?

As to the first question, the Tax Court held that Mr. Ellis’ IRA did NOT engage in a prohibited transaction when it acquired 98% of the ownership of a newly established LLC. The other 2% was owned by an unrelated person who was not part of the case and whose ownership did not have an impact on the decision. The IRS contended that a prohibited transaction occurred when the IRA bought ownership of CST, LLC. The Court disagreed, however, and held that the IRA’s purchase of the initial membership interest of the LLC was NOT a prohibited transaction. The Court stated that the IRA’s purchase of membership interest in a new LLC is analogous to prior holdings of the Court whereby the Court held that an IRA does not engage in a prohibited transaction when it acquires the initial shares of a new corporation. Similarly, the court held that a new LLC is not a disqualified person to an IRA under the prohibited transaction rules and as a result an IRA may invest and own the ownership of the LLC. IRC § 4975(e)(2)(G), Swanson V. Commissioner, 106 T.C. 76, 88 (1996). Consequently, the Court’s ruling means that it is NOT a prohibited transaction for an IRA to acquire substantially all or all of the ownership of a new LLC.

As to the second question, the Tax Court held that it was a prohibited transaction for the LLC owned substantially by Mr. Ellis’ IRA to pay compensation to Mr. Ellis personally. The court reasoned that, “In causing CST [the IRA/LLC] to pay him [IRA owner] compensation, Mr. Ellis engaged in the transfer of plan income or assets for his own benefit in violation of section 4975 (c)(1)(d).” This type of prohibited transaction is often times referred to as a self dealing prohibited transaction and occurs when the IRA owner personally benefits from his IRA’s investments. The Court looked to the operating agreement of the LLC which authorized payment to Mr. Ellis for serving as the general manager and also the actual records of the LLC which showed the payments to Mr. Ellis. When using an IRA/LLC, one of the many important clauses in the operating agreement is one which restricts compensation to the IRA owner or any other disqualified person (e.g. IRA owner’s spouse or kids). Also, the actual payment and transaction records of the IRA/LLC will be analyzed so it is important that both the LLC documents and the actual payment records do not allow for or result in payment from the IRA/LLC to disqualified person (e.g. IRA owner).

It is also important to note that the Tax Court rejected Mr. Ellis’ argument that the payments were exempt from the prohibited transaction rules under section 4975 (d)(10). Section (d)(10) provides an exemption to the prohibited transaction rules for payments from an IRA to a disqualified person [e.g. IRA owner] for services rendered to manage the IRA. The Tax Court rejected this argument stating that the payments from the IRA/LLC were not for management of the IRA but for management of the IRA/LLC and its business activities. In this case, the IRA owner was actively involved as the general manager of the IRA/LLC which LLC bought and sold cars. As a result, the Court held that the payments were not exempt and constituted a prohibited transaction.

I was happy to read this case and find the Court’s conclusions because it matches the same opinion and advice we have been giving clients regarding IRA/LLCs for nearly ten years: that a newly established LLC owned by an IRA does not constitute a prohibited transaction but the IRA/LLC cannot pay the IRA owner (or any other disqualified person) compensation for managing the IRA/LLC.

Mat Sorensen is a lawyer and the author of The Self Directed IRA Handbook: An Authoritative Guide for Self Directed IRA Investors and Their Advisors. He is a partner with KKOS Lawyers in its Phoenix office and assists clients nationwide on self directed IRA matters. He can be reached at mat@kkoslawyers.com or by phone at 602-761-9798. His website is www.sdirahandbook.com

Tips for Title Insurance

February 3, 2014

Guest article by Deborah Farnell:

When evaluating an investment in real property, whether for purchase or to hold a note on, one of the most important aspects in your risk assessment is making sure the property has a clear title. Typically, there are no IRS or custodial/administrator requirements to obtain title insurance on IRA-owned real estate. As the primary fiduciary of your self-directed IRA, the decision to insure the title to the investment property is entirely yours.

If you chose to simply have a title search of the property performed without actually purchasing the title insurance policy, you may gather useful information, but there is no coverage to protect you as the homeowner or lender. Quite often investors will rely on a pencil search or ownership and encumbrance report to inform them of any issues with the property and then forego the actual purchase of a title insurance policy to save money. These title search products provide no protection and are often performed as preliminary searches without the formality of a title search that is required to issue a policy of title insurance. In the current market of abundant foreclosures, short sales, bankruptcies, and fraudulent activity it is more important than ever to protect your investment. Title insurance is a one-time premium that protects your investment for the entire time you own the property.

