What Can You Do With A Solo 401k Plan?

Solo 401k is the most innovative qualified plan among others. Solo 401k rules even allow you borrow up to $50,000 for any purpose.

If you are one of those who would like to use your own knowledge and skills to make the most out of your investment opportunities, then perhaps, the Solo 401k plan is the best retirement plan for you. If you think you would do best in real estate investment or a private business, then you could invest your own retirement funds on these sectors. Not only that, you will also get a tax-free and penalty-free access to a loan amounting up to $50,000.

The Solo 401k plan is an Ultimate Qualified Retirement Plan created for self-employed individuals without any full-time employee working for them. Their business could actually be in any capacity and form, whether it is a corporation, a sole proprietorship, an LLC, a partnership, or even if the owner is working as an independent contractor.

Unlike conventional 401k plans, this plan permits small business owners or any self-employed person the capacity to make use of his or her own retirement savings to different investment opportunities. He or she may choose among assets such as real estate, businesses, tax liens and tax deeds, or precious metals without having the need of an approval from their designated custodian. And because it is a qualified plan, you will still enjoy tax-deferred benefits or even tax free gains from investing a Roth sub-account.

The investment choices and tax benefits are the main reasons that make Solo 401k plan so popular among real estate investors. Why invest in stocks and bonds, which you have little experience with, when you can put your rich experience in real estate to work and grow your retirement fund faster and more securely?

High contribution limits enables plan holders to take full advantage of tax deductible contributions which could reach up to $57,500 per year. This makes it possible to invest in real estate, which often requires higher capital upfront.

Among all plans approved by the IRS, this is the most innovative qualified plan that can be tailored to your financial needs. Solo 401k rules will even let you borrow an amount up to $50,000 for any purpose it may serve you, and to broaden the horizons of your retirement funds into include any form of investment, excluding only collectibles.

One Question Too Many Investors Fail To Ask A Coach

The question that I am talking about is simply this: “Have you ever lost money in any of the investments that you have been involved in?”

It’s a question that more investors need to be asking. It is also what I consider “The Question” that when answered will tell you a lot about with respect to who you are thinking of investing your money with, what you are considering investing in and even dealing with a mentor/coach.

When the person you are considering having an investment relationship with whether it be an individual, company, etc. answers this one question it will tell you a lot.

And it’s pretty simple to derive the necessary information you need from their answer as well because if their answer
is:

ANSWER #1 – “NO” – then you need to run away from this investment or the person working on the investment. A NO answer
either tells you one of two things:

1) They are lying – simple as that …..OR….

2) They do not have enough experience.

Anyone that makes investing in investment real estate (stocks, bonds, mutual funds, any other investment for that matter) their primary business HAS had investment losses because not EVERY investment works out.

It is impossible for every investment to work out. Even those investors considered the BEST at what they do and are very well known KNOW this to be the case and they have all lost money on something. Even those “sure things.”

It happens.

A very high percentage of all of the investment real estate properties I have been involved in have worked out very well but I also admit that I have had some stinkers too! Some stinkers that lost money and a few that lost more money than I would care to admit.

But facts are facts and as they say, THOSE ARE THE FACTS.

So, my answer to the question of “Have You Lost Money In Any Of Your Investments” is an absolute – YES I have.

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When you begin relationship with someone, especially an investment relationship everything needs to be transparent or  everyone is wasting their time. If the relationship is nottransparent and all of the facts are not discussed then this spells trouble with a capital “T”.

Things generally work out fine the majority of the time for sure but nothing is guaranteed. We are all smart enough to know this but how many of us really look into this? Ask the question?

You see I am always happy to discuss, PERSONALLY, the investment projects that I mention to you from time to time that I recommend and all of what you can expect but I am also always open to talk about the ones that just did not work out because the best way to have a great (but not perfect) track record is to learn from the bad experiences and lessons so they are not repeated.

Even in this economy!

Darin

Seller Responded – Making Your First Offer Example P3

Let’s recap what we learned in Seller Responded – Making Your First Offer Example P1. A seller responded to my marketing letter which was sent in the mail based on an “educated hunch” that the property was distressed. After speaking with the elderly owner’s daughter for the first time I came to the following conclusions:

• I spotted a property that no one else even knows is for sale.
• I’ve determined that indeed, the property is for sale.
• We also note that the asking price of $80,000 is the retail price for that neighborhood.

I decided now that it’s action time. Reviewing the numbers , if I set my target sale price at $80,000 and we spend $2000 in fix-up costs, we still have to discount the purchase price significantly from there in order to make a reasonable profit. We do not yet know what the minimum price will be so all we can do at this point is evaluate some of our options.

