Posted by thanks4thegoodvibes on April 25, 2011 at 13:25:08:
Thanks. Ill have to talk with local contacts and investors.
Using 401k money to invest. - Posted by iwanttosucceed
Posted by iwanttosucceed on April 20, 2011 at 16:03:10:
Hello and let me start out by thanking all of you you who take the time to answer and at least try to provide some help. Thank you.
Now lets get down to business,
I started doing some wholesaling and a few fixer-flips and I have encountered the following a few times in the past 1 and a 1/2 years I have been in business.
I have people that see what I do and want to use their 401k to invest with me or let me invest it for them. So, how is this accomplished?
I would like to control the investment as much as possible and therefor have them involved the least possible, but how?
I was thinking of maybe forming a LLC or c/s corporation, but its just because Ive heard of people doing this, but I really dont know if its what I should do.
It might not be much, but I have a prospect(s) with $25k in a 401k right now willing to do as I say and I will have a total of $165k in about 6 weeks available to me (granted I can learn how to).
AGain, thank you for all and any help. I actually have a few friends that I can probably convince to invest their 401k’s in my flipping/wholesaling business, but as for all ventures, I like to be more informed.
Re: Using 401k money to invest. - Posted by Chris in FL
Posted by Chris in FL on May 29, 2011 at 22:32:34:
I am considering something similar myself… Will post my concept, and welcome feedback on if this will work or not, and why.
I already have a private lender doing mortgages with me. He is an older gentleman, and pretty conservative - don’t want to do anything that he would find too confusing. My thought: I have a Roth with just a little money in it. I want to transfer it to a SDIRA with checkbook control. Set up a new LLC, and buy property in it for the SDIRA - a SFR - with him holding a mortgage that equals almost all of purchase price and fix up - my SDIRA contributes just enough to be part of the deal financially. Seven year mortgage - in 7 years my SDIRA owns the property free and clear, at which point I can continue to cashflow it, sell it, or whatever makes the most sense then. I realize UBIT may play a role, but not a big deal to me - I will otherwise buy the property outside the SDIRA, and be paying even more in taxes, throughout my ownership and sale of the property. Also, many worry about owning RE in an IRA being risky, but the IRA only has $1-2K in it - not a big risk. If/when I grow it to a more significant amount, I can plan an exit strategy to reduce risk. If the plan works, hope to put several properties in it in a short period of time, then let rents pay off the mortgages over approximately 7 years, and then sell properties… So that, over 7-9 years, I turn a $1-2K Roth into a well funded IRA.
FYI, I have already done 10 of the approx. 7 year mortgages with this guy, and I know I can buy decent property in my area that will cash flow okay in that time frame. Issue: can I be LLC manager, and therefore manage the properties, which are owned by my SDIRA-LLC? Besides keeping SDIRA-LLC totally separate from my personal assets, any other concerns I should be aware of? Thanks for any input.
Best wishes,
Chris in FL
Re: Using 401k money to invest. - Posted by John Hyre
Posted by John Hyre on April 26, 2011 at 07:59:25:
We frequently structure these sorts of deals. In addition to the valid issues raised by other posters, you have an overlay of tax rules that apply, adding further complexity to the deal(s). Further, how you approach potential investors matters because securities laws (with some potentially harsh penalties) come into play. Some broad and incomplete thoughts (details would take far more content than I am willing to type):
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What are you good/experienced at? Why would people trust you with their money?
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You will need to come up with a pretty detailed economic arrangement that works for you and your investors. Who puts in how much? Who gets how much & when? What if things go “Kerplooey”, et cetera.
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You will need a good securities lawyer to ensure that you are “legal” when it comes to raising money. I like and recommend Jillian Sidoti out of CA, she can work in all fifty states. Sharp, knowledgeable & practical…the latter adjective is less common with lawyers than one would wish.
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Depending on the nature of the deals (flip, buy & hold, etc), you will need to select the correct entity(-ies).
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You will need a strong, customized operating agreement - a template will not be even close to satisfactory. This is especially true in light of 401(k)/IRA issues. Hopefully your structure can be re-used, so you do not have to reinvent the wheel each time around. Control issues are dealt with in the agreement. Normally, you’d have day-to-day control as “Manager” while investors are needed to sign off on major decisions. What is/is not a “major decision” is negotiable.
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Get familiar with tax issues for exempt entities (especially prohibited transactions and UBIT) and have good tax counsel on hand to talk to. One mistep, and you blow your investors’ retirement account apart tax-wise, not good.
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Will investors’ existing custodian even allow such investments? Frequently, “self-directed” means “you can invest in any of our mutual funds that you’d like”, in which case you’d need to have some options for investor to roll over to another custodian - and they are not always eligible to do so in a tax-free manner (e.g. 401(k) with current employer).
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If foreign investors are involved, a whole new set of rules come into play. We have been seeing a lot of Canadians invest lately, and dealing with their tax system & Canada-US Tax Treaty, etc. If you think we are destroying the dollar, you should see what’s happening with Pound Sterling, Yen & Euro - those guys make us look smart, which is really, really scary…but that’s a topic for another day.
Just some thoughts to get you started, hope it helped.
John Hyre
www.realestatetaxlaw.com
The real challenge is probably… - Posted by Rick, the Probate Guy
Posted by Rick, the Probate Guy on April 21, 2011 at 13:00:12:
Lead generation, not investment capital.
