With the crash of the real estate market comes many opportunities for investors. Especially when purchasing the abundance of Short Sale and Foreclosure homes. There is however on caveat to these purchases that one truly has to consider and that is that you must honor any existing leases on the property for the duration of the lease term. 

What many people are doing that no longer want their homes or are planning on letting it foreclose is relocating to a new home and renting out their previous residence. The reason for this is that these home owners choose to say rent a house around the corner for $1200, and at the same time collect rent on their home for the same or often times even more money. Well instead of paying that money to their mortgage they just keep it and use it for their own person expenses since they have decided to let the house go. All fine and dandy for them but it is the tenant who actually gets screwed over when the home is sold, or foreclosed on. Or do they?

If you've got an existing lease, the lender or whoever buys the property int he foreclosure auction has to honor your lease. The Protecting Tenants at Foreclosure Act, Pub. L. No. 111-22, §§ 701-704 (2009) became law on May 20, 2009, and applies to state eviction proceedings, and requires that a new owner who took title to residential rental property through foreclosure honor existing leases until the end of the lease term. 

Even if the new owner wants to occupy the foreclosed property as a personal residence before the end of the lease term, or your lease expires within 90 days, or your tenancy is month-to-month, the owner has to give you at least 90 days notice to terminate the tenancy.  

So this may help protect innocent tenants whose owners were not completely up front with the tenant but it may put a monkey wrench in your plans as an investor, especially if you plan to rehab and/or flip the home.  

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You would have to be living in a cave if you haven't seen or heard about the implosion of the real estate market over the last two years. Ever day in the news it is foreclosure this and a new regulation that. Not to mention although some 401k and IRA account have seen some recover from those late 2008 lows. Don't get your hand caught in the cookie jar the next time the market takes a dip. Now many investors have been waiting on the sidelines not sure what to do with their retirement accounts. While it is easy to reproach the mortgage brokers, the government regulators, and the infamous people on Wall St., focusing on who to blame on the recent financial crisis may cause you to miss one of the countless opportunities out there right now. 

Many people are unaware that they can use their IRA and 401k funds to purchase and invest in real estate. You can roll a portion of your 401k into a Self-Directed IRA and purchase investment properties to rehab and flip or just sit on and rent out. Some markets have been hit by more than 50% and some or even undervalued today by 40%. The best part about using your IRA funds is that you can now obtain and IRA Loan to help you acquire  or rehab your property. Some of the IRA lenders are now lending up to 65% of the value of the property you are looking to purchase. Here are some facts about IRA Lending: 

What is IRA Real Estate Lending?

IRA real estate lending is the process by which you can self-direct IRA or other qualified retirement funds to purchase real estate. This is accomplished by funding the down payment of the purchase price with a qualified account and then obtaining a non-recourse loan to finance the remaining balance of the property's purchase price. Self-directed accounts can even be used to purchase property or buildings in other countries. For more information on opening a self-directed IRA account, please contact  This e-mail address is being protected from spambots. You need JavaScript enabled to view it

In today's market, mutual funds and other Wall Street investments that were deemed safe and fail proof have in recent years shown significant volatility and in most cases dramatic losses. Many people today are moving towards self-directed retirement accounts where they control more closely what their retirement account should invest in. Because IRA's are qualified accounts, they are classified in such a way in which they cannot be accessed without negative tax consequences until much later in life. This can be a problem if you want to purchase investment real estate but simply don't have any non-retirement funds available to do so.

In order for a self-direct IRA to fund a real estate investment, per IRS tax law, a qualified 3rd party administrator must facilitate the purchase of the property which ensures that the individual does not have personal possession or direct access to any qualified accounts. If this rule is not abided by, then the IRS classifies the money as an early withdraw which triggers not only a financial penalty, but also causes the proceeds to be subject to ordinary income tax rates. The 3rd party administrator facilitates the purchase of the asset and title is vested in the name of your IRA or designated account. A property can NOT be purchased in an individual name and afterwards transferred to your self-directed IRA. This is referred to as self-dealing and is strictly prohibited by law. If you purchase real estate within your self-directed IRA, you will not be able to live in the property or own it in your personal name. This also includes your family and anyone else who may be connected with the transaction that could stand to personally benefit from the transaction. Your IRA is only allowed to purchase assets solely for investment purposes and void of any personal gain or benefit prior to taking a distribution from the account.

