I gleaned this gem from a self directed investment site:
Compounding interest can be especially dramatic when the effect of taxes is removed from the equation. Do you know how much money you would have in 30 years if you invested just one penny today and doubled it every year? The answer will astound you: it is $10,737,418! Now, suppose you had to pay taxes of 31% on your investment? Over the same 30 years, you would have only $68,644. Obviously, no one can expect to double an investment every year for 30 years. Nonetheless, this example certainly illustrates the combined effects of compound interest and taxation
I just found the numbers to be astounding.
For the youngsters….start your investing early. Don’t neglect your IRA’s this year, even if you can only deposit $100.
blue
Replies
Blue,
I just put those variables into an excel spreadsheet and got different numbers.
The difference seems to be found in the use of different compounding periods:
Beginning with a penny and following 30 compounding periods of 100%, one ends up with the 10 mill plus you mention (taking a total of 31 years).
But the same 30 compounding periods after being adjusted to a 69% growth rate (instead of 100%), gives $116,008.
29 compounding periods will equal the 68,643.77 the source mentions.
Looks like the story teller slipped a line in his compound interest tables!
Nevertheless, your point is huge. Invest now, and regularly. And get the highest rate of return that you can tolerate.
I put those numbers into a spreadsheet and it works. Here's how I did it: in the first cell put $0.01; the second cell gets the formula =(a1 * 1.69) which is then copied for 30 years (rows); we're doubling the money and then taking back 31% for taxes.If future administrations reduce the tax rate to 27% then the 30 year total rises to $138,478, almost double the 31% number.Start saving now.
So where does a young guy start Blue? If you were 32 and had only a small retirement savings and little knowledge of investments, where would you start? Can you recommend a book? This is one of the few things in life that has the capacity to keep me awake at night. I don't know what to do, so I do nothing.
There are some great resources in the blogsphere--I follow
http://randomroger.blogspot.com/ and http://bigpicture.typepad.com/ closely. There are some very smart investment advisors that are happy to share their very good insights. I haven't found any books that have been too useful.
Diesel, doing nothing is for sure the second worst thing you could do. Spending yourself into consumer debt is worse.
Start with the book called The Richest Man in Babylon. It's really very simple to gain financial independence, but it's also just as simple to not.
I'm far from an investing genius so I have nothing to offer other than that book. It's a very simple read and when you're done, save it and give it to your kids.
blue
talk about good timing. I just finished reading the perfect book for you. The title is "The Automatic Millionaire" written by David Bach. It's available at your local library.
It's an easy read and will only take a couple of hours, but it is the finest, simplest, and best explained investment advise I have ever read. You'll love it.
Start now! good luck.
So where does a young guy start Blue? If you were 32 and had only a small retirement savings and little knowledge of investments, where would you start?
Brian-
You can start by forwarding that "small retirement savings" to me- I'll take care of the rest. Small unmarked bills are preferred, but checks under $10,000 each, made out to "CASH" would be fine as well. You'll also need to let me know how soon you'd like to retire, so I can plan accordingly.
Bob Kovacs- Certifiable Financial Planner
Mighty kind of you Bob. Geez, you're a helpful bunch here. ;)View Image
Brian, Take an hour or two from your busy weeks and stop by Fidelity and just open a retirement acct. listen to a guy babble for ten minutes saying you need to be diversified and he'll suggest funds for you. Set it up on line and move funds around yourself at no cost!They (fidelity) have some of the best funds and managers of them in the industry. I could give you the name of 4 that will perform at above 30% annually.Retirement is only 120640 hrs. away.David.
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The good thing about Fidelity is that they have dozens of plans available that can be matched to any risk/growth plan you may have. Some of the coolest (I think) are the "Freedom" plans- they have a Freedom 2010, 2015, and so on, and you pick the year you're hoping to retire by- the funds they invest in are based on that year. The fund starts off with agressive investments in the early years (when you can afford to make up a hit to your account), and becomes more conservative as you get closer to your chosen retirement point.
I've got some $$ on the Freedom 2035 fund, which is a bit depressing when I think about having almost another 30 years til retirement. Maybe I'll more it into the Freedom 2010 fund and accelerate my retirement ;)
Bob
Bob if your in the 2035, wouldn't they be more aggressive now. Really going after the high gains?. Like hey lets go for broke and double it up.
I stopped investing that way (with someone else basically telling me where to place my money) along time ago. Fidelity publishes funds stats quarterly and I just read what's going on and make my best educated guess.
I have to say it's been working well for me, and I'm just starting to get my children (between ages 9-13) involved in picking their own funds. It's fun to watch them compare who's went up more on a given day. Best banking lesson the DW and I ever did. <!----><!---->
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The Freedom funds are more agressive earlier, but they're are definately more agressive funds. I only keep a portion of my $$ in that one anyway- like you, I read the stats on the different funds and see what's doing well. I bounce the money around a bit just to mix it up, and to feel like I'm actually doing something besides just throwing money into the account every month....
Bob
A big thanks to everyone who offered advice, I really do appreciate it. Sometimes just getting started is the hardest part. We've got about 50K in a Charles Schwaab account that we basically know nothing about. I think I need to set up an IRA (been looking at T. Rowe Price... any thoughts?) and was also thinking about moving the savings account to ING as they seem to have decent return for a savings account.
But those Fidelity accounts seem pretty cool too. I'll have to take a look at those.
Thanks again.View Image
dieselpig,
T Rowe Price is right up there with Vanguard and Fidelity.
Vanguard overall is the cheapest in management fees which means more of your money stays in your account to compound. Some of Fidelity and T Rowe's "lifetime" accounts are a little less conservative (which means more risk) than Vanguard in hopes of generating more $ in the long run.
Honest, read one of the books so you understand some of the simple basics. Especially the stuff on index funds. You probably know more already than you think. The books will tie it together.
Take one of the big worries out of your life.
I plan to read a couple of the books mentioned Fred, very good advise. I'm really hoping they help me to make some (somewhat) informed decisions. Thanks again.View Image
Read anything written by David Bach and you will be financially successful!!!!
He's written: 1. Start Late Finish Rich
2. Smart Couples Finish Rich
3. The Automatic Millionaire
IMO, Fidelity has a shotgun approach to mutual funds. They establish dozens in a supermarket buffet line to have something for everyone. A few are good. Some are OK, and many are terrible.but that reflects my personal bias - I'm getting further and further away from mutual funds and doing more individual investmets in stocks. My IRA accounts are with Schwabb. I have a couple mutuals of theirs.TRPrice is a good company overall and their mutual funds generally have lower than average management fees. That is something to payattention to. Just like Blue's point about taxes eating off the top of your account to keep growth lower, mutual fund management fees also trim your earnings. I have had Price's New Era fund for years now. Oil, eneergy, and commodities managed to avoid the negative effects of inflation - which will be a major factor over the next dozen years for any investor to contend with. Don't put all your eggs in one basket either.ETFs are growing while mutual fuinds are steady or shrinking. An etf lets you invest in a market sector basket of stocks ( or bonds) with much lower management cost. You can sell the ETF shares just as liquid as individual stocks and own a broad share of a sector, like say - medical devcices, or pharmacueticals, or realestate, or energy, or utilities, or ...whatever you think is most likely to do best each year when you rebalance.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
to the most profligate of all "tool" investors I can think ofyour jones will be atough one to stem but I think you have it in you to get that jones fix in the land of equities
to add to your cheerleaders and good advicethose Schwab people probably peddle many a family of funds: Fidelity, Vanguard, T Rowe etc - learn more about that 50 grand you have and what it is doing for you ( or Schwab ). First they are agents for Schwab - then youMoney magazine is a good simple resource and when ( NOW tax time ) thinking IRA / ROTH IRA is an avenue a young builder / father like you should be consideringfrom what I see of your dedication to work, family, company & crew you would be the most likely to me to be writing that tome of what it takes to be that builder / millionairejust devote more of that tool fix money to equities and you're on your way
just devote more of that tool fix money to equities and you're on your way
Whoa! That's enough of that crazy talk there John. You're scaring the children.
In all seriousness, thanks for some very good advice. Sooner or later it's time to grow up.... at least a little bit anyway. View Image
This thread might be interesting for youhttp://forums.taunton.com/tp-breaktime/messages/?msg=67581.1
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
"Ask and you shall receive".
You guys are awesome. Thanks.View Image
Wow, wow,wow, thanks for directing me to the tread. When did I become HeavyDuty?
Got screwed by prospero again, somebody stole my identity.
Hey dieselpig, one other thing for a young guy in construction to consider is rental properties. You get a tax break (depreciation) for 27.5 years, the tenants pay the bills, and if you can do the maintenance/upkeep and some minor improvements during down time or between jobs, that's almost free and will drive your rents up. You've got the skills and the tools which will put you far ahead of the pack.
As the years go by, the rents increase and you can make a tidy income plus the equity.
If you're really ambitious, look for something that's beat (don't know what it's like where you are, but around here there are plenty of landlords who suck every dollar out of a place for 20+ years and basically do no maintenance -- when the place is virtually unrentable they sell). You can get a decent bargain if you can factor your labor in during downtime (hey, you're a young guy -- who needs free time, right?).
"Let's get crack-a-lackin" --- Adam Carolla
goog suggestion, but he can't forget that it takes a certain poersonality to be a landlord, or to deal with rental regulaors in MA
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Not trying to intentionally add confusion by adding to the volume, but ....
Another widely embraced stock market investment option is index funds. These invest in a broad swatch of equities. Such as the 500 largest stocks; or the largest 5000. They follow a benchmark index. So less fund managers, and lower fees.
Vanguard has made a name for itself with index funds.
Good luck with a first step.
Also take a hard look at Vanguard. Vanguard's leader (and founder?) for many years was a guy by the name of BOGLE. He was a BIG believer that far too many people invest in mutual funds and get hosed on fees. And that's true. It's also true that the majority of mutual funds do not beat their respective market averages, which means you don't really need a mutual fund - just invest in the S&P or the Russell indexes. But, if you're really stuck on mutual funds my recommendation would be to check out Vanguard because their fees are typically the lowest in the industry. I personally keep very little in Vanguard because I do most of my investing in individual stocks.
