Young with a Self Directed IRA - Posted by Gambit

Real Estate Investing Real Estate Financing
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Posted by Tony-VA on July 09, 2002 at 08:41:06:

You could partner as you explain in example #1. I have been told by the Trustee that there is no set percentage but it would be my guess (only an opinion) that if you were to keep the same ratio when distributing profits, you would best be able to avoid the appearance of self dealing. This question would best be addressed to someone like Hugh Bromma at Entrust. He is a walking textbook on IRA’s.

As for limiting liability in the above transaction, the best means of doing so would be to hide the IRA’s ownership via personal property trust. Karl (OH) and Ernest Tew are the ones who showed me the light on this technique. In essensce your IRA would invest in a personal property trust with a friend of yours (non-family member) as Trustee. The IRA would be the beneficiary. Your friend would then be the one signing documents as the Trustee for this Trust.

The Trust’s name might be the “mobile home investment trust, John Doe as Trustee”. This would hide the name of your IRA but not necessarily protect it.

From here you could persue the idea of forming a partnerships with the Trust to perhaps add a layer of entity protection but I will leave this topic for Ernest or others to expand upon if they will. I have never looked further but I wonder if there isn’t a means of setting up an LP with the IRA as the Limited Partner and your company as the General Partner, but again, I am totally speculating at this point and it is too early in the morning for me to think much more in depth so I could very well be wrong on this accord.

If you are really concerned about the liability of the Roth than your best bet is to find a means of having the Roth hold the Options on properties.

As for getting the notes in the IRA. If you should have the personal property trust do the IRA deal, the note would be in the name of the Personal Property Trust but your IRA would be the beneficiary so the proceeds would flow through to the IRA.

Many details will depend upon what your IRA Trustee feels comfortable with; what their interpretations are.

To get the best advice, you need to speak with someone like Hugh Bromma who can not only tell you how to do it, but why you can. But always bear in mind that Trustee’s are their to help move your money around but because it is self-directed, you are the one who needs to keep asking the questions and finding ways of getting that money work for you.

Hugh has some good “How To Articles” here about IRA’s here as well. He is very willing to help so try giving him a call. His Entrust Banner can usually be found at the top of the newsgroups.

Best Wishes,

Tony-VA

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Young with a Self Directed IRA - Posted by Gambit

Posted by Gambit on July 02, 2002 at 17:57:31:

I have been following the discussions on using a self directed ROTH IRA to do Lonnie Deals and like the idea. I am an 18 year old and have a few concerns about using one to fund my deals.

First, I am not going to retire at 62, 65, or older. I am thinking more like 30 would be nice. Using a ROTH IRA I would have a small fortune, but I could not freely use the money at such a young age.

So here is the big question:
Doc- If you were 18 years old and starting out, what would you use to fund your MH deals?

I appreciate any help or insight that can be given to me! Thanks!

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Re: Confusion over Roth IRA - Posted by Ernest Tew

Posted by Ernest Tew on July 03, 2002 at 10:55:35:

Gambit, I agree with most of the responses to the questions you raise about self-directed IRAs.

However, it is obvious that there is still some confusion about Roth IRA rules and what can be expected from a self-directed IRA.

Almost anyone can set up a self-directed Roth IRA. With Mid-Ohio or Entrust, its as easy as opening a checkig account. You can contribute from $200 to $3,000 to it each year ($3,500 if you’re age 55 or older) and you can take it out at any time. But, there is no requirement that you ever take it out.

Even the profits in a Roth IRA can be taken out under certain circumstances.

A Roth IRA can also serve as a “safe haven” for wealth, if handled properly. In my opinion, this means not putting any tangible assets, such as mobile homes, in the IRA.

I have an article that uses simple and concise language to explain the IRA rules and some of the amazing benefits that can be gained by properly using a Roth IRA. The article also includes a chart that makes it easy to compare the traditional IRA with a Roth IRA.

If you or any of the readers would like to have a free copy of the article, just send a short email to the address above and mention Roth IRA.

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Re: Young with a Self Directed IRA - Posted by Tony-VA

Posted by Tony-VA on July 02, 2002 at 18:14:14:

Most people at 18 desire and often believe that they will retire far younger than 60. This could happen if you apply yourself and work your plan. Just don’t count on it.

The Roth IRA could be your backup or your bank to partner with to fund deals that you might otherwise have had to pass upon.

Don’t discount the time value of money too quickly. A nice nest egg at that age may go along way or just long enough to get you through the month.

You will need to continue to do deals that provide profits in dollars that you can spend today.

Remember, the contributions to the Roth IRA can be withdrawn without penalty before retirement (you already paid the taxes on it). So you could fund the Roth for some time, get it up and running and then withdraw that investment capital and do deals that provide you money today.

Best Wishes,

Tony-VA

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Re: Confusion over Roth IRA - Posted by Dr. Craig Whisler CA

Posted by Dr. Craig Whisler CA on July 03, 2002 at 12:05:22:

Ernest you are right about this confusion and I probably am directly responsible for most of it.