Are there penalties for misusing IRA loans?

There are fines and penalties for violation of the terms of IRA lending. The 3rd party administrator can also assist you in confirming that a transaction is eligible. Another way to properly plan for correct use of this type of investment is to work with a knowledgeable CPA and financial planner. Prohibited transactions from IRA loans can also lead to complete disqualification of the IRA itself, so it is imperative to be very careful in this matter.

What is the process for setting up an IRA loan?

Once you have found a trusted 3rd party custodian, they will assist you with paperwork and compliance documentation necessary to transfer your qualified accounts to their trust account. Brooklyn Troy works closely with and recommends Pensco Trust Company or The Entrust Group for a 3rd party custodian.  First, a plan is decided upon and approved. Then the funds from your IRA are rolled over into the new self-directed IRA held by the administrator. If you are pooling a number of IRAs, as in perhaps you are joining your IRA with that of your spouse, all these funds will be rolled into a new self-directed IRA. Upon a property being selected to purchase, the custodian will then take appropriate steps in order to help you facilitate purchase that will be title in your IRA.

This subject is still a bit of a mystery to many people. Because it is an alternative investment as oppose to a mutual fund or more widely quantifiable investment, most stock brokers and investment advisors simply don't have experience offering advisement in this area. Self-direct IRA's are an ideal way to take advantage of the present real estate market. Many financial institutions deem this type of non-recourse loan a safe and lucrative because of the large down payment required (typically 35% or more) and the excess account reserves that ensures repayment of their loan.

Remember this is one investment tool to help you diversify your retirement investments. While no one can predict what all the markets will do over the next ten years one thing is for sure there will be ups and downs, and this time you dont want to have all of your eggs in one basket. The only free lunch in investing is with diversification.  

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As millions of Americans find themselves unable to afford their home may have attempted to obtain a loan modification. In fact the US Government came out with a Home Affordable Plan, better known as the Obama Plan. For those of you who are not familiar with this program it essentially was created to entice banks to modify the mortgage notes of Americans in order to make their mortgage payments more affordable thus reducing the foreclosures in the US. The problem has been that banks have been stalling on these mortgage modifications and in most cases even unjustly declining them. This video may be the best indicator why. Even though the video focuses on IndyMac, the FDIC, and OneWest Bank, one the public catches wind of this, both mortgage bankers and bankers will have more explaining to do:

http://www.thinkbigworksmall.com/mypage/player/tbws/23088/1076783

For those who don't feel like taking notes, it is a study on the sweetheart deal they cut, complete with an example of a bad $478,200 loan with six months of missed payments purchased at 70% for $334,600. The borrower is forced into a short sale on the property at $241,000, so the loss on the original loan is $244,200. The FDIC pays 80% of the loss calculated from the original price, not reduced 70% reduced price, bringing the loss payment to the purchaser to it to $195,360. So the short sale proceeds plus the FDIC guarantee totals $436,360. Already the profit for the purchaser is $241,000+$195,360-$334,600= $101,760, and on top of this, the original borrower was forced to sign a promissory note for $75,000.

Shocked? Understandably so, I reacted the same way. Obviously profits can be made in this market, that is the premise of Capitalism, but at what expense?

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As the real estate market begins to bottom out investors are starting to flock to certain foreclosure areas. Of course what comes with the heard is the passive, casual investor. As most investors know in order to pick up these properties you need cash and these days investors are utilizing and diversifying their 401k's and rolling over to a Self-Directed IRA. Although there are a countless number of investment deals in the real estate industry one must do their homework before parting ways with their retirement money. Here are three important rules to live by before writing your first check to escrow.

