2019 – Page 13

A Lesser-Known Source of Funding for Real Estate Investments

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Some real estate investors who have missed out on investment opportunities in the past due to lack of funding are learning they have the money—in their retirement accounts. Ohio resident David had grown frustrated during the past few years after having a couple of potential real estate investments fall through due to a lack of funding. In the fall of 2016, another opportunity presented itself. David learned of a pre-foreclosure property nearby that was being auctioned off. He knew that being able to make a cash purchase would increase his chances of winning the bid. This time, David was ready. Through research and discussions with his financial advisor, he learned that he had the funding to purchase the property. He could purchase it in his retirement fund. Best-Kept Secret for Real Estate Investors Investors can use self-directed IRAs and other retirement accounts to invest in a variety of assets, in addition to stocks and bonds that most investors know. Alternative investment options include real estate, tax liens, promissory notes, private entities and more. Self-directed accounts include the Individual Retirement Account (IRA), Roth IRA, 401(k), Simplified Employee Plan (SEP) and Savings Incentive Match Plan for Employees (SIMPLE), as well as Health Savings Account (HSA) and Coverdell Education Savings Account (CESA). With a self-directed account, money from an IRA or other retirement account is used to invest in an asset, and all profits and expenses flow through the retirement account. Tax advantages may include tax-free or tax-deferred growth within the account. Though David just recently learned about the concept, self-directed investing is nothing new. Since IRAs were introduced in 1974, the IRS has only listed a handful of items that are not permitted in an IRA (the entire list can be found in IRS Publication 590). Self-Directed Investing Gains Favor Like David, other real estate investors are becoming aware of the possibility of self-directed investing. After years of investing in real estate, Lowell of California learned about the concept in 2013 and decided to transfer his 403(b) account into a self-directed IRA. He then acquired a bank-owned property for just over $85,000. Lowell rented the property for two years, providing consistent cash flow and growth back to his IRA, until the property sold in December 2015. Between the rental income and the sale price, the property generated nearly a 77% return on investment (ROI). An experienced real estate investor, Lowell prefers the idea of using his IRA over borrowing to fund his investments. “Since my IRA now owns each property, I know that even if a property sits vacant, I am not losing money other than the necessary costs of insurance and taxes,” he says. Laurie of Colorado learned about self-directed investing from her father, who is a real estate agent. She opened a self-directed IRA and partnered her IRA with funds from her non-IRA LLC to buy a condo. Her husband’s IRA partnered with the LLC to buy another condo. As soon as she has enough saved in her IRA from renting or selling the condo, Laurie plans to invest in a property 100% in her IRA. “I wish I could do more self-directed investments,” she says. Real Estate Investing Indirectly with Retirement Accounts For those who prefer not to directly invest in real estate or other assets, a self-directed IRA’s versatility allows for other possibilities. For example, some investors boost their retirement savings by loaning IRA money to other investors. Susan from New York recently partnered with family members’ IRAs (three total) to loan a real estate investor money to rehab a house. She used a third-party servicer to structure the promissory note. During a 14-month term, the note yielded a return of over $42,000, a 25% ROI. Susan recalls being delighted to learn about the possibility of investing in alternative investments with her retirement account. “To my surprise, I discovered there were many nontraditional assets such as real estate, tax liens and promissory notes that our retirement dollars could invest in using a self-directed IRA,” she says. Self-directed investors aren’t limited to only investing with other self-directed investors. Christine from California is one of a group investing in a hotel being rehabbed in Ohio. She is funding her portion of the investment from her IRA. The IRA receives monthly income from room rentals, and Christine expects her IRA to receive a profit of about 25% once the hotel is sold. How to Get Started With Self-Directed Investing As with any investment, due diligence is key, and you should be sure to consult with a tax, legal or financial professional before making an investment decision. In addition to the list of investments not permitted in an IRA, the IRS provides information in IRS Publication 590 regarding: Disqualified individuals Indirect benefits Unqualified Business Income Tax (UBIT) Only certain custodians offer self-directed accounts because the required reporting and recordkeeping is unique. Equity Trust Company is one such custodian. Through its predecessor company, Equity Trust began offering self-directed accounts in 1983. *** The above case studies are for educational purposes only. Past performance is not indicative of future results. Investing involves risk, including possible loss of principal. Information included in the above case studies were provided by the investor and included with permission. Equity Trust Company does not independently verify all information provided by third parties. Equity Trust is a passive custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional. By Kent Kinzer Suggested Posts Perspective Grow Your Network, Grow Your Business by admin 0 Comments Profile Jeff Tesch Take the Reins at RCN Capital by admin 0 Comments Profile Jeremy Brandt: The Innovator Who is Making a Difference by admin Comment Off Regional Spotlight Kansas City: Stable Growth in a Hot Market by admin Comment Off Perspective It’s Time for a Checkup From the