Using your friends’ money is O.K., IF you know what your doing.
The risks of doing business with anyone is, I.M.O., largely centered around managing expectations.
Almost worse than losing all your investors money, hitting a home run on the first time sets a precedent that will always be tough to follow.
Also, losing someone’s savings all or in part on your decisions to choose one project vs another, is tough.
Hearing about over Holiday dinner is tougher.
“Please pass the potatoes, Mr. Lost-all-my-money.”
Ouch!
So, you’d better have the big talk, document your deal(s) very well, and communicate transparently.
Hope it works out well for all.
Re: Using 401k money to invest. - Posted by iwanttosucceed@yahoo.com
Posted by iwanttosucceed@yahoo.com on May 31, 2011 at 11:12:24:
Good luck with all of this Chris. Please save my contact info and keep me up to date. Your plan seems very interesting. I want to invest with a IRA also, but 7 years and you get a free and clear property? sounds better than my plan 
how is this working?
Anyway, I am no expert and I am only posing what I (think) i know or have learned so far.
To what i understand, you can be the , manager of the LLC with no issues as long as:
- your LLC(IRA’s LLC) has its own accounts seperate from your own
- The way you can get paid is by giving yourself a salary based on your duties as manager, just dont pay yourself a million dollars and it should be ok.
Pretty much your LLC needs to pay all profits to your IRA. This is actually what i hope to get into soon when I purchase a few properties. I plan to open a LLC for a “property management company” where i will act as the property manager therefor deserving a salary. The more my assets grow, the more I can pay myself while at the same time growing my retirement account.
I dont have a lender yet, maybe your buddy is interested in CA investments, but I do have a few friends that have a little money to invest so they will be letting the LLC borrow the money (p.note) so I (LLC manager) can use. I think it even gives me a better control and use of the cash. what you think?
I am still in the works and trying to learn fast, good luck to both of us and most importantly, dedication. Nothing will come so easy, but the results should be very worth it.
Re: Using 401k money to invest. - Posted by iwanttosucceed
Posted by iwanttosucceed on April 29, 2011 at 01:30:18:
Thank you for taking the time to post. I will be going through your site and possibly contacting you after I finish posting.
again, thanks.
Re: The real challenge is probably… - Posted by iwanttosucceed
Posted by iwanttosucceed on April 22, 2011 at 22:06:05:
You have a point. I realy dont want to lose their money and I wont do it if its not something I dont have some personal interest in. So, how can I set it up so I can use it?
Thanks.
Re: Using 401k money to invest. - Posted by Chris in FL
Posted by Chris in FL on May 31, 2011 at 22:25:39:
The 7 year part of the plan is pretty set in place. My private lender is an older guy, and he won’t do mortgages longer than 6-8 years. I did 10 mortgages with him in the past 12 months, buying mostly SFR, and the properties, taken as a whole, break even or slightly better. In my area, I can buy REOs and short sales, including all repairs, in the $20-30K range. They rent for $600-800/month, which is enough to cover mortgage payments (approx. $325-425), taxes and insurance (approx. $150/month combined), and leave some left over to cover vacancy and repairs. I have to angle to put the deals with the most positive cash flow in the IRA, as it doesn’t have much cash in it now, but I have the experience to figure that out okay. I don’t care to draw a salary for managing at all. I wanted to start doing deals in a SDIRA for many years now, but couldn’t afford to… Needed to keep profits and build cash flow outside a retirement account, as I needed them to support my family. However, things have turned a corner, and we are now starting to get comfortable, with the future looking to get even better. Now I can focus on putting some deals into a SDIRA and let it be just for long term, and hoping to build a big retirement fund, plus minimize future taxes. My big question/issue is, is this okay for a SDIRA with checkbook control? I seem to get mixed opinions when I ask about the idea… Maybe next step is to inquire with a SDIRA custodian company, and run it past their people. I hope it can be done this way - would be an exciting next step to my plan!!!
Best wishes,
Chris in FL
Re: The real challenge is probably… - Posted by Bill H
Posted by Bill H on April 23, 2011 at 13:49:27:
Rick is correct:
REMEMBER:
You can please all of the people some of the time.
Some of the people all of the time.
YOU CANNOT please all the people all the time.
Management of Expectations is paramount as Rick said.
EVERYBODY wants to get rich…some will…some will not.
Had a very good friend who did this for years. His advice was to prepare to be sued…someone will NOT like the results…no matter what.
PLAN, PLAN, PLAN, execute.
Good Luck,
Bill H
Re: The real challenge is probably… - Posted by iwanttosucceed
Posted by iwanttosucceed on April 24, 2011 at 01:27:37:
Thanks for your response and “warning,” but I have thought of this and I never want to lose their money or mine. I appreciate your concerns and thought, but again, can I get some help on how I can structure this? what should I do to be able to do it?
again, thanks.
Re: The real challenge is probably… - Posted by Bill H
Posted by Bill H on April 24, 2011 at 17:40:31:
can I get some help on how I can structure this? what should I do to be able to do it?
This type of information is virtually impossible for anyone to analyze here.
Nobody but you and your investors know exactly what you are tryng to do.
Nobody here is willing to take the risk of trying to set up a deal for you, have it go wrong, and get sued for your failure.
but I have thought of this and I never want to lose their money or mine
If you have NEVER lost money in real estate…YOU are not doing much real estate…all that gliters is NOT gold.
This will inevitably happen…you will lose.