1) Build Your Team Around You

One of the most important thing investors forget to do is consult with professionals. All to ofter people begin to believe that they magically after never buying, rehabbing, and flipping a home all of the sudden are real estate professionals simply because they have the IRA funds and/or cash to do so. Let me tell you even the real professionals in this industry got killed over the last to years, many of them with 30-40 years of market experience. The key to avoiding this pitfall is building a strong team around you. Don't be foolish to think that you can just figure it out as you go, after all this is you retirement you are talking about. Consulting with professional agents, escrow officers, and appraisers is a must. Yes their knowledge cost money but it will also save your money in the end as well. In the grand scheme of things what is a few dollars when you are leveraging your retirement funds in order to capitalize on the opportunities out there. 

2) Make Sure to Purchase Title Insurance

Just because you are paying cash and there is no lender requiring you to purchase title insurance doesnt mean that you shouldn't purchase it. After all the lenders made you do it for a reason. There are often issues with property titles that even the most experienced title officer wont notice and you need to protect your rear end. For example who is to say that the transfer deed wasn't somehow forged by someone pretending to be the sellers. Or who is to say that the husband didn't threaten to kill his wife if she didn't sign the paperwork to sell you the home. You may think those are extreme examples but trust me I have seen it before, and these days nothing should surprise you. Point being just spring for the title insurance

3) Always Leave a Cushion

Now after you make your projections for the total cost of the proposed property you always have to leave yourself a little bit of a cushion. By that I mean you have to always expect things to cost you more. If the total rehab costs are $5,000 allocate $7500 for it. With these rehabs you always have to expect the unexpected. On one property that one of our clients purchased the estimated rehab cost was $3,000, well after getting into the rehab they noticed the floor was sinking in one of the rooms. After the contractor gave their estimate they were faced with another $3,500 unexpected cost. That additional cost could sink a deal. Another thing to plan for is having to hold onto the property for longer than anticipated. Just because you expect the house to sell in 90 days doesn't mean it is going to, especially in this credit market. You may even have to rent the property for 6 months before the market bounces back enough to sell your property. Bottom line you have to expect the unexpected.

These are just a few rules to live by when investing in real estate. The market is now at a level where investing with you retirement funds is not only feasible but can actually be quite profitable. Contact us anytime if you have any questions or just want to run a transaction by us. 

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Separate income limits prohibit people who make too much money from contributing to Roth IRAs. Those limits remain in place.

The amount you convert to a Roth is added to your income, usually for the year of conversion. This year only, you have the choice of adding it to your 2010 income or splitting it evenly between 2011 and 2012.

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Here is a quick delinquency summary on the commercial loan market from Trepp:

• Troubled loans transferred to special servicers  grew to $68.3 billion versus $12.3 billion;
• Loans of concern have caused servicer watchlists to swell to $146.0 billion, compared with $124.0 billion; 
• Hotel delinquencies surged to 13.87%, up from 1.2%;
• Multi-family delinquencies reached 9.27%, increasing from 2.8%
• Overall delinquencies climbed to 6.07%, rising from 1.3% - reaching an all time high.

As you can see commercial delinquencies  like those in the residential market are still increasing. Some experts are predicting the peek for commercial loan delinquency wont be seen until 2011. What this means for investors is an opportunity to expand your portfolio and pick up some great commercial properties at some amazing prices. Primarily most investors tend to utilize their retirement funds for the purchase of residential properties, but there are increasing more and more amazing opportunities arising in the commercial sector. Although financing is a but more difficult to obtain utilizing your 401k for the acquisition of some commercial properties is become increasingly more lucrative. Keep your eyes peeled on those struggling commercial properties in your area, their are plenty of opportunities out there to be had.

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Many people are still unaware that just because their 401k balance isn't enough to purchase a property it doesn't mean that they can't take advantage of the current real estate market. The fact is that there are several options for investors to utilize the funds that are available and successfully roll them over into a real estate investment. What is the primary vehicle needed to complete this transaction? Non-Recourse Loans.