Asset Protection: That Thing You Should Have Done Yesterday

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Besides knowing the cost of the insurance, be aware of “gotchas” that can ruin you financially. There are more than 30 million lawsuits filed in the U.S. each year. If you own a home with equity, a business, rental income property or have large sums in stocks, bonds and cash, then you have a target on your back. It is human nature to think nothing bad will ever happen to us. The reality is that life is full of curve balls, and families and businesses get hurt. Wealth is not automatically protected against lawsuit-hungry individuals and companies, which is why asset protection planning is critically important. When structuring your personal and business assets, always think defensively by protecting your wealth, investments and business intellectual property. When people hear the phrase “asset protection,” they often assume it’s something that’s necessary only for the ultrawealthy. In other words, they mistakenly believe that individuals of more modest means have no reason to enlist the services of an asset protection attorney. Lawsuits and financial catastrophe can affect anyone, regardless of the value of their assets or their situation in life. Getting Started Proper asset protection is not as easy as zooming over to a legal do-it-yourself website. Creating defensible legal shields around your financial castle requires a skilled team that specializes in asset protection law. Importantly, remember that asset protection is not an “after-the-fact” solution. You cannot call the insurance company when your house is on fire to ask for more insurance coverage. Legal asset protection works the same way. You must get organized when the seas are calm. The most prudent course of action is to include asset protection as part of your big-picture financial plan. You work hard to build your assets. All that effort is a waste if they can be taken from you in one fell swoop. To be effective, proper protection must be in place before you are sued. Sometimes, protecting your assets involves acquiring additional insurance to protect against accidents and risks. Other times, a well-drafted estate plan can be used to ensure assets are properly protected against future claims against you. How to best protect your assets can be determined only after a competent asset protection planning attorney evaluates your situation. Sometimes, misconceptions and misunderstandings about legal matters can result in people foregoing important rights or jeopardizing the valuable property they have worked a lifetime to obtain. The field of asset protection planning is no different. Confusion about the work and service provided by an asset protection planning attorney leads many people to procrastinate until disaster strikes and property is threatened before they seek the help of a lawyer. Unfortunately, due to laws in California and elsewhere, it is usually too late to protect assets once an event has taken place. Procrastination is the enemy of good asset protection. Asset Protection and Real Estate Nowhere is asset protection procrastination more prevalent than in the world of real estate investing. While real estate is a great way to store wealth and create streams of passive income, it does come with myriad strings attached. Unlike stocks or bonds, real estate often requires a “hands-on” approach and exposes an owner to significant liabilities. For example, the mailman will never slip and fall on your Apple stock. Here is a sampling of situations where an owner may incur liability for their property: A tenant trips and falls down a flight of stairs due to a defective handrail A tenant’s child drowns in a pool that isn’t adequately fenced off A branch on a tree on your property that hasn’t been adequately trimmed falls on a third party’s car An environmental survey reveals significant mold or chemical contamination on your property that needs to be remediated These are all situations that could involve a lawsuit or a claim against your insurance. In certain examples, the liability may be so great that insurance doesn’t cover it, allowing the injured party to come after your investment properties or even your personal assets. The question here is “How do you reduce this risk?” Working from an estate planning context, the goals for investment real estate would be to: Protect ourselves from liability while we are living. Preserve our assets to maximize what we pass on to our children or other beneficiaries. Make it as easy as possible for this transfer to occur upon our passing. One simple and relatively inexpensive way to reduce the liability on investment property is to purchase an umbrella policy. An umbrella policy provides additional coverage above and beyond your primary policies. For instance, if you have insurance on your investment property for $300,000 and an automobile policy with limits of $500,000, a $1,000,000 policy will increase those limits $1,300,000 and $1,500,000, respectively. This provides a greater cushion in case you incur a significant judgment. Another way to protect yourself is to create a limited liability company (LLC) to hold your real estate. An LLC is a legal entity that provides significant benefits to its members. The primary benefit is that the liability of the owners of the LLC is limited to the assets of the LLC and does not extend to the personal assets of the owners. Let’s say a tenant falls down a flight of stairs, suffering severe injuries. In that case, the tenant can only go after the property held in the LLC. He can’t get at your personal home or other investments that you have outside of the LLC. If you have multiple properties, you can create multiple LLCs to maximize the amount of protection you have. Another benefit of LLCs is that they can be seamlessly blended into an existing estate plan. It is relatively simple to transfer LLCs into a living trust to allow your loved ones to manage things in the event of your death or incapacity. Furthermore, as you acquire more assets and build your net worth, you may want to start transferring some of your assets to your children to reduce