When I say buy mobiles in your Roth IRA, I don’t mean to buy them directly in your IRA. While it is techniqually feasible to own mobile homes and rental propertiew in your IRA it would be unwise to do so in my opinion. You primarily don’t want the liabitiy inside your Roth and you don’t want to operate any kind of a business operation that would incur the UBIT tax.

What I am refering to, and I want to clarify it now is that your goal should be to capture your profits and hold the notes, therefrom, in your ROTH IRA.

Ernest’s article on IRAs is an excellent one and everyone should print it out for further study.

Regards, doc

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I agree with Tony 100%. - Posted by Dr. Craig Whisler CA

Posted by Dr. Craig Whisler CA on July 03, 2002 at 01:55:30:

Why not do some deals in your ROTH IRA and some more in your NIMCRUT trust and a few deals in your LLC or Corp. You can draw on your NIMCRUT trust at ANY age even on the same day you put funds OR PROPERTY in it. The NIMCRUT trust has NO limits on how much can be contributed or on who can make the contributions.

I retired first at 30, then at 40, 50 and 60. There’s many a slip betwixt the cup and the lip.

At your age you haven’t had sufficient experience to even begin to imagine all of the things that can go wrong. It is a very rare person who hasn’t gone broke a couple of times. Going broke is ALWAYS totally unexpected, of course, or we wouldn’t let it happen. It just as hard to hang on to it as it is to make it, sometimes harder. Trust more to the protection of your Roth IRA than to your own, yet immature, financial judgment. You should follow Tony’s advice. Derek, your success in doing so will be your self-scoring I.Q. test. Your Roth IRA is the OPPORTUNITY OF A LIFETIME, BUT to work it full magic it needs YEARS. Only you can give it those years. You wanted the advice of the experienced and the oldtimers, here it is. Go absolutely beserk about putting as much as possible into your ROTH IRA, EVERY year of your life, even if you live to be 100. If you start at age 18 and put the maximum amount (its very low anyway) into your IRA and listen closely to how Jack Miller tells you how to work it with options, you stand a 50-50 chance of ending your life a billionaire. Check the math Derek, its a slam dunk. ALWAYS put in the MAXIMUM each year for you, your wife, AND each your children, just as soon as you can get them earning a litle money working around the house and neighborhood. If you really LOVE your children you will get them working as soon as possible and get their Roths funded however small that funding may be at first, then YOU can help them buy very cheap options to get their Roth IRAs jumpstarted and RACING. Yes get your children started as early as possible. Your kids have a 100% chance to become billionaires, if they can start by age 6-10 with their own individual IRAs. If you children have just AVERAGE success, with all the years ahead of them they will still become billionaires if you get their ROTH’s started as early as possible. This is why I predicted in earlier posts that the Roth IRA will bring back the family financial dynasties like we had in the late 1800s and early 1900s. You know like the Kennedys, Rockefellers, Astors, etc. If you don’t believe this then you need to take a course in the use of financial calculators. Then you can easily prove this to yourself. I challenge EVERYONE on this board to try to disprove me on this point.

Regards, doc

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Re: Young with a Self Directed IRA - Posted by Derekb-PA

Posted by Derekb-PA on July 02, 2002 at 18:49:15:

Hey Tony, I have a question about that…Are you saying that any of the contributions I make each year are available to withdraw without penalty at any time? Or at least after the 5-year period from opening the account? So if I put 3 thousand in this year and say I did a deal that earned a 10,000 profit somehow…I could then go and take that original 3,000 out? That’s sounding pretty good to me!! Also is there a limit on when you have to take that original contribution(yearly?) or say can you let it accumalte over five years, then take it all out?

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Re: Confusion over Roth IRA - Posted by James Buster

Posted by James Buster on July 08, 2002 at 20:29:14:

>What I am refering to, and I want to clarify it now is
>that your goal should be to capture your profits and
>hold the notes, therefrom, in your ROTH IRA.

So how does the Roth acquire the note, if it didn’t own the MH and sell with owner financing? Remember, you said you don’t want liability to the buyer as the previous owner, nor do you want the IRS to claim you’re a dealer and levy UBT on your Roth’s income. Neither can your Roth buy the note from you. Sources I’ve read, such as Jack Miller’s excellent “Roth IRAs and Other Tricky Stuff”, only talk about a Roth taking capital gains via option exercise. They make no mention of how a Roth might acquire a note in this scenario. Nor, really, do they mention notes in a Roth at all except to buy directly or create as an owner-seller.

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Re: Confusion over Roth IRA - Posted by James Buster

Posted by James Buster on July 06, 2002 at 07:45:27:

If I understand you correctly, in order for the Roth never to have been owner of the MH you (or a comapny owned by you) must buy the MH subject to an option owned by the Roth separately negotiated with the seller. Then the buyer buys the option from the Roth on an installment contract and exercises it, allowing the Roth to avoid both a charge of self-dealing (if it exercised while you were owner) and liability as property seller. I presume, then, that you negotiated an option price higher than what you or your company bought it for, creating current profit (food money!) while funnelling most of the profit to the IRA.