- Rob
you use past tense. Jack Bogle is still actively evangelizing his theories and style. He is correct that about 85% of fund managers don't beat their respective comp markets, but 15% still whollop themInterestingly, his son is a manager who does beat the market.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
I am 14008 working hours from retirement.
My brother is real rocket surgeon at this kind of stuff ( First million before 30 kinnda guy), it's actually what he does for a living.
He gave me a copy of " The Automatic Millionaire". I forget the authors name and I'll be away all weekend. I'll try to post it on Sunday Night if I get home early enough.
Anyway, he said read it cover to cover and then set it aside and read it again. He tells me the advise in the book won't make you a gazillionaire, but it helps mostpeople make that first all important step. A step a lot of people never make. More importantly it helps them set up some kind of plan so they keep taking steps.
Looks like Retiree already beat me to that advice!
Edited 4/7/2006 6:11 pm ET by robert
Take the first step quickly. If you can put even a thousand bucks away ( I think th elimit for your age is $4500 per year) into an IRA before april 15 you can deduct it from your income on your 2005 1040.
The effect of this is that it reduces your income tax by at least 15%, so effectivly, the govt is subsidizing your investment. it only costs you $850 to make that thousand dollar investment in your future retirement. now suppose you make another 15% on it over the next year. you haave $1150 now for a net cost of $850, gaining three billsBut if you delay and do nothing, you get to pay that $150 in income taxes. The diference in what could be gaained and what gets paid to the govty instead is $450.now let that $450 compound its investment value over the next thirty years or so until you are fat and bald and it alone will conservatively be worth over seven grand, plus the gain on the original thousand, maube another twelve grand...The time to start is now. really. you can make some mistakes along the way, but the worst mistake is doing nothing until you are already fat and bald.I made that mistake to some degree. youth, lifestyle, and a divorce kept me broke and not even thinking about retirement. Then it was about 1998 that I inherited $400 and decided to make it seed money for retirement and started an IRA. The next year I added $800 and decided to try to double my addition every year. haven't been able to do that, but I have got to where I donate the maximum and adding more to outside investments. It starts to et to be fun when you see your money working for you instead of burning your body out, especially when it gets to where you don't have much body left to burn out on the job.Could be a good topic for discussion at Tipifest
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
dieslepig,
All good advise from the previous posters.
It's unbelievable how much better you'll do by starting NOW rather than later.
Google to the Ballpark Estimator and play with the free calculators and you'll see.
I've read lots of finance books and agree the Automatic Millionaire is good, especially his "pay yourself first" approach.
The best author ever is Jane Bryant Quinn, No BS and very easy to read. I've given her books to several nieces and nephews and they all swear by them.
Her newest is "Smart and Simple Financial Strategies for Busy People". You could follow just that one book and do fine. She explains and recommends using mutual funds and leans toward Fidelity and Vangard who is usually the cheapest for fund management fees.
Her other book, "Making The Most Of Your Money" is like an encyclopedia that will answer about any personal finance question you might have.
She makes investing super easy and her advice is dead on.
By all means, get your wife to read them too.
Good luck!
oldfred
Go to your local bank or CU and start a Roth. See if you can work it out to have monthly deposits made from your checking account or some such, so you never really see the money.Or better still, if you have an employer who has a 401K plan, sign up for that.Once you have $10-25K or so saved you may want to investigate transferring into a different plan, to maximize growth, but initially it doesn't matter much -- any sort of interest-bearing, tax-sheltered account is fine.
If Tyranny and Oppression come to this land, it will be in the guise of fighting a foreign enemy. --James Madison
Blue,
While that sounds neat you need to consider other factors other than the simple math involved. For example doubling a penny doesn't sound expensive but at some point you are coming up with 5 million dollars to make the last double, something nobody I know of has sitting around..
I like the leveraging effects of home ownership..
That is a modest down payment controls an asset worth hundreds of thousands of dollars. I bought my first house GI nothing down. But let's say I used $2500.00 as a down payment. That $2500 investment if it returned say just 5% per year effectively earns say $10,000.00 on a $200,000 home.. Effectively tax free!
Not only is the "profit" tax free but you gain two other real benefits as well.. First you get to remove most of the monthly payment from your income saving you many thousands of dollars. second you get "free rent" or a place to stay.. your bank deposit doesn't give you that!
If you think 5% is too great a return to expect, you don't have much of a memory.. We are nearing the end of a war, (no politics intended) none of the war has been paid for yet and the way America has always paid for it's wars is thru inflation.. Remember Vietnam? We had well over double didget inflation following that war. Homes during that period inflated numbers like that.
Frenchy, I agree that the leveraging factor of real estate is also a powerful factor.
The point of the original post isn't about which investment is better. Instead, it shows the dramatic effect of how taxation affects the end result.
Are you aware that you can hold real estate in your self directed IRA portfolio?
blue
blueyeddevil,
Taxation isn't a real factor in realestate. I already pay the highest rate here in Minnesota and it's a tiny fraction of the growth of the value of my realestate holdings over the last 30 years.. Careful dealings keep the income gained from that growth out of the federal tax mans hands..
I started to read about it but my eyes began to blur after about 4 hours.. Boy, there are about a million ways to slip on a self directed IRA aren't there?
I eventually settled on a REITS, although with the increase of interest approaching 7 1/2 percent I foecast a real slowdown and am looking for my next big market.
Frenchy,
Don't forget that paying the real estate tax is keeping a good bit of the income out of your hands too. Local rate here is .18 -- $18k/yr for every million in value. With houses that are nothing to write home about going in the half-mil range, thats $9k every year in prop tax for the average middle class house. In my little world, that's a lot of scratch.
I don't plan on selling most of my properties -- my heirs can deal with a big cap gains tax mess -- I'll be dead then so who cares. ;-) In the mean time, outrageously high real estate taxes really get under my skin. Increased values don't mean anything if I don't plan on selling.
For my rehabs, first thing I do upon receiving the permit is to apply for the city tax abatement (10 year real estate tax abatement on improvements). Talk about driving up real estate value. It's a gift from the city to developers and rehabbers.
"Let's get crack-a-lackin" --- Adam Carolla
philarenewal,
Property taxes are a fun way to amuse yourself..
The simple facts are that the fastest growing neighbor hoods pay the highest taxes, (they have to pay for all those schools, roads, and police stations) followed by declining communities. were too few people are forced to pay for services.
I live in a very upper class neigborhood (average home well in excess of a million nearing two ) My taxes are embaressingly low.. all the major improvements are in and paid for. We have a superabundance of police protection and still pay relatively low taxes..
Don't worry about capitol gains,, Too easily avoided if you want to.. get a good tax guy...
Think of property taxes as a good thing.. (I know a stretch). Higher taxes makes a more exclusive neighborhood.. you know the old realitors saw, location, location, location......
Frenchy, you need to understand that everywhere is not like where you are.
I live in a city where the average age of a house exceeds 100 yrs. The infrastructure is in and has been for a good 40-50 yrs. Housing values are rising here because (1) people are returning to the city because they want to live in a city (2) interest rates have been remarkably low for a relatively long time (3) economy has been strong driving demand for housing -- supply and demand -- you know the rest of the story. Our center city land area is what it is and they ain't making any more of it.
Has very little to do with growing community (my city has actually been a net loser of total population). The "hot" neighborhoods are those with low crime.
Property taxes are only a "good thing" if you plan to sell everything. I don't. For my rental properties, I'm in the process of raising everyone's rent to cover the additional tax burden. It's getting to the point where a solid middle class family can barely afford to live in our center city area. The politicians don't give a crap 'cause there are plenty of wealthy folks willing and able to pay the taxes ready to move in. Mostly wealthy suburbanites who are cluless about what makes the city a great place to live (it's the people -- and the good/fun/interesting people are not them).
I don't know about you, but I don't care for that demographic.
I'm also not worried about cap gains. That is the "happy problem." For my rehabs, paying taxes means I made some decent money (over and above the depreciation on all the rentals). That's the whole purpose. ;-)
"Let's get crack-a-lackin" --- Adam Carolla
philarenewal,
If I read your post correctly it sounds like you agree with me.. that paying taxes is a good thing, it means you made money..
Any property taxes on rental property should be passed on to the renters.. costs go up rent goes up. if you are like most landlords you claim a percentage of rent as your income. costs go up, your actual income goes up even though your percentage remains the same..
I hope you aren't like some I know who simply collect a dollar amount per property..
Hi Frenchy, I do pass property tax costs on to my tenants. I don't make any kind of mark up on it because there's a limit to what people are willing/able to pay. So basically, no, if property taxes go up, rent goes up, but I don't make any more money from just that.
What I'd prefer to do is limit rent increases to keep up with the general rate of inflation. I make enough money from the places (anyone with a pulse could make good money in real estate in the past 10 years, so I qualify) so a secondary goal is to provide decent housing to nice people I like (yeah, I know it's a business, but man does not live on bread alone, yadda, yadda, yadda).
What is happening here is property tax increases far exceed inflation (minimum increase is 10% per year; they are expected to more than double next year after a city-wide reassessment). The nice decent people who live in my places likely won't be able to afford them pretty soon. I don't like that. I'll still be making plenty of money because rental demand here is very strong, but it's not right what the taxes are doing. Basically forcing the middle class right out of town.
When I said I like paying taxes, I was referring to income based taxes on the rehabs I sell and from other income from working. If I make so much that my income exceeds the depreciation deduction on all the rentals, or I hit the active income vs passive loss limits, I've had a good enough year and am generally pretty happy to be paying those taxes.
Property based taxes = BAD; can't spend equity. Property produces income which is and should be taxed.
Income based taxes = GOOD; If you make more income you can afford more tax.
"Let's get crack-a-lackin" --- Adam Carolla
philarenewal,
I gotta agree with you that property taxes are bad, then so is income taxes, and just about any system devised to pay for services we may not always enjoy paying for..
However we need fire departments to put out fires and I guess we gotta have the cops, we may as well make sure that everybody builds to a minimum standard in order to prevent flimsy houses from blowing over and wrecking the neighborhood..
I'd hate beggers to go from door to door asking for a handout so I guess we need welfare, finally it's sorta nice to have parks and places for kids to play and dogs to romp, otherwise the streets get clogged with kids and dogs.. it would make traffic a real mess..
Now if they could do all that for free, it sure would be nice..
>>I gotta agree with you that property taxes are bad, then so is income taxes, and just about any system devised to pay for services we may not always enjoy paying for..