Here are some helpful hints to consider when obtaining title insurance for your transaction:

  • Work with a title company that is familiar with complex transactions and is considered investor friendly. Quite often when you are shopping for title insurance and do not have an established relationship with a title insurance professional, you will get objections and claims that the transaction you are proposing is illegal when all that is needed is a better understanding of the structure of the deal.
  • Be proactive in getting the information on the transaction to your IRA administrator and title company as soon as possible. My title company does not charge a cancellation fee for transactions that do not close, and we ask our clients to get us the contract as soon as it is accepted so that we can begin our title work immediately and get any objections or problems solved before deadlines come due. Since there are often a number of parties involved in these transactions that need to review, question, and revise documents as the deal concludes the more proactive you can be to allow the parties time to perform their necessary due diligence, the smoother the transaction will be.
  • Review the title commitment carefully. Make sure you understand the requirements and exceptions listed on the commitment and that all items are satisfied as needed. Quite often when purchasing from national banks or servicing agents, a national title company may be used that is not familiar with state or local rules and customs. Perfect examples of this in Florida are the issues with unrecorded utility liens and code violations, which vary by city or county.
  • If you are purchasing property to be held in your IRA, you can typically get the seller to pay for the owner’s title insurance policy. If you are lending money and holding the note, you can require your borrower to purchase a lender’s or mortgage title insurance policy that covers your interest in the property.

Deborah has been in the title industry for more than 18 years and is the owner of Southeast Professional Title, LLC, in Maitland Florida. You can reach her at Deb@seprotitle.com or 407-539-0781.

Getting America to Save

January 29, 2014

Article by Glen Mather:

I originally had no intention of listening to the State of the Union address. After all, the content is never a surprise, with bits and pieces being leaked weeks in advance. But when the address began, I was on a long drive, so I tuned in. Even though I reached home before the President’s speech finished, I idled in the driveway through its end.

While most of the speech carried few new ideas, imagine my interest as an IRA administrator when the concept of “myRA” was announced. Here are a few more details gleaned from senior administration officials: Enrollment in myRA would be voluntary, although there are rumors that it may require an opt-out for employees working at companies without a current retirement plan. The account can start with a $25 contribution, with automatic payroll deducted contributions of as little as $5 per month. Tax-free withdrawals could be made at any time (so I would assume that the contributions are not tax-free). Once the myRA account reached the $15,000 cutoff, it would be automatically rolled over to a Roth IRA. The true wrinkle of the myRA concept is the investment choice. It will be made for you. Not mutual funds, high growth stock or indexed funds. No, the only option is government bonds, chosen by your investment advisor – the government.

So is this a good idea? Well, if it gets more people to start saving, absolutely. The habit of putting some money aside on a routine basis is unassailable, no matter what your economic situation may be. After all, you can’t invest what you don’t have.

But if it produces a generation of savers who have no choice of their investments, it can breed dependence and indifference.

A self-directed IRA, whether a Traditional, Roth, SEP or Simple, is one where the client is in full and absolute control of their investment choices. Most ironically, what the President is proposing with this new savings plan seems to be exactly the same as a Roth IRA, but with much less choice.

Perhaps what is needed most is a publicity campaign focused on the myriads of retirement plan choices that we already have. There is little doubt that 401(k)s, 403(b)s, and 457 plans, along with the various types of IRAs, are great vehicles to prepare for retirement. Employer-matching and the tax benefits further incent the obvious need to augment Social Security with something more substantial and certain. These plans have attracted contributions and have grown to hold more than $9 trillion in retirement savings. Not exactly failure.

So let’s spread the word about the value of saving, especially tax-free, and let’s remember the benefit of taking reasonable risks – they offer a potential greater reward. Government incentives such as the Retirement Savings Contribution Credit produce amazing incentives to modest-income savers, yet few take advantage. MyRA may make a difference, or it may just further confuse an already confused taxpayer. The idea is laudatory, but the result is yet to be determined.

Private Money Loans from a Self-Directed IRA – High Returns at Low Risk

January 23, 2014

Guest article by Fern C. Burr:

For more than 20 years, I have worked as a Realtor, a mortgage lender and broker, and a real estate investor. My reason for success is this – I always try to maximize my profits in a way that is as safe, secure, and as careful as possible. Now, however, I spend a lot of my time teaching other people how to be successful real estate investors.