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Making Your First Offer CalculationsSome of the options we can consider when  looking to make an offer to a seller include:

Offer Option#1:
We could offer $60,000 on a cash-out sale. That’s a 25% reduction from the original asking price. After fix-up, our gross profit would be $18,000 if we could resell at $80,000 to the new buyer. We would request a 60-day escrow (independent third-party processor such as an attorney) in order to give ourselves enough time to find the new buyer before the escrow was scheduled to close.

Then, our new buyer would obtain new financing thus cashing out our seller and giving us our $18,000 profit. The escrow costs would be paid by our seller, Ida Mae, and by our buyer so none of the closing costs would come out of our gross profit. Escrow would simply pay us our profit out of the new financing obtained by our new buyer.

Option#2:
We could offer an even higher price; say $70,000, with the proviso that the Ida Mae carries back the financing. Our argument here would be that Ida Mae would then receive higher interest than she could obtain from a bank CD at current interest rates. She would have a monthly cash flow that would undoubtedly last her for the rest of her life. We would find a buyer at the $80,000 figure that would also pay us a larger down payment than we would be paying to Ida Mae.

If we structure this correctly, we not only get our buyer to cover our down payment, our buyer also covers our $2000 in fix-up costs plus perhaps another $1000 or two that we immediately put into our pocket. We can simply transfer the seller-provided financing to our buyer, or we can create a wraparound mortgage in which we earn a slightly higher interest and monthly payment than we will be paying to Ida Mae.

If we can obtain 5% financing, we can charge 6% financing to our buyer. If we can get Ida Mae to agree to a $3500 down payment, we can charge a $6000 down payment from our buyer. Using 5% interest and a 30-year amortization schedule, our monthly payment would be $356.99 on the $66,500 mortgage ($70,000 purchase price minus $3500 down payment). Our buyer would pay us $443.67 per month on a $74,000 mortgage at 6% interest for 30 years. Monthly, we would make $86.68 ($443.67 minus $356.99) in addition to the $2500 lump sum up front ($6000 minus $3500). We recovered our $2000 fix-up cost and have an additional $500 in cash.

Summary of Our Offer to Ida Mae:

$70,000          Purchase Price to be paid to Ida Mae

+  2,000          Fix-up costs out of our pocket

$72,000          Our total cost



$70,000          Purchase Price

-   3,500          Our Down payment to Ida Mae

$66,500          Mortgage owed to Ida Mae at 5% interest, 30 yr amortization

$356.99          Our monthly payment to Ida Mae for Principal + Interest

Summary of Our Buyer’s Payments to Us

$80,000          Purchase Price paid to us by our buyer

-   6,000          Down payment from our buyer

$74,000          Mortgage (wraparound) owed to us by our buyer

$443.67          Monthly payment from our buyer to us (6%, 30 years)

Summary Between What Our Buyer Pays Us vs. What We Pay Ida Mae

$6000             Our buyer’s down payment to us

- 3500             The amount we pay to Ida Mae as our down payment

$2500             Gross Cash to us

- 2000             The amount we paid to fix-up the outside and inside

$  500             Net Cash to us

$443.67          Payment we receive from our buyer, Principal + Interest

- 356.99          Payment we make to Ida Mae, Principal + Interest

$  86.68          Net monthly we make on the difference

Option#3:
We could offer Ida Mae her full price under a lease-option program. Here we would offer to lease the property from her for a year with the right to renew that lease four additional times. Then we would find a tenant/buyer who would lease from us at a higher rent than we are paying Ida Mae. Additionally, our tenant would give us an option payment larger than the payment we would make to Ida Mae. As a result, we profit from the difference in the option payment up front; from the difference in what we pay as rent versus what we collect as rent; and finally from a higher sales price than what we’d agreed to pay Ida Mae.

We might offer Ida Mae $1000 for the option but charge our lease/option buyer $5000 for the option, thus making $4000 up front. We’d handle the lease payment in the same manner as we structured the wraparound mortgage in number 2 above. We’d pay $500 per month in rent but charge $700 in rent to our tenant.

We’d start out at a target sales price of $90,000 at the end of one (1) year to our tenant. If the tenant elected to renew the lease/option for another year, a new option payment and a higher monthly rent and purchase price would be established. If our tenant walked away from the deal at the end of the first year, they would forfeit their option payment and we would simply find another tenant/buyer. Recall that we reserved the right to renew our lease arrangement with Ida Mae for an additional four (4) times after the first 1-year period, so we really have a five (5) year lease/option working for us.