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Re: Notes and Options - Posted by Ernest Tew

Posted by Ernest Tew on July 04, 2002 at 10:17:48:

Doc, you’re correct. Putting notes in your Roth IRA is a great way to go as long as there is no self-dealing.

Arranging for the Roth to acquire an option on property (from an unrelated party) is even better.

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Helloooooooo… - Posted by Dr. Craig Whisler CA

Posted by Dr. Craig Whisler CA on July 03, 2002 at 02:07:56:

… you can take your original contributions back out at ANY time. There is NO 5 year waiting period to withdraw your original contributions. You can put in $3,000 then buy a couple of options on rehab deals and trun it into $50,000 faster than you can possible imagine, TAX FREE (no more tax problems with Lonnie deals) and immediately withdraw ALL of your original contributions, with NO penalty.

Helloooooooo…

Regards, doc

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Re: Confusion over Roth IRA - Posted by Tony-VA

Posted by Tony-VA on July 06, 2002 at 11:24:33:

In most cases, when buying mobile homes, we are going to have to pay cash or some cash and a note in order for the Seller to move. In these more traditional Lonnie style deals, you might consider (as Ernest suggests) utilizing a Personal Property Trust to hold the title. This Trust would be funded by your Roth IRA. The Roth would be the beneficiary. To keep the transaction totally arms length, you would probably want to find a Trustee that is not excluded (such as a non-family member).

When dealing with Seller who do not need cash, you might consider Leasing the home with an Option to buy. Your company would Lease the home and your IRA would hold the Option to Buy. As you eluded to, when you sell the IRA would gain the difference (either through assignment of option or simultaneous close) in it’s option price and the price of the Sale. I would suspect that you are going to find that these types of transactions are more frequently accomplished with Real Property as opposed to mobile homes.

Keeping this thought pattern in mind, you may find a myriad of opportunities to employ this technique. Whenever you analyze a deal, think what might be broken off and where profit might lay that could be better held within your Roth. Then contract the deal separatly by partnering with the Roth or Personal Property Trust.

Tony-VA

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Re: Notes and Options - Posted by Jim

Posted by Jim on July 04, 2002 at 11:51:41:

Whar are your thoughts on a Roth holding an “investment contract”–where the payoff is a % of gross rentals from MH park, for instance?

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Whats up Doc? - Posted by Gambit

Posted by Gambit on July 03, 2002 at 06:48:54:

Thanks for the info Doc!

I am going to set me up one soon, first I gotta get the book about doing it on cashflowconcepts.com.

Thanks for the help! Keep up the great work!

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Re: Confusion over Roth IRA - Posted by James Buster

Posted by James Buster on July 08, 2002 at 20:14:43:

I see the opportunity for cash flow by sandwich leasing the property by my company. Is there an opportunity for splitting the capital gain with my Roth? Is that accomplished as I described, or in a different way? Or is it better just to keep the entire deal within a single entity?

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Re: Investment Contract - Posted by Ernest Tew

Posted by Ernest Tew on July 05, 2002 at 09:02:12:

I’m not sure what the “Investment Contract” would involve. Keep in mind that a Roth IRA should make investments and should not become a business. And, most important, the Roth shouldn’t have any prohibited transactions, such as self-dealings or dealing with people or entities under your control.

My favorite approach is to have the Roth IRA (or a personal property trust funded by Roth IRAs) acquire an option to buy (from an unrelated party).

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Re: Confusion over Roth IRA - Posted by Tony-VA

Posted by Tony-VA on July 08, 2002 at 21:17:17:

If you are simply doing a sandwhich lease then have the Roth hold the Option to purchase. That will put the profits from the sale into the Roth IRA where it won’t be taxed. You get the profits in the spread between what you pay on your lease and what your tenant/buyer pays you.

Personally I like the partnering aspect. The Roth money can help you do deals that you might otherwise have passed on for lack of ready capital. By partnering you can move on the deal now and keep that money active.

Tony-VA

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Re: Confusion over Roth IRA - Posted by James Buster

Posted by James Buster on July 09, 2002 at 04:13:11:

Perhaps some hard examples to ask questions about are in order.

Example 1:
You & Roth buy MH for $5T: $2T from you, $3T from Roth. You sell for $10T cash. Must profit be split 2:3, or can other profit splits be arranged without being charged with self-dealing? As former part owner of the MH, how does the Roth avoid joint & several liability to the buyer?

Example 2:
MH is bought for $5T, and sold for $3T cash & $7T note. One presumes the Roth avoids liability by never having an ownership interest in the MH. It therefore can’t acquire the note as an owner carryback, and neither can it acquire the note by lending to the buyer because it would be a no-no for it to finance the purchase of its fiduciary’s property. So how does the Roth partner with you on the deal, acquiring that note while avoiding both self-dealing and joint liability? A specific description of the transaction would be appreciated.