While I still tinker in the stock market, I prefer investing in real estate. I was introduced to the concept of a self-directed IRA 10 years ago, the same time that NuView opened their office in Lake Mary, and I have been a client ever since. I am always happy to spread the word about self-direction and what a useful tool it has been for me and for many of my clients.

People think of a mortgage broker as someone who originates institutional mortgages for primary residences and for buy-and-hold rental properties. These types of mortgages are referred to as Conventional and FHA loans. While we do originate those products, we are also known in the real estate investor community as THE place to go for private money. These private funds often come from people who use their self-directed IRAs to invest in mortgages secured by real estate, in essence these people lend money from their IRA to the borrower.

Why do people need private money? Sometimes the property needs work or it won’t qualify for Conventional financing; other times, private money satisfies “the need for speed.” Recently, I got a call from a buyer on a Monday telling me his offer on a property was accepted. It was a great deal, but it had to close on Friday. Because the buyer got us everything we needed quickly, and because of the great relationship we have with the owner of the IRA and the excellent work relationship we have with the staff at NuView, we were able to close that loan in less than one week.

We treat our loan applications for private mortgages the same way we treat a loan application for an institutional mortgage: We get information on income, liquid assets, and a full tri-merge credit report. We also always get an appraisal on the property. The name of the game is Due Diligence. We want to love the borrower and love the property. Every borrower has to have some “skin in the game.” We gather all this information, then the lender just has to make a “common sense” decision.

Fern is a State of Florida Licensed Loan Originator/Mortgage Broker and Owner of Mortgage Professionals of Central Florida, and she is also a State of Florida Licensed Real Estate Broker. You can reach her at Fern@cfl.rr.com or 407-330-2855.

Crowdfunding vs. REITs for Real Estate Investment

Guest article by Jilliene Helman:

The recent trend toward online “crowdfunding” has begun to make some private real estate investment opportunities more accessible to investors at relatively small minimum investment amounts. Diversification remains a key concern however, and the real estate investment trusts (REITs) that would seem to solve that problem for “average” investors continue to be given short shrift by the larger financial institutions. What gives?

REITs operate pools of many different properties and their shares offer at least a degree of liquidity. Yet recent surveys estimate that institutional investors continue to place between 80% to 95% of their real estate allocations into private real estate investments, rather than publicly traded REITs. Crowdfunding sites tend to similarly focus on private opportunities.

Many market participants insist that there are simply some things that private real estate investments can do better than public REITs. Some of these purported advantages are:

  • Public REITs are driven partly by underlying market sentiment, rather than real values
  • REITs are limited by asset class or geography; but cycles don’t always track either of those groups, so private opportunistic buying makes more sense
  • Private equity is better managed and investor-aligned because sponsors are highly invested, and so focused on achieving high returns
  • Private equity is disciplined by its focus on achieving a successful exit
  • The liquidity of public REITs is illusory (only the biggest REITs are liquid)
  • Private equity can be nimble, with more ability to buy at the bottom of the market and sell at the top
  • Private transactions use a bit more leverage, so should be able to outperform public funds

It seems that part of the issue with REITs is essentially their nature. A creation of the Internal Revenue Code, a REIT is a real estate company or trust that has elected to qualify under certain tax provisions to become a pass-through entity that distributes to its shareholders substantially all of its taxable earnings in addition to any capital gains generated from the sale or disposition of its properties. To qualify for this tax treatment, a REIT must follow several legal requirements, probably the most significant of which is that distributions to shareholders must equal or exceed 90% of the REIT’s taxable income.

This requirement would seem to be beneficial to investors, but it can prove to be a handicap. Because they must distribute nearly all of their income, both mortgage and property REITs must regularly sell equity in order to grow, i.e. acquire more assets. Institutional investors holding REIT shares are continually being approached to increase their existing positions, a circumstance that can worsen liquidity issues at smaller REITs whose shares are already largely held by just a few institutional holders.

Refinancing risk includes not only the risk associated with the cost of debt, but also that relating to the availability of capital. In 2008, the subprime mortgage crisis resulted in a very severe credit crunch in which many REITs were unable to refinance corporate or property-level debt when it came due, regardless of operating performance. The focus of discussion became “survivability,” and there was a massive sell-off in REIT shares. One very high-profile REIT, General Growth Properties, which had been one of the largest REITs in existence, sought bankruptcy protection.