Summary of Lease/Option Program

$90,000          Sale Price to new tenant/buyer

- 80,000          Our Purchase Price from Ida Mae

$10,000          Our Profit on the difference

$5000             The non-refundable Option Payment from our Buyer

- 1000             The non-refundable Option Payment to Ida Mae

$4000             Our Profit on the difference

$700               The rent we charge to our tenant/buyer

- 500               The rent we pay to Ida Mae

$200               Our monthly profit on the difference

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Of course all of this is speculation since we don’t know as yet what our potential seller will agree-to in price and terms. The advantage of pre-determining our options is that we always have a solution to our seller’s problem. Regardless of what Ida Mae tells us she wants, we have a prepared response to solve her requirements and st

20 Mile Marching To Real Estate Success

Every real estate investor should make sure to be an avid reader and they should not simply limit themselves to real estate books. General business books are also extremely important. On that subject, there is no one better than Jim Collins, the author of Good to Great and Built to Last.

Jim Collin’s most recent book is called Great by Choice and it contains an extremely important nugget of wisdom for anyone in business, but especially for any real estate investor. He refers to it as “20 mile marching.”

The phrase is borrowed from the philosophy Joe Brown used when marching to the South Pole. It involves diligent preparation and a consistent and patient approach. Each day, Brown would march 20 miles, no more, no less. He didn’t allow impatience or fear or greed or even boredom to dictate his behavior. Instead he followed a consistent approach that got him and his team to the South Pole and back without losing a single member of his team, a feat many others died while attempting.

Jim Collins relates this to business as follows:

“The 20 Mile March is more than a philosophy. It’s about having concrete, clear, intelligent and rigorously pursued performance mechanisms that keep you on track. The 20 Mile March creates two types of self-imposed discomfort: (1) the discomfort of unwavering commitment to high performance in difficult conditions, and (2) the discomfort of holding back in good conditions. (P. 45)

Contained in this idea is the important albeit simple advice to never give up. Every investor I know lost money on deals and made mistakes. My brother even has a sign in his office with the words “make more mistakes” on it. As Thomas Watson once said, “If you want to be more successful, double your rate of failure.” Even when things gone badly, one must continue to push ahead.

In addition, however, Collins also gives a warning about how to deal with success. In Collin’s book How the Mighty Fall, he discusses another concept called the “undisciplined pursuit for more” which he points to as the primary catalyst for decline. Decline is generally does come from resting on one’s laurels or refusing to change as many would expect.  Instead, it usually comes from an undisciplined gamble brought on my overconfidence. After one has had some success in real estate, the temptation is to go bigger and faster instead of following a diligent, consistent plan. And if you are moving into a new niche, do so carefully. “Fire bullets” instead of “cannonballs” as Jim Collins would say.

Once you start having success in real estate, it is important to stay focused and not get overconfident. It is important to stick to your plan and not get too far ahead of it. Of course that doesn’t mean to turn down a great opportunity that knocks at your door, but it does mean to test your limits carefully.

When we first moved from Oregon to Kansas City, we bought a 29 unit apartment that was in a much worse area than we originally anticipated. We moved too fast and it ended up biting us badly. Once we learned the market, though, we’ve found a consistent formula for success. And we’ve followed it, even when it got kind of boring.

And that is the lesson here. After all, it’s better to be bored and succeed than excited and fail.

Buying Investment Property – Getting Estimates Tips

Let’s say you’ve found the perfect investment property to rehab & flip or to fix-up & rent. You have done aquick estimate of repairs you think need to be done, submitted an offer, it was accepted and you then ordered an inspection. Then what?

Using Inspection Report
Make note of any unexpected problems that were discovered in the course of the inspection. Start working in contractors, and handymen to get estimates to fix, repair or replace items in your potential investment property.

Determine where or not it would be a wise decision to continue to negotiate the purchase price. [Investing Tip - This has worked for me once!]If your are working with a bank, send them a copy of the inspection report and ask that they negotiate further on the price. You never know how motivated the bank is. There is no harm in asking and usually their response to a list of repair is that they will have to lower your lending amount because the value has decreased. If the seller wants the deal to do through they will lower their number most of the time so that the sale with your loan can do through.

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Scheduling Repairs
One your offer has been accepted, schedule the repair men to start work on the investment property  the day AFTER your anticipated closing date. Once you have closed on the loan for your investment property, the interest clock is ticking and your holding costs are rising. Arranging ahead of time for work to begin on the property immediately after closing is crucial.

When getting estimates, try to schedule all of your rehab people to come to the property either at the same time or in 15-min increments. to minimize the number of trips you have to make to the property.

WARNING: Don’t do any work on the property prior becoming it’s owner unless you are 100% positive you will close on the deal. You do not want to spend money on  property that date may prevent you from purchasing.

Remember you can double-schedule your repair guys as long as they won’t be tripping over one another. For example, it is unlikely that scheduling a roofer, plumber and gardener to work at the same time would prevent any problem.

