American Express Gift Cards

American Express Giftcards

4/19/11

Are You Ready To Prosper?

The messsage is clear at this exclusive event, as Actor Cuba Gooding Jr quoted in the movie Jerry McGuire "Show Me The Money!" that is exactly what we intend to do.  On May 12, 2011 "Meet The Private Money" will take place from 10am to 2pm at the Palace in Cornelius, NC. One of the cities known as beautiful Lake Norman.

Attend this exclusive event and learn how private money can fund your real estate deals from shortsales, rehab financing, foreclosure bailouts, reo acquisitions and much, much more. The opportunities are endless. The freedom that comes with creative financing is outstanding, and attending the Meet The Private Money Event will open your eyes to a whole new world of unlimited wealth building opportunites.

Let us tell you what the Guru's won't, and learn the secrets to funding your real estate deals in real time. There is nothing sold at our live event.

Interested in Commercial Real Estate, But Don't Have a Million Dollar IRA?

Investing on commerical real estate isn't out of reach. You can learn step by step how to make commercial real estate a passive investment in your self-directed retirement plan portfolio.By: Monte Smith

IRA & 401(k) Insights

Commercial real estate (CRE) can be a good passive investment. Today’s costs are considerably lower than in the past, which means now may be a perfect time to consider purchasing real property and diversifying your IRA. However, commercial properties are often valued at more than 10 times that of a residential rental property, and your IRA may not be in the million-dollar range. So can you use a smaller IRA to invest in a commercial property?

First, let’s define commercial real estate. Generally, CRE refers to buildings or land intended to generate a profit, either from capital gain or rental income. You can choose to maintain either an active or passive CRE investment. An active investment requires that you are more involved with the daily tasks of managing and/or improving the property, which in itself is a full-time job. However, this article will focus on CRE as a passive investment, wherein you hire a property manager to be in charge of the property. There are several major types of commercial property that can be used as an investment in this manner, including multi-family buildings, retail and/or office space, industrial structures, and hospitality establishments. 

Why would you want to invest in CRE? One good thing about using CRE as a passive investment in an IRA, is that someone else manages the property then mails your self-directed IRA the monthly rental check. Any expenses are paid by your IRA, or are taken from a specific separate account designated for expenditures towards the maintenance of that property. Another perk is the return on investment. Many CRE investments may yield large returns, thereby potentially increasing the value of your IRA portfolio with minimal “work” by you. How does one invest in CRE? Well, some commercial real estate brokers offer two types of services. First, they act as a catalyst to raise funds for an investment. The broker will start a new LLC or corporation, with the intent of raising money for the purchase of a commercial property. To raise money, the LLC managers look for investors to purchase shares of the LLC that will acquire said commercial property. Second, a broker may offer to manage the property that has been acquired by the LLC. The broker then finds tenants, collects rent, and maintains the property for a fee. The investment that your IRA may make, is therefore not a direct investment in real property. The IRA owns a portion of the LLC, which has acquired the real property. The IRA has signed for the acquisition of the LLC, and in the operating agreement for the LLC, various rights of ownership and management are made clear. Generally, the IRA does not have rights to the real estate acquired by the LLC, nor a management role in the property.

For example, a commercial broker establishes an LLC that will ultimately purchase a commercial property. The broker raises capital in the LLC by selling shares. The goal is to raise enough capital in the LLC to secure financing for the purchase. For this example, the financing goal is to raise $500,000 in equity from 3rd party investors, including IRA owners, then borrow $700,000 from a bank or use owner financing to reach a total of $1.2 million, with which to purchase the investment commercial property.

For IRA investors, it’s important to stop and look at the example above because the LLC will be using financing. Debt financing is what the LLC does by borrowing $700,000 from a bank, as in the example. The IRA then becomes subject to Unrelated Debt Financed Income Tax (UDFI). The reason for potential payment of tax by the IRA, is that income is potentially generated from borrowed funds. The income derived has not been taxed, so the IRS has determined that the UDFI should be used to capture tax. Although the IRA is not acquiring the $700,000 loan, the LLC in which the IRA is invested is. The proportional UDFI tax to be paid (after many permitted write-offs for the LLC) flows through to the IRA, eventhough an IRA is a tax-deferred vehicle. The IRA is required to prepare and submit, sign, and pay UDFI tax when applicable. This is regardless of whether the UDFI is generated through an LLC, or directly by the IRA if it owned the real property.

Continuing with the example, the commercial broker will sell units of the LLC in order to raise equity. In this case, the broker will sell units for $25,000 each with a minimum investment of 2 units. This is where your IRA comes in. You may not want to risk your entire IRA, but $50,000 might be feasible.

Once the LLC has acquired enough equity and secured financing, the manager of the LLC (who may also be the broker) will make the purchase. Their role moving forward will be to manage the property. As mentioned before, a property manager relieves the investor of the burden, which makes it a passive investment. The management company does take a fee, but it finds tenants, collects rents, takes care of the upkeep, and performs any other duties relative to maintaining the property. The property management functions may be included as part of the operating agreement, which you would have read and approved as part of the IRA purchase process.

Ultimately, it’s up to you to decide what type of investment to make, which is what makes self-direction so powerful. It also requires due diligence on your part. If you decide to invest in commercial real estate as a passive investment, you will need to become familiar with the process. Study the market so that you can make a good purchase. Also, make sure you know and trust your broker, who is vital to making the investment successful. Always seek sound legal and tax advice for every transaction you choose to make. Your self-directed IRA depends on you to ensure that your investments are safe and sound.

Monte Smith is the Director of Education & Marketing for Entrust Georgia, LLC. He can be reached at msmith@theentrustgroup.com or 800-425-0653 ext. 1133.