REITs also face other issues that tend to reduce their attractiveness to some investors. They tend to focus only on the highest “Class A” assets, and are often unable to take advantage of “core-plus” or “value-added” properties needing some remodeling or more extensive renovation to get their cash flows up to desired levels, but which also offer greater potential returns. Another drawback is that the value of REIT shares can fluctuate constantly, just like any other stock. If one purpose of real estate is to provide true asset class diversification, some people argue that REITs fail that test simply by being publicly traded. Private real estate investments are somewhat insulated from – or at least not closely correlated with – the equity markets.

The debate over whether private real estate investments or publicly-traded REITs are better overall investments will surely rage on for some time. REITs suffered greatly during the recent recession but have come back strongly recently, with many institutional investors taking a greater stake in them than in previous years. Nevertheless, most large institutions – and crowdfunding sites – remain focused on private investments for reasons of reduced volatility, exposure to a broader range of opportunities, and true asset class diversification.

 

Jilliene is the CEO and co-founder of RealtyMogul.com. Realty Mogul is crowdfunding for real estate – a marketplace for accredited investors to pool money online and buy shares of pre-vetted real estate investments.

Real Property vs. Market Investments

January 9, 2014

Guest article by David Hoyle:

After spending more than 20 years on Wall Street as a partner in a major investment firm, I now focus on providing a cost effective way for others to invest in the real property market through self-directed investment programs. I believe there is no better way to diversify capital market risks, better-known as stock market risks, than through the introduction of tax-deferred investments in income-producing assets into an individual investor’s portfolio.

I hope that as you and I look into our collective crystal balls of the future, we recognize the following:

  1. Stocks are making new highs, despite an expectation on the part of a majority of investors, but that growth will remain low and fragile in the coming year.
  2. Bonds, which have been made expensive through the Federal Reserve Bank’s “Quantitative Easing” program, will now become a source of increasing volatility and risk as the FED scales back its buying program.

At a time when equity and bond portfolios are becoming more correlated (i.e. they tend to behave the same and are therefore less diversifying and more risky), real estate investments represent a true source of diversification and a source of very attractive returns. While individual stocks may offer double digit returns in the future, seldom do general index linked assets offer multiple consecutive years of double-digit returns.

As uncertainty creeps into the financial assets marketplace, an increasing number of investors will look to real property investments. Problematically, they will see opportunities, but will be confronted with increasing liquidity issues. Banks will not lend.

This is where a great opportunity for self-directed IRAs exists. Direct portfolio investment, joint ventures, equity participation lending, and other transactions within a self-directed investment framework all look likely to be on the upswing for 2014 and beyond.

Together with NuView, we at Old Florida Properties look forward to helping you find profitable opportunities.

David is the founder and managing broker of Old Florida Properties LLC, a licensed real estate brokerage firm located in downtown Orlando. You can contact David by phone at 407-529-4621, or you can visit his website at www.old-fl.com for more information.

What’s different in 2014 for self-directed IRAs?

The public stock market exchanges have had a remarkable year – with the Dow Jones Industrial average up 22% and the Nasdaq up an amazing 33%. Yet, interestingly enough, the growth of self-directed IRAs continues unabated. Why? Many investors would prefer to invest in what they know and understand, and in many instances believe that by making their own decisions they will have a better long term result.

Quite frankly, the best news is that Congress and the IRS have pretty much left IRAs alone, although rumors are swirling about potential curtailments on conversions to Roth IRAs. The good news is there have been no changes to the contribution limits for any of the IRA vehicles this year. The only change in this arena is largely around income limits for eligibility to contribute or tax deductions for those contributions.

For those of you interested in solo 401(k) plans, the defined contribution limit has increased to $52,000. Educational Savings Account contributions are still at $2,000. And Health Savings Account contributions have been raised to $3,300 for individuals and $6,550 for families.

So, to those of you who haven’t started self-directing, get going. And to the rest of you, congratulations and continue to build your wealth. The success our clients experience with us are inspiring, and we are grateful that we can help keep client investments sheltered from the taxes that can eat away at returns. Investing through an IRA with NuView, your dream of retirement may be closer than you think.