C'mon Frenchy, you know that's not what I'm saying at all. First of all, I definitely pay more in taxes than I take in services. Have no real problem with that because I benefit in some way from all of it (although paying for cruise missles has me a little upset).
I have no problem paying more than I take 'cause right now I am able to pay. Life is good, etc., etc.
That may not continue forever. I plan to fully retire someday. I might not be able to pay for more than I take, forever. I also have concerns for hardworking people around me swallowed up by rising property values that lead to a property tax bill they can't afford to pay. You would be OK with forcing them to move away somewhere else so someone who can afford to pay moves in. I don't believe that's fair. I also think it leads to social instability and undesirable class stratification (how you like them fancy terms?).
We both know what I am talking about is how the taxes are assessed. I prefer taxes based on income. If I have the income, I pay more. Fine with me; like I've said several times, I wish I paid a million $ in income taxes -- means I'm making a fortune every year.
"Let's get crack-a-lackin" --- Adam Carolla
Philarenewal,
Yeh, you make sense,, however with assests like rental property as you are well aware you can avoid paying income taxes while you accrue wealth generating assests..
In my perfect world thAT i'M GONNA BE KING OF SOMEDAY, WHAT i WOULD DO IS CHARGE A SIMPLE FlAT TAX ON ALL TRANSACTIONS, Buy something and they collect the national sales tax.. Buy a lot of somethings pay a lot of taxes
Yep I'd tax the sale of everything. exempt nothing.. you buy a stock you pay the tax, you buy a hotdog you pay the tax.. A company buys steel to make cars they pay the tax. you buy the car and you pay not only the tax of the steel but whatever value is added to the steel. That way we might be able to have the tax less than 5%
Keep your money in the bank and there would be a tax on the interest, there would be tax on all goods and all services.. a modest simple little tax that nobody could evade.. The tax code instead of being 22, 000 pages long could be somerized in one page evade the tax and go to jail..
Sentence would be simple.. evade a the tax and you serve a minute in jail for every dollar due.. Or you can buy your way out by paying 10 times the amount due..
Hmmm. jails as a profit making enterprise!
Frenchy, I'm not sure why you claim that taxes aren't much of a factor in your real estate, but I'll take your word for it.
I recently was informed that I can purchase real estate, with a loan against the IRA and I see a huge benefit in using self directed IRA money for flips. The loans have to be non-recourse. I haven't thought it all out yet, but this is a new idea for me. Up till yesterday, I didn't know I could add a loan on top of IRA dollars.
This is especially significant because it opens a huge new door when we go looking for investor money.
One of the problems with flips is that they don't get taxed as long term capital gains.
Thaks for commenting that you've read 4 hours until your eyes blurred. That made me realize that I could probably dredge up 40 hours worth of reading on the net and when I googled for some sites, I was pleasantly surprised. I'm going to order some audio stuff as well as do some serious reading.
I'm curious about how the IRA is used for equipment leasing. What are the restrictions? Did your four hours get into that?
blue
Oh Yeah!
You'l find more information about taking loans against IRA's in IRS Pub 590, page 41, under "Prohibited Transactions."
http://www.irs.gov/pub/irs-pdf/p590.pdf
When one uses real estate inside an IRA, it loses the tax advantages that we get from the deductions of taxes, interest and most others.
Just because one can, I cannot imagine why one would want to - other than that's the only source of capital. And that would bring up other prudent financial planning philosophies.
But I will admit, there's far more people on the Forbes 500 list of wealthyist people that had made their money off of real estate.
Sounds scary and complicated to me
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
When one uses real estate inside an IRA, it loses the tax advantages that we get from the deductions of taxes, interest and most others.
I'm not following that thought process.
If you hold real estate within an IRA, you don't have any tax consequences do you?
Lets look at a theoretical example: Suppose you concentrate your efforts on finding flipper properties and manage to find, fix and flip one house a year for the next twenty years. On each house, you manage to net 50k before taxes. You also have a solid income of another 50k working as an employee.
In your IRA, you'd have the Million that you made from the flips, plus whatever interest you earned by leaving the surplus in an interest bearing account.
How much would you retain outside of the IRA assuming that you end up paying in the 28% bracket and are tagged with short term capital gains and/or self employment taxes?
blue
If you hold real estate within an IRA, you don't have any tax consequences do you?
Not initially. Especally if you interpret Consequences as obligations.
Tax Advantages are opportunities.
But the downside of no tax consequences now are they get bigger later. Your example, or goal, would eventually result in taxable distributible income from the IRA putting you in about the highest bracket. 35%
Real Estate can be a wonderful investment, especially because it has some of the most liberal Tax Advantages associated with it.
As Frenchy was leading to, you need to accept a different form of accounting when making these RE investments within tax deffered acconts. Instead of deductable expenses, which increase profits, everything put into the property becomes added to the basis, or cost. As time continues, its cost continues to rise until you can claim the tax deferred profit.
But since loans are not permitted with the IRA, whatever RE flip you plan will have to be totally funded in cash by the IRA. Plus you'll need additional monies in that IRA (thru contributions, transfers or income generated by other assets within the same one) to finance the remodeling, taxes, and especially the custodial fees. Since the Custodial Bank will have to be making distributions for you, they charge. Expect a fee schedule something like a trust department's - 2 to 3%.
Accordingly, say you found this estate sale opportunity east of Lake Orion. For $300K, it's yours, but will need another 100 in fix up costs. But should then sell for 500. To make a long story short, you'll need another 50 on the side for surprises, taxes, & fees. Your basis in the house has become $450K, netting you the 50 you describe.
You'll need an IRA with at least $500K in it to do the deal. That's a roughly 10% return if done in one year. Frankly, other asset classes can successfully challenge this return.
But using after tax money, normal tax considerations and the 1031 system, 60K gets you started, 17K in payments, A HELOC funds the repairs and costs, costing about $8k the first year, then you sell and net your 50 profit.
Your $85K investment has turned into $135k, giving a 69% return. We also need to add back the lower tax having to be paid on your other 50K of income due to property tax deductions, mortgage interest paid, etc., plus the increased long term benefit received from reporting additional self employment income taxes for Social Security (your benefits after retireing will be higher).
And then, within 60 days following the sale, pick up some POS out by Ortonville. But now you can leverage up to 5 times your $110K down, instead of 60. The $50 K gain is deferred into that property, just like making a transfer between an IRA at Fidelity to another at the American Funds. Your next profit stands be be closer to 75K, maybe 100. Within the IRA, you're looking at 55K.
Accordingly, the compounding effect with the 1031 structure is superior.
I knew a guy that actually did this once almost 20 years ago. He got a big rollover and then bought about 6 lots in this recently subdivided hillside in N.C. He used a small bank in Ohio for a custodial fee of $250 per year (10 times that of a brokerage firm at the time), plus the distribution fees.
Although raw land is supposed to be the most risky type of RE investment, he choose to do it. The last I heard was he had to sell one lot off at a small loss to keep sufficient assets in the pool for awhile, but he died shortly after. I would imagine if held until now, it would have been a great move. But when he died, that was his primary asset as his wife needed whatever money she could raise quick. She had to sell all of her own IRA mutual funds (with the 10% penalty) around 9/11 to get quick cash while waiting until some or all of the lots to be sold. And everything that came out of the IRA became taxable income. When one is forced to tap into an IRA to make ends meet, a vicious circle is formed with taxes not due for a while. It causes a second trip to the well for more money, which again causes another trip the next year. The liquidity of the real estate has a factor.
My point being, the IRS code 1031 section covering deferral of gain for real estate invetors is very much similar to IRA's in function, yet offers the use of previously mentioned Tax Advantages. Such as long term capital gains of 15% (as opposed to 35%) on the deferred profits.
Gives more room for mistakes, too.
But since loans are not permitted with the IRA
Pete, sorry to ruin that long post but most of your post was based on that erroneous statment.
Loans are permitted with the IRA.
But the downside of no tax consequences now are they get bigger later.
I don't know of what taxes you are speaking of but I do know that all monies distributed out of a Roth IRA are tax free.
You'll need an IRA with at least $500K in it to do the deal. That's a roughly 10% return if done in one year.
Not exactly true. You could do the same deal with the same 85k out of your IRA. Using a loan will cause some other calculations and trigger some taxes, but the fact remains, you could do this same deal using only 85k out of your IRA.
Since the Custodial Bank will have to be making distributions for you, they charge. Expect a fee schedule something like a trust department's - 2 to 3%.
Not necessarily true. It all depends upon who and how you set up your self directed IRA. Those trust costs were a big concern of mine too until I started digging into it.
Accordingly, the compounding effect with the 1031 structure is superior
I am well aware of the tax benefits of using a 1031, but I don't think you can say it's superior. Although the time issues of using a 1031 aren't that difficult to deal with, they still exist. If you work the deals from within your IRA, you can achieve regulation freedom, except those dealing with self dealing and other prohibited transactions.
The 1031 will eventually catch up to you if you try to spend any of your earned equity too. It is useful for maximizing your leverage and gains, but someday you will pay the piper. By working from within a Roth, you eliminate any and all tax liabilities, even beyond your death while still achieving those same stunning compounded gains.
Although raw land is supposed to be the most risky type of RE investment
I agree, raw land is not the type of real estate that most people should involve themselves in. For the most part raw land is speculative by nature and one should stay away from it unless they have deep enough pockets to hold it for the long haul. On the other hand, raw land can be hugely profitable in the short term, if bought right. "Buying it right" means that you should be able to double your money within a year or two, but if it doesn't work out, you better hope you don't need your cash out of the property any time soon.
My point being, the IRS code 1031 section covering deferral of gain for real estate invetors is very much similar to IRA's in function
Again, I don't agree. A Roth IRA does not defer the taxes as the 1031 does. That results in a huge differential when the dollars are actually spent.
But when he died, that was his primary asset as his wife needed whatever money she could raise quick. She had to sell all of her own IRA mutual funds
It sounds like this couple didn't have a 6 or 9 month emergency fund....like most Americans. It also sounds like the wife was perhaps not equipped with enough financial knowledge to make a bad situation work out. The position of holding 5 or 6 lots free and clear would be a very significant positive to me, even if they weren't in the best area or if the building market was sluggish. Those lots could be used as collateral on other property or maybe even a different business. At the very least, I could use them to finance my way into a pizzeria and make money selling pizzas.
