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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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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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 are a countless number of ways to utilize your 401k and diversify your portfolio. An option that most people don't often utilize are non-recourse loans for self-directed IRA's. The IRS requires a non-recourse loan for all real estate purchases that use leverage with a self-directed IRA, which means that if the loan were to default the lender can only take the property and can not come after the borrower or their IRA account. Non-recourse loans are more often used for investors who want to acquire property using their self-directed IRA but don't have enough capital to purchase the property, and don't want to use their hard earned IRA as collateral. Non-recourse loans allow clients to purchase and use the property and only the property as collateral for a loan. That means that credit/fico scores are often not used in the underwriting decision on these loans because the borrower is not the guarantor for the loan. This does however require the properties being lent on being cash flow positive.  Most of the time non recourse lenders will even lend up to 70% loan to value.

For example lets say investor Bob has $90k in his 401k IRA that he is looking to invest but really doesn't want to use it all on one property. While searching for the right investment he finds an amazing property that is going for $100k, that he knows is way under valued and can cash flow positively even in the current market.  Bob knows he can do a 401k rollover into a self-directed IRA for $30k and then obtain a non-recourse loan for $70k in order to complete the purchase. Assuming that the property is cash flow positive, which is extremely common in this market, Bob can now use the remaining funds within his IRA account and purchase several properties instead of just one. This not only diversifies his portfolio but reduces his exposure to any potential down turn in the market, or unexpected vacancy. Now with the $90k Bob had ready to purchase an investment property he now has 3 properties that are all cash flow positive and each month the rental checks go right back into his self-directed IRA account.

Here are some basic guidelines for IRA financing:

Requirements for IRA Debt Financing:

1.  Purchase transactions for investment properties only
   
2. IRA assets to be managed by a custodian in a self-directed IRA or SEP.
3. IRA assets must be verified for purchase and reserves. IRA reserve requirement may be up to 20% of the loan amount, to be available in the event of insufficient cash flow to pay operating expenses and mortgage payments.
4. No employment or income verification

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With the uncertainty within the financial industry these days it is no wonder investors don't know where to go with their money and investments. Over the past year we have seen such financial industry staples such as Lehman Brothers, and Bear Stearns go under, and even had a $50 billion Ponzi scheme by Bernard Madoff exposed. With all of the uncertainty in the market a great alternative can be Self Directed IRA's. With a self directed Ira investors have more control over their investments. Through the aid of a custodian such as Pensco Trust Company investors can roll over their 401k into anything from land, rental properties, tax liens, or even a pizza parlor. 

In fact many investors are now using their retirement accounts to diversify their investment strategy. With real estate prices at historic lows now may be best time to invest in real estate. Bob Wooderd, a 55 year old Florida business owner saw his retirement account lose about 30 % of its value last year and he is now actively searching for deeply discounted condos through out the Florida. ''There are condos now selling below the cost to build and provide a pretty handsome rental income. I have used the combination of my 401k and non-recourse loan to purchase 3 condos in the last 4 months and my IRA is receiving roughly $800 per month in positive income.'' says Mr Wooderd. Over at Brooklyn Troy we have been providing investment opportunities for our clients by rolling over their retirement accounts into self directed IRA's. The real estate market hasn't been this prime of a potential investment in years. Whether it is land, a rental condo in florida, or using your funds to start that dream business self directed IRA's provide a nice supplement to your existing retirement investments. 

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