There was a previous entry several months back that goes into a lot more details, but in a nut shell you are able to obtain a loan, up to 70% loan-to-value, to purchase an investment property using your 401k or IRA funds.  Because the IRS mandates that all loans involving retirement funds must be non-recourse the only collateral that is needed is the property itself. The advantage of this being that derogatory personal credit, previous foreclosures, bankruptcies, etc, are completely irrelevant when trying to obtain a non-recourse loan. The lenders solely base their loan decisions on the property, it's cash flow potential, and minor reserve requirements within your IRA account. What does this mean exactly? Basically with a standard loan your bank will require you to personally guarantee the property. In the event of foreclosure you the borrower would then be personally liable. With a non-recourse loan involving your IRA funds the government wanted to make sure that in case a real estate investment soured the lender couldn't just come an wipe out your remaining IRA funds if the loan went into default. 

At Brooklyn Troy we have seen purchases of properties involving IRA funds increase by 80% in 2009 and 20% of those purchases involved our clients obtaining non-recourse loans. Here is an example of one of the transactions we recently completed.

The purchase price of the property was $130,000 and this particular client had just over $40,000 available for a rollover into a Self-Directed IRA. Initially our client thought that their only option was to purchase a property for no more than the $40k in their retirement account, which significantly limited their investment options in their area. The solution to the problem was obtaining a non-recourse loan. In this particular area the lender was willing to lend up to 70% loan to value which gave roughly $130,000 of purchasing power.   Already having several properties already picked out we simply analyzed each property and the potential ROI on each. After narrowing it down to two properties we were then able to make our move. Our client then made an offer on their first choice and actually were able to purchase the property for $125,000. After obtaining the loan for $87,500, and utilizing the $40,000 they had rolled over into a self directed IRA our client was able to purchase a property for $125,000. 

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*This is an article written by Pensco Trust CEO Tom Anderson that was featured in the August 2009 SJREI Journal.*

While today’s residential market is flooded with foreclosed properties, the resulting devaluations in many parts of the country are creating unique opportunities for long-term investment buyers. With many consumers increasingly concerned about liquidity as a result of the reeling economy, investors are turning to their retirement accounts to take advantage of an incredible buyer’s market. Since the credit market is effectively in neutral, investors are scooping up properties in some areas for less than 50% of appraised value, with all cash purchases with their self-directed IRAs.

For example, on July 6, I heard from a real estate broker in Florida that he was able to purchase a 2,800 square ft. home on a golf course in a gated community (and needing no repair) for $100,000. It was listed by the bank that foreclosed on it at its appraised value of $200,000, and it sold two years ago for $440,000!

Although we may not yet have reached the bottom of the market for residential real estate, and the window of opportunity will likely stay open until the third or fourth quarter of 2010, the opportunities today have the dual potential for significant appreciation in the five to 10 year time frame and the production of positive cash flow during the holding period at today’s prices.
Experienced real estate investors, brokers and realtors are taking action now, recognizing that more foreclosures will follow early next year as adjustable rate mortgages (ARM mortgages) sold in 2007 kick in with a vengeance in the first quarter of next year.

At PENSCO Trust, we have seen a 26% increase in IRA real estate purchases (to $26 million) between the first and second quarters of this year. Most of this increase was associated with foreclosures in the residential market, however, we have also seen quite a few real estate syndicators buying up unimproved land (undeveloped lots), with the idea of conditioning it through entitlement in time for the next upswing in the real estate development sector. In some cases, they are buying at 10 cents on the dollar. These deals are not for the faint of heart and may require a longer holding period, so they are not suitable for anyone with liquidity needs.

Another avenue self-directed IRA investors are pursuing is to provide credit to others for the purpose of buying real estate. With traditional credit markets almost nonexistent, borrowers are getting needed funds from IRA investors looking to increase their investment yield on their retirement accounts. Such investors may offer the down payment, first mortgage or second mortgage or even become a co-tenant on a purchase when the buyer does not have the necessary funds.

For example, one investor may locate a great investment property, but not have sufficient funds to buy the property. By combining forces and funds with an IRA investor, who may participate through an equity investment or an extension of credit, they can acquire the property.