Pete, please don't take my comments as being argumentative. I'm just trying to have a discussion. I would love to continue discussing this topic because real estate and all associated topics are my passion right now. I also see this as a relevant topic in a building forum because many carpenters are uniquely skilled to capitalize in the rehab business, but lack the financial skills to get over the funding hurdle. The IRA angle will open a lot of doors for those that are seeking funding for their ideas.
blue
Pete, sorry to ruin that long post but most of your post was based on that erroneous statment.
Loans are permitted with the IRA.
I have no plans to argue.
I've provided my reference. I'm not aware of any greater authority than that I gave. If you wish to test that point with the IRS, that's your business. But when the IRS tells me that loans against an IRA is a prohibited transaction, I have a hard time quibbling over the issue.
I will concede that sometimes leveraged investments get into IRA's. And as I believe you've referenced by "additional taxes", will create the "unrelated business taxable income" tax, or UBTI. But there are limits on the exposure to UBTI and how it's reported.
I'm aware of promoters pushing alternative arrangements. I'll be the first to admit I have not heard all their points, nor do I intend to. Several of the big major accounting firms have recently been hugely burned because of aggressive interpretations of the tax code years ago. There are many, many not so major firms with similar history.
Some of these people are brilliant and perhaps have found some way to increase margins due to a new strategy or another. But I have learned long ago, and over and over again, when an investment's sense is primarily based upon a tax avoidance mechanism (other than life insurance and municipal bonds), that mechanism can fail.
Roth IRA's also are wonderful vehicles. But let's look at a very basis part of their benefits - the tax free withdrawal feature. Who REALLY needs it? Who does this benefit the most? (Not to mention, how long will we continue to be blessed with Roth accounts?)
Those of us that will have retirement incomes above the average. When you know that whatever comes out of your IRA will be taxed at whatever is the highest rate at the time, you need a Roth. But those people can't get a Roth! But maybe this new Roth 401(k) that's starting could work, I'm not sure?
Of course, no one wants to pay taxes, but some focus far too much on the subject when it has minimal effect on their bottomline. I've seen many with 15% tax brackets glowing over their Roth's. Looking at their assets, they'll never be outside that bracket, probably even lower. Why in the world they want to pay taxes now for something they may never need...
Which brings me to your earlier comment about a 50K present income. When one retires from that income level and starts drawing Social Security, his SS payments will not be enough to be considered taxable. Any taxable income will come from retirement withdrawals or other unearned taxable income (stocks, bonds, funds held outside of the retirement plans). At this point, the tax free withdrawals from a Roth kinda becomes useless - to a point.
But anyway, if you want to pursue this type of structure, keep us informed how it works. But keep us fully informed, without leaving out the bad side.
Understand the worst that could happen besides getting assessed with back taxes and penalties, is to have your IRA disqualified by the IRS, resulting in an immediate full payout of the funds and the corresponding taxes and penalties, if applicable. To some, that could be considered a reasonable business risk.
I would love to continue discussing this topic because real estate and all associated topics are my passion right now.
It's a great subject. But remember, it is only one sector of where people invest their money. Real Estate got hot following the 1987 market crash. And come 1990, those worlds went to hell. Back up and take a big picture overview of what's really available. I find Investors Business Daily gives the most complete and fair analysis.
My sources lead me to believe another weakness is due soon. We're seeing such signs in your neck of the woods. Whenever there has been such a big rise in energy costs, weakness follows. Especially with interest rates being increased nonstop. These effects are toxic to real estate. There is no asset class that gives a perpetual positive real rate of return. Even TIPS can give a negative rate of return due to market conditions.
Liquidity is one of the reasons we usually use REIT's for our real estate asset class when creating investment portfolios. Transaction costs are peanuts compared to RE transfer costs.
But direct Real Estate investments in any structure are more than an investment, they become jobs. They require managing and that is a cost. Some thrive in that job, others struggle badly. One has to like it.
Pete, your original post on this subject was filled with wonderful factual statements. Your math indicated that real estate purchased within a Roth IRA was a poor second choice to using leverage outside of an IRA and simply paying the tax. You used the lack of leverage as your primary point. After discovering that leverage is allowed, you seem to now have decided to forego logical, mathematical discussion and instead debate the topic relying on emotional scare tactical statements....some which don't seem to have any bearing on the topic.
I cite these paragraphs as proof:
"I'm aware of promoters pushing alternative arrangements. I'll be the first to admit I have not heard all their points, nor do I intend to. Several of the big major accounting firms have recently been hugely burned because of aggressive interpretations of the tax code years ago. There are many, many not so major firms with similar history.
First of all, if you don't read what the promoters are explaining, how can you possibly comment as to their legality? Are you of the opinion that every promoter is some kind of shyster?
And what does the fact that some big accounting firms got caught aggressively pursuing some tax angle have to do with this discussion? Should we all abandon every tax reducing idea simply because the big boys got knocked down on some convoluted tax theory? Should we all stop contributing to our IRA's simply because some big shot accounting firms got caught with their pants down?
Your statement " have learned long ago, and over and over again, when an investment's sense is primarily based upon a tax avoidance mechanism (other than life insurance and municipal bonds), that mechanism can fail". is nothing more than innuendo. Nothing I have written speaks to creating a real estate investment that relys solely on tax avoidance.
I feel compelled to ask you: what brings forth this statement? :"Roth IRA's also are wonderful vehicles. But let's look at a very basis part of their benefits - the tax free withdrawal feature. Who REALLY needs it? Who does this benefit the most? (Not to mention, how long will we continue to be blessed with Roth accounts?)" I'm particularly amazed at the final sentence which seems to indicate that since the government might change the tax code, that we shouldn't bother to take advantage of what is offered today?
Those type of scare tactics might influence others to avoid looking at legitimate, legal ways of minimizing my tax burden, but they'll have no influence on me. I've paid my fair share of taxes all my life and I intend to continue paying my fair share, but I won't be deterred from investigating and thinking about taking advantage of the loopholes that the congress has left into the tax code. They know that the vast majority will simply decide that this type of stuff is too complicated and that just leaves the loopholes open a lot longer....we all know that if the masses "discovered" these tax shelters, the tax revenues would drop and they'd have to close the loopholes...the same ones they are using. "They" refers to the congressmen and lawyers and bankers who are all enjoying the fruits of their labors, while the hard working stiffs think they should pay taxes on everything instead of hiring professionals to help them understand the tax codes.
Instead of scare tactics, why not go back and re-run your numbers and show how profitable a real estate deal will be if done properly in a self directed IRA.
http://www.advisorsquare.com/new/trustlynkcorp/default.asp
blue
blueeyeddevil,
Taxes add to the cost of the house, you always pass those costs on. Now you can claim that if you didn't have to pay taxes your profits would be higher, but if you didn't have to spend money fixing things your profits would be even higher!
So buy house all fixed up and you get maximum profits, right? (sorry, it's the easiest way to show the concept..)
Blue, you missed the really big tax benefit of a couple of years ago where Uncle Sugar paid for much of your equipment costs. Now the market is being flooded with the equipment being sold since all the tax breaks are sucked out of it..
There are some tremendous bargins out there. It will kill new equipment sales for a while and that will put more people out of work not to mention hurting my income)
Carefull about reading stuff on the net.. some of the data is just plain wrong and can lead to great deal of trouble..
I would absolutely run every single idea I have thru my tax guy.. he's a former IRS agent and stays abreast of the rules and interpitation of the rules. One program I used was shut just before tax time leaving me to scramble.
The break is still on the books but a recent court decision effectively nulls it..
Blue, you missed the really big tax benefit of a couple of years ago where Uncle Sugar paid for much of your equipment costs. Now the market is being flooded with the equipment being sold since all the tax breaks are sucked out of it..
Actually Frenchy, I didn't miss out on the really big tax benifit a couple of years ago. I plunked down my signature and got myself into a nice new 90k machine and the tax benefit was a primary reason that I did it.
But alas, my gain then leads to my loss now. Perhaps I would have been smarter to wait two years and pickup one of these underpriced machines that are now flooding the market?
Thanks for the advice about consulting with my tax man before indulging in business practices that I hear about on the net or from other sources. That is always a prudent idea and one that I would certainly do whenever I make a paradigm shift.
blue
business decisions should always be made for business reasons and not for tax reasons.To do otherwise is to reneg and put the govt man in charge of running your businessKeep him wheere he belongs - the busboy collecting the tip after a good meal - year
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Piffin, I believe your post is well intended but I find it amusing that you would bother posting that sage advice when the discussion is centered on minimizing taxes on real estate deals from within a Roth IRA. Have you chirped that bit of wisdom in when discussing gains made from stocks and bonds within a Roth IRA?
Do you see how you are trying to make someone feel guilty for figuring out how to make a tax free gain of 100k with real estate, but you wouldn't entertain that idea if the gain was made using "traditional" methods?
Most Americans are not aware that their IRAs can legally own LLC's, LLP's, Real Estate, etc. They are not told that they can by their "trustees" because the trustees (Fidelity, Vanguard, T.Rowe Price) make money off of their managment fees. It would be non productive to inform their clients that there are other venues to invest their investment dollars. Those types of investment houses can legally act as trustees to invest in real estate but they choose not to. They are profit corporations and they set up their services to maximize THEIR profits. Thankfully, this is a capitalist society and there is always somebody working hard in alternative service businesses.
Anyways, the point of this thread is being missed by many I'm afraid. I've alluded to it, and maybe even stated it but I'll say it again: "There are a lot of people out there with a lot of money invested in 401k's that are overinvested in the stock market. These people can be a very valuable source of funding for you if you want to chase bigger real estate deals."
I'm not the politically correct kind of guy, but I'll qualify that statment and say that "remember, every business and real estate deal that you do should stand on it's own as a wise business deal. Do not rely on tax schemes or appreciation to make a deal a good deal. If the deal doesn't provide positive cash flow, then don't do the deal".
There, now we can get back to the real discussion: the effect of taxation over the long haul and the abundance of investment dollars that could launch some of the less affluent working stiffs that have immensly valuable skills and not much financial backing. Many of us have engineering type brothers with bulging auto worker 401s that could be legally tapped to fund profitable enterprises.