One last tip: Get to know an Investor Friendly Handyman !

Until next time….Camille

Why You Should Consider Real Estate Investment For Your Self Employed 401k?

Self employed 401k, or often called Solo 401k, is designed for self employed individuals and business owners, who usually are drawn to the flexibility and high limits of the plan. One of the perks of having a self employed 401k is that plan holders are able to choose among the widest variety of investment classes, ranging from stocks and bonds to private businesses and real estate. Of course, you can choose to go with your favorite stocks. However, adding real estate to your retirement funds can give you substantial advantages. Let’s take a look at how real estate investments can benefit your retirement fund.

Diversify your portfolio to minimize the riskAs we all know not to put all the eggs in one basket, having all your retirement future rested upon one investment type is not recommended. Especially with the ups and downs of the stock market, we can never tell when the next financial crisis is going to happen. Having part of your funds invested elsewhere will mitigate the risk.

Besides, unlike stock investment, with real estate you are much less likely to lose it all. In the worst scenario, you can always sell or foreclose the property to recover your capital.

Predictable earnings to your self employed 401kWhen security is the top concern, most investors often choose to invest in rental properties, which offer a steady, predictable stream of payments to their retirement account. Another option is investing in notes, where the plan will be paid a fixed interest rate every month, even if the property is not occupied. Due to the secure nature of these investments, most people see them as sources of passive income, where there is little to no effort required to manage the property.

Or gaining large returnsOn the other hands, some investors prefer a bigger return to quickly grow their retirement fund, which can certainly be achieved by investing in real estate. Usually, this group of investors will invest in properties that have potentials for long term appreciation, or engage in flipping houses.

Besides allowing real estate investment, self employed 401k also has many features that make it more feasible to invest in real estate. For example, investing in real estate often requires more capital upfront. Fortunately, the plan allows higher contribution limit than an IRA, which means you can put away more funds in a shorter amount of time to finance real estate purchases. Leveraging your investment is also allowed by non-recourse loans, whereas such transactions with an IRA account will trigger Unrelated Business Income Tax (UBIT). To avoid complication during the loan process, make sure to talk to  your plan provider and work with a specialized non-recourse lender.

7 Facts Investors Should Know About Hard Money

Private lenders have been around for, well, ever: as the saying goes, lending money is the second-oldest profession.  In advanced economies today, private or “hard money” loans are used by real estate investors ranging from professional renovation investors with excellent performance records to desperate last-resort borrowers with terrible credit histories.

While there remain some back-alley loan sharks around doing shady deals with desperate investors who aren’t responsible enough to borrow from anyone else, most hard money lenders are open, ethical businessmen and women with real estate acumen and extra cash to invest.  There are even some formal banking institutions who engage in hard money lending.

Here are some cold, hard facts about the hard money industry to help you determine if  hard money is the right money for you.

Hard Money Lender & Loan FactsFact #1:  Hard money deals are often sought after for their quick turnaround (usually within 7-14 days to process).  Any investor interested in flipping a property knows that time is of the essence and needs to have funding available sooner rather than later.

Fact #2:  One way in which hard money lenders differ from more conventional lenders is in the fact that many hard money lenders tend to be local and more hands on in terms of wanting to view the property before lending money on the deals.   Hard money lenders want to get that up-close-and-personal look and feel for a property before making a decision to lend on a property.

Fact #3:  Hard money loans are generally much more expensive overall than conventional loans for both the interest required on them as well as points the buyer is expected to pay on them.  Generally speaking, investors seeking hard money can expect to pay anywhere from 10 to 20 percent interest and get hit with as much as eight points with some lenders in some states.

Fact #4:  Hard money loans are most often sought by investors doing short term deals rather longer term deals.  Most hard money lenders will lend from periods of six months up to a few years.

Fact #5: While the red tape is certainly less and the turnaround time is much faster, more hard money lenders are taking a closer look at borrowers’ experience and credit history.  After the real estate crash of the late ’00s, many lenders were triply burned, as borrowers defaulted, but foreclosures were slowed to a crawl for political reasons, and values had crashed.  So while ten years ago lenders were more open to lending money as long as there was sufficient equity, today they tend to be more conservative and screen out rotten-apple borrowers more thoroughly.

Fact #6:  Most private lenders require borrowers to use a specific appraiser who the lender knows and trusts, who will not be swayed by the investor’s pleas for padding the value.

Fact #7:  Most hard money loans are structured very similarly to balloon payments with due dates usually spread over no more than one to two years after the loan is issued.

Real Estate Investors there are many other means to getting your deals financed or purchases other.  What are some other unconventional ways have you used to finance your deals?