It is important when investing in real estate with a self-directed IRA, that you choose a competent IRA custodian with a strong track record. Good custodians will help you to understand the rules and the process, easing your entry to self-direction.

In addition, it is very important that your custodian is geared to execute in a timely and accurate manner, as real estate transactions can close very quickly and earnest money deposits frequently have to be made from your IRA on the same day to secure the best opportunities. PENSCO Trust is proud of the fact that we generally get all real estate transactions funded on the same day they are authorized by our clients, and, in almost all cases, within 48 hours.

Certainly, investing today is more challenging than in a bull market, but some things are certain. Real estate values are down in most areas of the country, building has almost come to a screeching halt and demand will eventually catch up to supply, at which time prices will rise. How long that takes is anyone’s guess, but some like those odds better than investing in the stock market. Choose your own poison, but eventually you have to take action to keep your wealth growing.


*Pensco Trust is a passive custodian and in no way endorses nor gives any investment advice on particular investments* Original article can be found at www.selfdirectedira.com

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We all know and felt the crash of every world market last year. It was a complete financial disaster. Many clients did a Roth conversion only to see their account balances decimated by the market free fall, and huge tax bills looming on values that no longer exist. For those of you who fall under this category the government has implemented a great tax break that will allow you to recharacterize your Roth accounts and eliminate the tax liability on the lost account value.

For example say that in 2008 you converted $100,000 into a Roth account at a 25% tax rate, which generates a tax bill of $25,000. The value of the account today is only $40,000 leaving you with $60,000, that no longer exists, that you are required to pay taxes on. Fortunately with the tax code break for 2008 you can now recharacterize (convert) your Roth account back into an IRA account an the funds are treated as though they never left the IRA account. There is only one problem, the deadline to complete this transaction October 15th, 2009. 

 If you recharacterize your Roth back to an IRA or 401k account the funds only need to stay in the new account for 31 days before they can be transferred back to a new Roth account.  The conversion has to be done as a trustee-to-trustee transfer.

 Here are few key points to consider:

 1) Type of transfer and how much. The original amount has to be transferred back to an IRA or 401k account regardless of the current value of the funds that were transferred.

2) The date in which the retirement funds were transferred to the Roth account.

3) It doesn't matter how many shares or what type of assets were reconverted they all qualify for the recharacterization. 

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There is a common misconception that the only real retirement option for self employed individuals is a SEP-IRA. A lot of advisers aren't too familiar with the Solo 401(k) and especially the solo(k) with a Roth option.

 Who Can Benefit?

Real estate professionals, sole practitioners, entrepreneurs, independent contractors, interior decorators, essentially any self employed person.

What is the difference?

Here is a general breakdown of the two:

SEP IRA's allow for tax-deductible contributions as well as deferred growth. The contribution limits for the SEP IRA is 25% of your compensation with a cap of $44k. The only issue with this is that the IRS only allows you to contribute 25% of you net profit. This is where one of the major advantages come into play for a solo(k).

A Solo(k) has the same contribution limits however you can not only contribute 25% of profit sharing you can also contribute tax-deductible salary deferrals of up to $15k per year. Basically you can make very little self employed income and defer it all. This gives you an added advantage if your self employed income is your secondary income and you are looking to maximize your tax advantages. Best of all there is no UBIT on leveraged real estate or investments, and you have the ability to borrow against the plan. You can also add your spouse to the plan and your total annual contributions can total $109k for joint filers over the age of 50!!

Another key advantage is that you can separate your Solo(k)  into four Sub-Accounts or ''buckets":

1) Two Salary Deferral Buckets: Allocate up to $16.5k or $22k (if over age 50) to either:

• Roth Sub-Account (No restriction on AGI)
• Traditional Tax Deferred Sub-Acount

2) Profit Sharing Bucket: Lessor of:

• A) $49k (minus $16.5k from salary-deferral)
• B) 25% of your ''compensation'' or ''earned income''

3) Rollover Bucket:  All Rollovers go here, both funds are not permitted

4) A TPA is required. Pre-established relationship with Pension Benefits Consultants (PBC)

In summary you can win big being self-employed and having a Solo(k). 

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