It's an idea worth exploring.....
blue
Your reference says:
You may be able to leverage the purchase of real estate in the retirement account. However, it is often difficult to find a lender that will lend to a retirement account. The lender can not lend to you on behalf of your retirement account.
Sounds like what I was saying. It goes on further to say:
You can not:
Enter into a transaction to buy or sell real estate to or from yourself and your retirement account.
Pay property related expenses with your personal funds then be reimbursed by
your retirement account.
Live in or vacation at any property that is owned by your retirement account.
Write-off depreciation or other expenses from the property owned in a retirement account.
Earn a commission or fee on any transactions involving your retirement account.
No deductions! Again, this sounds like one needs to do his Real Estate deal ths way with all cash, no leverage. Meaning a BIG Roth account. Personally, I've seen people with big IRA's - in the millions - but the biggest Roth I've seen was a bit under $100K. The accumulation mechanics haven't allowed these to grow as much yet.
You also refer to these huge piles of capital awaiting these real estate investments:
Anyways, the point of this thread is being missed by many I'm afraid. I've alluded to it, and maybe even stated it but I'll say it again: "There are a lot of people out there with a lot of money invested in 401k's that are overinvested in the stock market. These people can be a very valuable source of funding for you if you want to chase bigger real estate deals."
401 (k)'s are different than IRA's, especially Roth's. Are you suggesting that your autoworker brethern, take their distributions upon being laid off, roll them to IRA's, then convert those IRA's to Roth's while paying the taxes and then make Real Estate investments within that structure? The amount of investable assets has been decreased to at least 80% of the original (with more taxes likely).
Are you suggesting this is a superior mechanism to the use of after tax money and the 1031 system?
After reading all that's been written so far on this topic, I fail to interpret this as an opportunity.
Why would someone want to take this action (whether right or wrong), in an area of historically lousy real estate appreciation? In Cailfornia, I could understand it. Some there are desparate as well as those people think the only investment in the world is real estate (and they forget how quickly that can change - prices dropped 50% in '94 following the Northridge shaker and increasing interest rates).
BTW, did you check out the fee schedule for these "Flex" IRA's within your reference? They're going to charge you 1/2% to pay your taxes! Or any other bill. They charge and charge and keep on charging. I do like how they compare traditional IRA fees to these "Flex" IRA fees.
Blue, if things are so bad that you need to tap into this type of a deal to keep going, with a good plan, I'll lend you the money. Or I'll hook you up with a buddy that just bought a vacant subdivision west of Lapeer. But this investing of real estate within IRA's issue is so complex and fraught with fees that I'd hate to have to see a friend go that route.
And frankly, it's hard to imagine a shortage of capital for real estate investing now. It's tighter than a year ago, but far more liberal than when I built my first house (in Michigan) back in '81 at 16.75%. Which after 16 years upon the sell, gained me nothing.
Personally, I'm looking to get (or build) a place in your next of the woods in the not too distant future. But I'm expecting a train wreck to occur first. Then I'll be looking much more carefully. These interest rate increases will have their effect sooner or later. But I recall that when the car shops shut down, those workers become construction experts, competeing with traditional builders and hispanics. Sounds like a margin squeeze coming...
You may be able to leverage the purchase of real estate in the retirement account. However, it is often difficult to find a lender that will lend to a retirement account. The lender can not lend to you on behalf of your retirement account.
Sounds like what I was saying. It goes on further to say:
It doesn't sound anything like you were saying. Youlve stated that leverage wasn't available. Now you must agree that leverage is available.
The difficulty in finding a lender is becasue the loan must be a non-recourse loan. If someone was hellbent on only seeking out prime lenders, and conventional financing, they certainly would have a hard time getting that loan but I think we all are aware that the banks are only one place to look for loans.
The most logical place to look for a loan in a real estate deal is with the seller. I know for a fact that getting a non-recourse loan from a seller would be simple busines....especially if the downstroke was 20% or better. There also would be many ways to induce sellers that were motivated to accept a non-recourse clause with less money down. In fact, if you are simply assuming someone elses loan, your Self Directed IRA isn't being used for collateral and it would be legal to place the property in your IRA with someone else on the loan.
That brings me to the idea of using partners. The partner could go on the loan, while the IRA could provide the downstroke and fix up costs, if doing a rehab.
The point is that IRA's can legally use leverage.
No deductions! Again, this sounds like one needs to do his Real Estate deal ths way with all cash, no leverage.
Of course you dont need any deductions....you won't have any tax liability! What would be the point of tallying up deductions?
401 (k)'s are different than IRA's, especially Roth's. Are you suggesting that your autoworker brethern, take their distributions upon being laid off, roll them to IRA's, then convert those IRA's to Roth's while paying the taxes and then make Real Estate investments within that structure? The amount of investable assets has been decreased to at least 80% of the original (with more taxes likely).
I think you are confused as to the mechanics of placing 401Ks into self directed account.
After reading all that's been written so far on this topic, I fail to interpret this as an opportunity.
Of course you are confused. You haven't figured out that a simple 5 or 10k cash investment in an IRA can net you 40k tax free gains in a month or two.And you can do it again and again and again and again.... You aren't looking at how fast the nest egg can grow. You seem to grasp the idea when discussing the 1031 advantage but somehow forget that same principle because of your pre-conceived wrong ideas about self directing an IRA.
but the biggest Roth I've seen was a bit under $100K. The accumulation mechanics haven't allowed these to grow as much yet.
The guy with the 100k in his Roth could easily double and triple that sum in a year investing in real estate flips. It's not unthinkable to pick up hundreds of thousands of dollars on just a small down payment, then assign the deal. The money is made up front when you buy. If you find a property that is worth 150k, you are free to buy it for 100k, with a very small down payment. Let me see you do that with mutual funds.
Why would someone want to take this action (whether right or wrong), in an area of historically lousy real estate appreciation?
Who is talking about doing deals in areas of lousy real estate appreciation? Even though I reside in MI, which is experiencing deflation, the principle I'm discussing would work in any of the expanding markets in the sunbelt. It works here if you buy right.
BTW, did you check out the fee schedule for these "Flex" IRA's within your reference
No I didn't. I only posted that link because it cleared up your misconception that leverage couldn't be used.
I did have a conversation with an account executive today at Equity Trust. They have zero fees for exectuing buys and sells of real estate deals. They do have a $190 annual maintenance fee for small nesteggs. The fees escalate to about $800 for accounts larger than 500k. They don't charge fees for normal transactions but if you want something shipped overnight, they charge for that.
I guess if I can find a way to send my stuff in early enough I can avoid all fees.
They make their money on the yearly fees. They have 34,000 clients at this time and if you do the math, you'll see that they are doing fine. They also do other transaction services such as 1031s.
Blue, if things are so bad that you need to tap into this type of a deal to keep going, with a good plan, I'll lend you the money
That's the kind of talk I like to hear. I'm putting you on my possible investor's list. Frankly, I already understand that if the deal is a good deal, I'll be able to fund it. That principle is at the heart of doing any and all deals. There is no shortage of capital. We are living in extraordinarily good times in terms of money availability.
Personally, I'm looking to get (or build) a place in your next of the woods in the not too distant future. But I'm expecting a train wreck to occur first. Then I'll be looking much more carefully. These interest rate increases will have their effect sooner or later. But I recall that when the car shops shut down, those workers become construction experts, competeing with traditional builders and hispanics. Sounds like a margin squeeze coming...
The autoworkers are already out there in remodeling heaven. Many of them will work for very low wages...just to get out of the house. I don't see them as my competition because I don't work in the remodeling industry. The builders that we service wouldn't hire an autoworker with no framing experience. I'm not that worried about margins...they are already so tight that I'm writing checks to work for free.
blue
It doesn't sound anything like you were saying. Youlve stated that leverage wasn't available. Now you must agree that leverage is available.
Sorry, Blue, but I'm gonna take a time out. My words seem to be coming twisted and I don't like to quibble over what was said several days ago. I could go back and play the game that so many do and cut and paste til the dogs go home, but I'm sticking with what the IRS says. I never said leverage wasn't available. I said the IRS says no loans against IRA's. You wanna question that, talk to the IRS, not me.
Bottomline, Your IRA method is a higher cost, lower return method of making a real estate investment. If I were to do a real estate deal, this would be the last place I would seek financing.
I never said leverage wasn't available. I said the IRS says no loans against IRA's. You wanna question that, talk to the IRS, not me.
I thought you said you were going to take a time out. After you said that, you followed up with that convoluted statement.
If you agree that leverage is allowed, you seem to be agreeing that loans can be made "against" the IRA. Perhpas the term "against" should be cleared up and our little misunderstanding might be solved.
IRA's cannot be used as collateral. The cash or assets can be used as down payments and loan can be acquired, providing that the only recourse the lender has is to take back the property. The lender cannot go after more of the IRA to satisfy the judgement.
That constitutes leverage in my vocabulary. It also is a loan, but I wouldn't characterize it as a loan "against" the IRA. The property is the security for the note and therefore the loan is "against" the property.
Bottomline, Your IRA method is a higher cost, lower return method of making a real estate investment. If I were to do a real estate deal, this would be the last place I would seek financing
That's just a blatantly false statement and you have no way to back it up. I just told you about a firm that will service your account for $190 per year. You probably pay that or more in your mututal fund fees even if you aren't aware of it. With a 10k down payment on some land, I could easily secure 90% financing by many landowners in a non-recourse land contract deal. There would be virtually no closing costs. If the property was in a fast appreciating county, it would not be unthinkable for it to go up 20 or 30k in a year, even if you bought it wrong (meaning you didn't negotiate a discount). If the property did in fact go up 30k and you sold, you would have a 30k profit based on a ten thousand dollar investment. You'd have zero tax liability and the entire sum would remain in your IRA. If the IRA money was a Roth, you would never pay a penny of taxes on that 30k, even when you took it out and spent it.
Run those same numbers out side of your IRA and the only way you can beat it is is to 1031 the property. Your 1031 transaction costs would be a minimum of $250. That is a full $60 more! Additionally, some day, your deffered captital gains costs will catch up to you, unless you die.
Quite frankly, I'm not looking to build a portfolio for my kids. I want to eat hot dogs with my buns in my retirement.
I'm also not advocating that every real estate deal that someone would do should come out of their IRA. I am explaining that some people with large positions in their stock portfolios might love to know that they have real estate options. In the past few years, there have been some very dramatic gains in some markets...like Florida and California and Vegas. There are trademen residing in those markets, dirt poor because they lack great business acumen and they don't know that they could tap into large sums of money to fund a subdivision, yet they probably know ten people that would help them out if they understood what some of the richest people in the world are doing.....
I don't mind you taking the time out, but don't try to get the last word in with such a blatantly wrong statement. And I don't mind that you wouldn't consider doing a deal from within an IRA. Everyone has their own methods and should only do what they feel comfortable doing.
Me? I'm comfortable working outside of my comfort zone.
blue
Me? I'm comfortable working outside of my comfort zone.
As well as most other's.
Good Luck.
>>"IRA's cannot be used as collateral. The cash or assets can be used as down payments and loan can be acquired, providing that the only recourse the lender has is to take back the property. The lender cannot go after more of the IRA to satisfy the judgement.
Non-recourse financing.
Blue:1 Pete:0
Ball is still in play.
;-)
Edit: to add another $.02 (not piling on, just adding $.02), it ain't that hard to get non-recourse financing when loan to value drops below around 75% to 65%, depending on the lender and what you're buying. Blue has his thinking cap on for this one.
"Let's get crack-a-lackin" --- Adam Carolla
Edited 4/15/2006 12:17 pm ET by philarenewal
May I suggest you go back and reread my posts.
All I've said all along is that making a loan against an IRA is a prohibited transaction.
The of fact someone finally defining "nonrecourse financing" in such a way to satisfy the IRS's "no loan against" provision does not change the provision.
But maybe you can explain to Blue that the fee schedule of 1/2% of any distribution counts towards the built in fees. Plus others.
Bottomline, as said earlier, "Just because one can, doesn't make it a sound strategy."
The proposal as presented is a higher cost, lower return method of financing. Furthermore, it does nothing to increase any present day income nor offers increases in future SS benefits.
And finally, this is not "Blue's Thinking Cap." Recall how I mentioned a buddy of mine doing this over 15 years ago?
Pete: I said I don't want to pile on.
I've read the various posts and tryed to sift through what seems like pretty complex info.
The IRS does have its rules about encumbering plan assets. Blue mentioned a way (don't know if he came up with it, but he at least mentioned it) to get around that rule through a non-recourse loan. That's what I get out of it.
You gotta admit it's pretty clever. Not long ago, investment property loans in the the 75% to 65% LTV range were par for the course (heck, when I was younger, LTV in the 70% range was a max for a residential mortgage). Now, lenders will throw non-recourse money at you for basically the same ratios. Because of the unique money environment, there is an easy way to comply with the IRS rule and still leverage the real estate. I think it's pretty smart. Actually I'm really impressed, it's really smart. Wish I could think of stuff like that.
Is it risky, yeah it's very risky. If you don't know what you're doing you stand to lose big. It's not for a newbie dabbler. I admit, I wouldn't do it; at least not right now -- I've never been that smart or that lucky -- if things start to head south I don't want to have to deal with the bank snapping at the property and maybe the IRS snapping at my heels at the same time -- but that doesn't mean it's not a great idea for others who are willing to learn what it takes to do it right and saddle the risks. That's what capitalism is all about.
In terms of higher risk for equivalent returns, maybe you have a point. But if you're in the construction business, the risks lessen to some degree because you can use your specialized knowledge and experience to help generate better than average returns, and keep away from trouble spots that the "average" investor would get himself into.
For example, if the right building comes up for sale in my town, I'm pretty well set up to evaluate what its worth and put a bid in on it without much angst. Having bid a number of times on various buildings, my bids are close enough to the others that I'm comfortable that I'm not in outer space with the way I analyze value, and when I get a place I'm comfortable that I have not overbid and will make at least a fair and honest profit. For other types of investments, my experiences have not been as good. I need lots of external advisors to help me get measley returns, that I can't use the sweat of my own brow or the power of my own intellect to improve in value. Doesn't appeal to me no matter what the experts would calculate as my risk adjusted return for what I am doing. Don't want to keep trotting out Enron, but that's kinda how I feel about investments I don't have at least some control over.
Anyway, you don't like the idea and that's your perogative. But seems to me you're pizzing all over it too much for the negatives you brought up. The historical returns for real estate and for stocks, for example, aren't that far off. But I can "make" the value of my real estate go up by improving it, and I've been doing it long enough that I can spot good values most others don't seem to. I have absolutely no background in picking stocks and if I try to "make" the value of a stock go up, I go to jail. ;-)
Just the way I see it.
"Let's get crack-a-lackin" --- Adam Carolla
Philarenewal, I didn't dream this application of the rules up. I've known about self directed IRA opportunitys for some time, but I only recently discovered that a loan could be obtained in conjunction with the IRA. That significantly changed the way I viewed the opportunity.
You mentioned risk and I don't think anyone should ever ignore the risks of any investment. But, when you discuss risks, I think it's also prudent to compare them. For instance, the real estate market is showing signs of weakness and maybe even a little retraction. The threat of a real estate bust seems to be looming. My question to those that would steer clear of real estate because of this impending disaster is this: if all real estate loses 50% of it's value over the next six months, what shape do you think the stock market will be in?
I'd say the risk is equal.
I also agree with you that your own specialized knowledge of the property in your area can give you a big advantage over stocks. I've owned stocks for more than 15 years and so far I'm not imprressed with anything they've done. I've done much better with real estate, but I'm no wizard at that either. I'm learning though....
Now, about working on buildings that you own with your IRA. There are rules against that, but there are workarounds.
For instance, if I own less than 50% of a company, that company can work on my building. There are other ways, some easy, some complicated. There are different ways to accomplish everything that you want to do, within reason.
There's a company that creates a Selfdirected IRA, LLC in Austin that I'm considering. Basically, they have a program that will allow me to capitalize on the Roth, using a traditional, without me having to convert it and pay the taxes. The upfront cost of the LLC is steep, but it comes with some other value. The debate in my head is whether to pay the upfront costs or go the cheaper way with Equity Trust.
One way or the other, I'm going to move a portion of the IRA over there and start advertising for some foreclosures.
blue
>>"One way or the other, I'm going to move a portion of the IRA over there and start advertising for some foreclosures.
Blue, I'm no expert either. But you are willing to take a risk and work hard.
Right now, there are plenty of cherubs in the market making good money without a clue (maybe me included; I hope not ;-) .
Regardless, one thing I will not ever forget is that you can't make money without hard work. If the market turns down, people still need a place to live.
The speculators out there who don't know which end of a hammer does the business will cry -- and you will pick up their pieces.
Busting your azz will make a profit. Sometimes more; sometimes less, but you have a plan and are willing to work it.
In my book, that's what it takes.
"Let's get crack-a-lackin" --- Adam Carolla
I'm pizzing all over it because people are pushing a concept without fully reading about and understanding what they are talking about.
Blue keeps harping about NO FEES. This is from his reference:
Annual Fee $150
Transaction Fee for Coins, Bullion, Real Estate $250 each
Asset Fee $20 per asset per quarter
4Other Service Fees (on the reverse side)
Wire Transfer Fee, deposit verification, cashiers check, interim statements, IRS
amendments/restatements, and late fee. $15 each
Wire Transfer Fee (International) and returnedchecks 50 each
Overnight Mail 20 each
Special Services (hourly) plus expenses 75 per hour
Fee Schedule Conversion Fee, RMD Calculations, Stop Payments, Notice of Reconveyance and incomplete paperwork reprocessing fee. 25 each
ROTH Conversions 100 each
Coins/bullion storage fee 100 annually
Safekeeping (original documents held in the vault) 10 annually
Asset Re-registration Fee – assets being distributed or transferred out $25 per asset plus costs
Unscheduled Distributions
Partial Distributions - cash $10 each + direct costs
Partial Distributions – assets $15 each + direct costs
Scheduled Automated Distributions Monthly - $24 / year
1099-R Form, notary fee, and Capital Change
Processing/Notification (i.e., tender offer) $10 each
I've highlighted those expenses that would likely be incurred in such a deal.
An annual fee of 150, plus quarterlys of 20, makes $230 just to hold and do nothing. Let's assume seller payments can slip under the $24 per year plan. (254) Not sure of the utilities since some vary. Add in the buy of the RE for another 250 plus the overnite fee of 15 (another 265)
Note that the partial distribution of $10 plus direct costs (however that is described) is 1% of a check for $1000.
Every check going out - for taxes, seller payments, water, gas, lites, repairs, etc. gets clipped the $10 plus costs.
The only one of those expenses seen in the identical RE transaction outside of the IRA, is the $15 overnite fee.
Blue, how do you compute your $190?
Earlier I mentioned that I'm retired - at age 55. That means 1, that I have absolutely NO vested interest in suggesting some way or another. 2, I've personally skated the retirement preparation field successfully - far earlier than most. That MAY suggest something regarding the selection of appropriate and successful investments. You's guys are talking hypotheticals. I've walked the walk and talked the talk.
All this issue really is about is the access to alternative forms of capital for RE investing.
I'm saying the IRA method is excessly burdened with fees and restrictions. Those that cannot read will disagree.
I'm further saying that anyone choosing to fund RE investments in this manner is desparate for financing. By putting that person together with a desparate seller could create a deal. Does that make a good deal? For the RE agent, yes. For Blue? I'd have to see his business plan. So far, he's leaving an awful lot out.
Now, if you guys want to see an alternative form of RE financing, try this:
My stepkid needed to move cause he has no idea about home upkeep with a 60 year old WWII relic. He bought it with an overpriced first time HUD loan with 5% down. Some payments got misplaced, escrow account mishandled involving taxes. The usual story that gets someone into a lower FICO score. He finds a new spec for 180K. On a teacher's salary, he can't swing the deal.
The DW and I have an extra 400K sitting around not necessarily needed at the time.
So we set up a brokerage account with all 3 of our names on it, but with the boys SS number for reporting. (Not a completed gift since our names remain.) DW and I deposit the 400 K into the account.
The account is set up under these understandings:
The 400K is to be completely invested into a well diversified stock and mutual fund portfolio (bonds not included due to their prices and interest rate effects) with a focus upon income producing assets. (The portfolio earns income of 3%.) All taxable earnings will be reported under his SS number (he's in the 15% bracket, we're 35%). All income and capital gains will be split 50/50. He makes a monthly house payment of $500 back into the account.
ALL of the boy's debts must be included and only one CC is allowed, which must be paid off monthly. The boy uses margin privileges to borrow against the portfolio to pay cash for the house and retire all other debts.
The cash in the transaction eliminates most closing expenses (no mortgage fees, survey, etc.). FICO scores are irrelevant. The income generated by the portfolio is sufficient to coverage margin interest costs alone, but his payment represents his investment into his self-sufficiency as well as regularly diminishing the borrowed amounts.
Bottomline, the boy gets twice the house he can afford, and it'll be paid off within 12 years. No other blls or loans. And we get our 400K returned plus lower taxes on the income. So what if he skips a payment or two from time to time?
The real issue here is the boy will someday inherit a sizable amount of assets. If he does not know how to handle these assets, just like so many others, he'll pizz 'em away. This protocol trains him on how to do so as well as removes the underlying financial debt demons that cause most people to compromise their integrity.
After 5 years of following this schedule, it's worked beautifully. My most recent internal rate of return calculations reflecting the financial success of this process show a touch over 30% compounded annually (including cap gains). He's responded perfectly throughout this program.
My point being, sometimes a family member approached with the proper arrangement, can be far more appropriate source of financing than other schemes.
Pete, you're harping about pennies. I hate to brag but at this hour on a Sat. night I've had a few (actuallt a few more than a few) so I feel like bragging. My last real estate deal netted me $380K with a tax bill of $18k (my accountant is the one I will use for life). I did it outside of any kind of retirement plan 'cause I'm too young to qualify for all that shid. If you know what you're doing (and I don't pretend to, the market right now will make profit for anyone with a pulse, and I qualify), you can improve real estate and make a fair and honest profit, at the very least. Within less than one month of that deal, I already closed on another.
There is a huge market for turn key real estate. The socccer mom generation does not want to lift a finger, and if you are willing to lift a finger (and bust your azz), you will profit.
If you do it inside an IRA, more power to you. When the fees have five digits or less, it is noise. You are talking about fees with 3 digits.
"Let's get crack-a-lackin" --- Adam Carolla
When the fees have five digits or less, it is noise. You are talking about fees with 3 digits.
When one plays with 7 or more figures, your noise concept has merit. But that's not what Blue is talking about. He's talking of using a smaller IRA and then outside leverage on top. The fees described as a function of his investable monies in the IRA add several % or more to his deal. That weakens it's potential to succeed.
When it comes to you, this issue does not pertain. You use normal methods of financing under the usual tax structures. That results in wealth creation. Good for you.
And I notice that you listen to your advisors...
>>"When one plays with 7 or more figures, your noise concept has merit. But that's not what Blue is talking about.
Maybe now I'm getting argumentative. ;-)
If I told you what I had in that deal initially, you would probably puke. It wasn't any where near 7 figures. Everyone always tells me I'm crazy for getting in but I'm either lucky, stupid or brilliant (I'm kindof religious so I think there's more going on for me -- not deserved but going on). Sure, toward the end I had my neck stretched as it should be for that kind of return.
I've had many before, have another one already in the works, and will have another one after that . . . .
What Blue is doing doesn't sound all that different. Check out his thread on "no money down deals don't work" to get a picture of the scope.
I listen to my advisors and I listen to everyone, including you of course. When I don't fully understand what they're telling me, I poke at 'em same as I'm poking at you. What I usually find is that if I think they are wrong, it's really that I don't understand what they're telling me. Poking at 'em (till they scream sometimes) usually gets us both where we need to be. ;-)
Maybe that's how this got where it is. On the one side, you are looking at it as percentage of fees versus capital at risk versus expected return. On the other side is little money down (low entry cost) huge leverage (high expected returns and high capital at risk (unless it's non-recourse) and high capital at work) and fees that are mosquitoes compared to what's going on in the investment (building roads, say, costs more than a few hundred $ in administrative fees).
Maybe we're all talking about the same thing but have different parts of the elephant.
Anyway, I'm done piling on and I've likely said too much already. Tell us why you think one investment class is better than another and I can understand. Tell us that one investment class sucks without a lot of backup and I don't get it. That's kind of where I am.
"Let's get crack-a-lackin" --- Adam Carolla
Philarenewal, you seem to be understanding exactly what I'm talking about. The fact that you are doing real estate deals obviously helps.
I wouldn't do any deal without crunching the numbers in a variety of ways. But I won't overlook any potential technique either. I don't automatically discount anything till I'm satisfied that I understand it. Doing deals from within the IRA is only one way that deals will be done.
I think Pete is not recognizing that there are a lot of deals out there...more deals than I have money or investors for. Personally, I'm tapped until something sells and the IRA avenue represents a couple more avenues for me. I'm tickled pink knowing that I have some more cash available to offer as earnest money! Back to the MLS for me! LOL.
I'd love to hear about your real estate efforts. Im guessing you bought something that was run down and shot your wad fixing it, despite the warnings from the naysayers.
For me, so far in my career, I haven't done that well in real estate. I'm batting around .100. I haven't lost, but I haven't done anthing that exciting yet. I'm learning. I am particular about what I get myself into though and that is definitely slowing me down. I don't want any residential tenants and that has made my start in real estate a bit more difficult. I've also consistently ignored all the basic advice that I read and have therefore learned the hard way LOL! Amazingly, I'm still solvent and will be doing fine in the next inning!
Share those stories by email if you don't want to publicly tell too much.
blue
Im guessing you bought something that was run down and shot your wad fixing it, despite the warnings from the naysayers.
Yup, pretty much. Not much too it really. It's easier in a city 'cause each neighborhood has its own character, but it's not all sprawled out like the burbs.
I started buying small apartment buildings and rehabs in neighborhoods on blocks I would want to live on, for about the past ten years. That was my sophistocated first pas litmus test for location selection -- would I want to live there. ;-) From there, I'd look at what I thought was on the way up. In comparing one neighborhood against the other, and even block by block, there is a lot of seat of the pants and someone trying to do it without living here would have a very tough time. You gotta go out and actually walk the blocks and look carefully at what's going on.
To give an example, count the number of trees and note their age on a block. Keep track of what happens to 'em over the course of a year. They get vandalized or just die from neglect -- bad neighborhood (cars get vanalized, fine happens everywhere but what kind of scumbags would vanadalize trees? -- think about it). Lots of young trees in good shape, the neighbors are doing things and looking out for things. Lots of people don't notice stuff like that and there a plenty of little signals. A neighborhood starts turning like a glacier for years and then when it hits critical mass, if you're not already in, you're out -- it's too late. When that happens, people will bid up places where the margins get thinner than a safe and easy mutual fund. Never understood that.
Another way of finding places is just dumb luck and like I always say I've had way more than my fair share of that. Don't know what I've done to deserve it, but I'm thankful for it.
To give a forinstance, the place I just sold, while I was doing it I could see the tops of the roofs of the houses on the next block over from a window (houses back to back across a small alley). All the roofs were well maintained except for one that was obviously in "distress." Long story short, through serendipity I got in communication with a daughter of the owner; they wanted to sell after having tried to rehab it themselves and failed. They wanted to clear X $ out of the deal and get out of it. Ran the #s, X plus the transaction costs was a fair price, done deal. Month or so later, closed on the sale of the one I was working on and two weeks later, closed on the buy of that one. Away we go on another one.
Plenty of naysayers all along the way. A funny example, one dump I bought had a back door in the back section of the house that was about 5' tall and the whole back section was sinking into the ground -- no foundation; it was build on logs many years ago (still with intact branches as I discovered) just thrown on shallow trenches in the ground.
My plan from day 1 was to demo the whole back section of the house, pour proper footing and foundation and build that whole part new. My girlfriend at the time told me I could not buy that house 'cause the back door was too short for me to fit through, the floor sloped like a roof and who would ever buy it looking as it did. I tried time and again to explain to her that everything she saw around her in that part of the house would be gone, as in g o n e. She couldn't get it. Bought it, did the work, sold the place, did just fine. ;-)
Another example, when I first started all my friends warned me about property in the city 'cause it was such a heII hole and I would lose my shirt in such a corrupt place. Property values tended to vary in a cycle that just went round and round, never really up, but often enough down. I refused to listen to them. Probably stubborn and stupid, but I didn't want to hear it. Now they all, except one, live in the city. ;-)
I hate talking numbers and I get embarrassed about what feels like bragging 'cause I'm a small potatoes kind of guy compared to you guys, but I wanted to point out to Pete that, for example, fees that might run into the many many tens of thousands of dollars are irrelevant. From my point of view, I'm talking buildings and land not some transaction fee on a $1,000 bond. Shid, when I sell I pay my realtor 6%, full boat, without blinking and she is entitled to every penny of it. Shave 6% off any other investment out there and you do have a problem. I'm happy to pay it (well maybe not "happy," but she earns it -- I just about wouldn't make a move without getting her involved).
In terms of financial evaluation technique for a rehab, your method is probably better than mine. It's exactly what you might expect (at least the only thing I can come up with). I spend a good half a day, at least, if not several days tallying what it would really cost to rehab it to the quality and character of the neighborhood it's in.
I get cold comfort from my realtor what it would actually sell for if rehabed to that level (not with pie in the sky appreciation but if it were to sell today -- I think too many folks are dreamers about appreciation and that's where you can and will get deals when they get in trouble -- bail 'em out but not for free. I assume appreciation due to just the passage of time at zero). Use that estimated sale price as a base and then whack off the sell transaction fees. Subtract the rehab cost. Subtract expected profit. Subtract transaction costs of the buy. That's my maximum bid.
Nothing more to it. I have a spreadsheet I whipped up long ago that even gets into interest cost per day of anticipated ownership while I'm working on it and it's being marketed, the whole nine yards to the penny, and all the scenarios for rent income if it's to be a rental, but at bottom for a rehab it's cost plus profit has to equal price. If it won't work, I don't bid.
Sorry for the long post but I love to see people succeed, and I love talkin about building and real estate. So as Adam Carolla says, lets get crack-a-alackin! ;-)
"Let's get crack-a-lackin" --- Adam Carolla
Pete, you seem to be suffering from selective hearing. I suggest a trip to the ear doctor.
I told you that I gave you that particular link because it clearly pointed out that loans could be taken in conjuction with an IRA deal.
I also clearly stated that there were zero fees if you chose to use a different site.
Heres the link to that site: http://www.trustetc.com/index.html
Click on the link "Low Annual Fees"-"No Hidden Fees-Compare and Save" and I'll graciously accept your apologies for choosing to ignore facts that don't seem to fit into your preconceived notions.
It really should not come as a surprise to you that some companys have different fee schedules. You seem to be acting like there is only one company that does this kind of thing and only one fee structure. Your persistance at ignoring the facts is adding nothing to the discussion. I'm not opposed to learning something bad about this type of arrangement but quite frankly you haven't backed up a single objection with facts. I've presented a very simple real estate deal and asked you to prove your point. You failed. I showed you where there was only $190 fees associated with a 100k deal and you haven't shown me a site where you could 1031 it cheaper.
I really don't mind you shooting holes in something, but your objections should be factually based, not emotionally biased.
blue
Edited 4/16/2006 1:37 pm ET by blueeyeddevil
Within certain discussions, one party or another either develops or loses respect for the other.
It's happened here. Your twisted, convoluted responses show how confused you are about these issues.
When those confusions turn into personal attacks, the personal attacker makes a public acknowledgement that he has lost the argument.
I've only got a post grad education with 20 years of investment planning experience. Obviously that is inferior to a rough framer.
You win.
twisted, convoluted responses?!!!
That's funny Pete. Every step of the way, you've tossed in a new twist. You still haven't spelled out the simple math that proves your point and you still haven't acknowldedged that these transactions are free of fees.
Sometimes twenty years of doing the same thing galvanizes a person and blinds them to other solutions. I'm okay with you investing in stocks and bonds and whatever else you make money on. Those things haven't worked out very well for me.
As for taking advice from a framer; I wouldn't suggest to do that. I would contact the experts that have invested their life into self directed IRA's and pick their brains. I wouldn't go to a financial advisor that is making commissions off selling annuities, now would I discuss the issues with a stock broker who makes money off selling stocks and bonds. Neither has any incentive to let you know there are other ways to make money in your IRA.
If real estate deals are too complicated, maybe you might consider buying tax deeds. While earning upwards of 18%, you might actually end up with a 100k property for 2k.
The only reason I'm still in this discussion is to learn something. I'm willing to learn something from you, if you'll offer it up. So far, you seem to be telling me that the fees are too high to do a real estate deal and I know of two firms that will allow me to do real estate deals every day, all day with zero fees. Yes, you might be right if I were to use that one particular firm that charges fees for everything, but I haven't looked at their program with the thought in mind of using them. I will contact them and have them explain why their firm might be a better choice, but if they can't overcome those fees with some benefits, they won't be in the running to be my transaction engineer. It's as simple as that.
blue
>>"you might consider buying tax deeds. While earning upwards of 18%, you might actually end up with a 100k property for 2k.
Hey Blue, don't forget your legal fees for foreclosure and clear title. You might end up with a $100k property for around $20k. That would suck, huh? ;-)
"Let's get crack-a-lackin" --- Adam Carolla
Phil, here in Michigan, the state delivers a marketable deed for house sold for tax delinquency! There is a length period of redemption and if the tax delinquents don't pay up, with the accrued interest, you can move in!
blue
But maybe you can explain to Blue that the fee schedule of 1/2% of any distribution counts towards the built in fees. Plus others
Ummm, what part of ZERO FEES is confusing you Pete? Equity Trust will adminster the self directed IRA for zero fees, other than the $190 administrative annual fee. That fee applies to any account from $0- $25,000.
I haven't discounted using that other site because of the fees. Perhaps theres a reason and they are earned...I don't know. All I know is if I hold the account in Equity Trust, there are NO fees. That's 1/2% less than what you are stating.
Are you intentionally ignoring what I am saying or do you just like to dredge up false facts to bolster your position?
The proposal as presented is a higher cost, lower return method of financing. Furthermore, it does nothing to increase any present day income nor offers increases in future SS benefits.
Where is the higher cost?
And how did future SS benefits enter into this discussion? For the record, I'm already maxed out at the top rate of SS, so adding more to the pot won't help much. Now my goal is to keep as much as I can as I round third on the way to home.
Just because one can, doesn't make it a sound strategy
Everyone should evaluate every deal and do the deal in the best way that fits them and their economic plans. I've never presented this technique as the end all to every real estate deal. On the contrary, I've presented it as an alternative source of capital for those that might be looking for venture capital.
I'm fine with the fact that you still don't think you can obtain a loan using your IRA as the down payment. Almost every source I read states that most Americans, including many CPAs and Attorneys think the same way as you. I'm actually happy that this misconception is so widespread because when too many people take advantage of lucrative tax shelters, congress moves to close them.
Please, keep spreading your word.
blue
I don't have any idea hopw I could make you feel guilty, so that certainly wasn't m,y intent. I was repeating a piece of advice I have read over a dozen times in various books and articles. I believe the I first read it in a favorite tome of ours - Think and grow richif you are focusing primarily on the tax advantages of a deal, you will make your self bnlind to the risk/reward ratio that is a must part of ever business decision
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
blueeyeddevil,
The market has been absorbing about 12,000 to 15,000 telehandlers now for the past 5-6 years. with recent consolidations in the industry, (cat is no longer making them, Lull, Skytrack, Gradeall, etc. have been absorbed by JLG, Pettibone is hanging on by their fingertips and many of the smaller imported forklifts like JCB etc. are being priced out of the American market due to the strength of the Euro and the weakness of the dollar). That is going to lead to a consolidation of the market and those who don't panic now will see the value of their equipment rise up and appraoch tradional values..
This is really just a bump in the road. don't panic, hang on.
Telehandlers regardless of brand are really 20 year machines, (unless you are a mason) it will still be around working hard when you are ready to retire.
(if you're a mason, watch out, you are in for a really bumpy ride!!!)
That is going to lead to a consolidation of the market and those who don't panic now will see the value of their equipment rise up and appraoch tradional values..
This is really just a bump in the road. don't panic, hang on
Thanks for the comforting words Frenchy. I'm not really panicking and we aren't intending to sell right now. We are going to refinance though and spread the payments out another five years.
blue
blueeyeddevil,
We do it all of the time, if they financed thru us it's a simple paperwork deal that I bring out to them and it takes maybe three minutes of your time to do.. (wish I got a little taste of the refinacing involved, I do it as a service to those who bought from me in the first place)..
If they took the low interest rate offered by the factory, there is a prepayment penalty that adds dramatically to the costs and all the paperwork involved you'd think you were buying a house..
Frenchy, you are corect. It is a very simple paperwork deal.
I'm actually surprised at how easy the equipment financing is. I wish I would have been more open to doing something like that when I was young and ambitious.
If I was staying in the subcontracting business, I'd probably go find me a 100k crane right now.
blue
blueeyeddevil,
I can't recommend cranes right now.. I've sold them for enough time to know that the profit potentional of cranes varies dramatically.
For them to be profitable they need to be used heavily (or at least on a job site collecting rent) For a long time truck mounted cranes could pay forthemselves in about three years of heavy use giving about 2 more years of pure profit.. then sold off before the real heavy maintinace hit.
Only buy a used crane if you have good mechanical skills and the ability to work all night to repair broken items in time to be one the job at the scheduled time the next day.
Being on time is everything in that business.. if you are an hour late you'll hear soooooooooo much bitchin' that you'll wish you could crawl in a hole. I promise you you will quickly learn the man-hour costs of every crew!!
The only defense against such complaints is a crane so big that it's hourly rental rate vastly exceeds the cost of the crews involved.. (think 200 plus tons capacity)
Truck cranes are a little differant.. (remember truck mounted verses truck cranes) while the smaller ones are used for setting roof trusses, they are also used for sign work A/C work and some commerical applications as well.. Given their much greater capacity than a truck mounted crane they can be used to set prefabricated houses on foundations and for many other tasks that a truck mounted crane can't do..
As a real crane built with a 25 year useful life maintinace is much lower that the 5 year life of a truck mounted crane..
The real profitable cranes are the 50 crawler cranes.. while you will need two dedicated haulers to use them they have so much more capacity in a such a smaller footprint that a good crew can be price competitive with a much less expensive crane with a much longer stick..
Crawler cranes require a minimum of an oiler and operator to work.. during assembly an additional hand is almost manditory if you are going to compete with hydraulic cranes on short one day jobs..
As for equipment financing, I would make it manditory to buy from a dealer who has his own in house finacing. If you deal with a bank all they care about is is the payment paid on the day it's due.. you are simply a number to them..
Construction isn't like that.. there are times when no fault of your own payments are delayed, the job gets delayed, weather interfers, well you know the drill.
We get calls all the time and are experianced with such problems. it's no big deal and we can easily accomidate people,,. do you want to make up the skipped payment this summer or add it to the end of your contract?
It's amazing how we can help people when they call us before the payment is due and give usa heads up..
We're less flexible if it's after it's due and even more so if we need to call you..
However if you call us before it's due we don't even report it as a late payment to the credit reporting agency's
Yes We offer cheap financing,,. with factory underwriting it doesn't cost us anything, But you are deallin then with a bank.. their rules their paperwork and their late fees, prepayment penalties and hassles..
Almost seems like its worth being a criminal.
Anyone catch the news report of the young Latino from Mexico that specialized in the illegal transport of humans? In the first three months of hauling illegals from Mexico into the USA he made $15,000. He compared this to the $58/week he earned cutting lettice in the fields.
He said he looked forward to Bush's plan to tighten up the border, because it would make things harder for the common border-crosser and make his service worth even more. Got to love how they look at it. He's making as much as me and he's only 23 without an education, and only got moxi to show for himself.
An excellent site for both tips and research is http://www.fool.com it is a web location dedicated to investing run by the Motley Fool Inc.. There is so much out there on the web relating to investments it takes days to read it all. If you do not like the process of pouring through income statements or SEC filings you could always simply use the stock market itself and invest in Spiders (SPY - call sign) or (QQQ). They invest mathematically in the Standard and Poor 500 or the NYSE. Fidelity- as suggested - is an excellent start also because their research tools are available to anyone who open an account - great tools if you have the time. Wish I was 32 and knew what I know now. Would have bought a lot of KingB franchises or Apple Computer.Mike C.