Using Insurance to Preserve Lender Capital

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How much more capital would your investors provide if you exceeded expectations for preserving their capital? Warren Buffett, the Oracle of Omaha, has a Golden Rule: “Rule No. 1 is never lose money. Rule No. 2 is to never forget Rule No. 1.” The standard investment rule Buffet follows is to preserve investor capital. This seems like a very easy rule to follow, yet most lenders never get past the numbers in their prospective deals. You probably did a great job underwriting the loan. You have the right to foreclose for nonpayment, and you may have even cross-collateralized against the borrower’s other properties. Did you forget something? Did you underwrite the risk in your borrower? Buffet tries to preserve investment capital, so should you as a lender try to preserve your capital? Absolutely yes! Once your loan is closed, will your borrower protect you and your investors? Most likely, no. Once you fund your deal, your borrower’s interest or need in you is over. This makes your borrowers the greatest risk to your loan portfolio. Builder’s Risk, Worker’s Comp and General Liability Coverage Simply put, what can go wrong, will go wrong. Consider your typical fix and flip borrower. The borrower provided information that allowed you to provide funding, including proof of insurance. Is the proof real? Is the policy currently in force? Is the coverage right? Some borrowers believe that a standard homeowner’s policy is all that is needed. Yet there is a vast difference in builder’s risk coverage and a standard homeowner’s policy. The traditional agent provides a homeowner’s policy that will not cover a typical, non-owner-occupied property. That is not the type of policy this lender needs. In addition, if this borrower was also the contractor, as a lender, you should have received a copy of your borrower’s workers’ compensation policy and general liability coverage too. Missing any of these important coverages could result in your borrower being sued and defaulting on your loan, leaving you and your investors holding an empty bag. Force-Placed Coverage Another common mistake for newer lenders is overlooking force-placed coverage. These are coverages for when the borrower’s insurance is cancelled, has lapsed or isn’t sufficient. First, force-placed coverages are expensive. Second, insurance carriers know that when you as a lender are force placing the required coverages, the relationship between you and your borrower is already in the proverbial toilet. Most insurance carriers want to know about your loan portfolio long before a loan is in trouble. Usually, your initial application is a disclosure about your loan portfolio. Consider the difference between a lender who has only two loans and both loans need to have force-placed coverage and a different lender who has 100 loans with only two properties requiring force-placed coverage. One of these lenders cannot underwrite. Who do you think the insurance carrier will accept? A different force-placed problem happened recently to a “new” lender in Las Vegas. The lender funded a short-term purchase loan. The borrower did initially provide a homeowner’s policy. A few months into the loan, payments stopped. Unfortunately, this lender made a key mistake. The loan included language allowing foreclosure for nonpayment; however, the note never required the borrower to maintain liability coverage. In this specific case, the lender could not force place the coverage because the contract did not state that as a condition of the loan. Eventually, after multiple court appearances, the lender was able to foreclose. The lender still needed to evict the borrower. Yes, a different court venue was needed to evict. By the time the lender got the house back, the house was missing all copper plumbing and wiring. Rehabbing the house the second time was entirely on the lender’s dime. Key Person Insurance Insurance cannot be used to guarantee an investment gain. What kind of coverages can a private lender require of their borrowers? Before that question is answered here, a quick review of other lenders is needed. The conventional lending world offers credit-life and credit disability-sickness coverages. You might have heard about that coverage. It is called mortgage protection insurance. Credit life cannot be a condition of receiving a conventional loan. Remember, these policies do not pay the lender “if” the borrower just decides to stop paying. The borrower must die or get sick for the lender to be paid on “credit” policies. Additionally, U.S. Small Business Administration (SBA) guaranteed loans above certain thresholds require key person coverage on the borrowers. Key person could be life insurance or disability-sickness policies on the borrower. The lender is the loss payee. Why place key person coverage on the borrower? Statistically, loss of work resulting from an injury or sickness is still one of the leading causes of foreclosure in the U.S. If your borrower cannot work, he or she cannot earn income, complete their project or more importantly, pay you back. For any risk you see as a lender, you may be able to seek insurance coverage. The ultimate benefactor of any insurance on a loan are your investors. The bottom line? As lenders, you underwrite the loan, and the insurance solutions you place on the loan preserve lender capital. Why would a private lender require key person coverage when you already have the right to foreclose for nonpayment? The answer is simple: How long do you want to wait before you get paid back? Foreclosure rules vary by state and municipality. Plus, the borrower’s family could get involved, making foreclosure time-consuming and costly. Key person coverage offers lenders an alternative source of repayment. Choosing which types of insurance coverages you, as a lender, should require on your borrowers is based on the risk aversion of your investors. How much more capital would your investors provide if you went above and beyond expectations when preserving their capital? Above all, finding a solutions provider that thinks out of the box and focuses totally on the private lending world is key. Insurance agencies and providers are specialized. Be wary of the insurance partner

Grow Your Network, Grow Your Business

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Why strategic relationships will take your company to the next level Everyone knows the phrase, “It’s not what you know, but who you know.” In the mortgage industry, this is especially true. In an industry that relies heavily on referrals and word-of-mouth recommendations, it is surprising how often companies overlook the importance of developing strategic partnerships and underutilize existing relationships. Although identifying and establishing connections with potential partners can involve a great deal of work, when done properly, the benefits easily outweigh the effort. Cultivating strong referral relationships should be a top priority for any company in our industry. It is a highly effective way to increase the visibility of your business and grow your customer base without straining your marketing budget. What Do You Want to Accomplish? For those just starting out, forming strategic partnerships may seem a bit daunting. However, the first step is simple: Determine why your organization is looking to form these alliances. Once you figure out what you want to accomplish, you can start researching which potential partners align with your goals. Researching prospects will typically be one of the most time-consuming parts of this process, but it is a crucial step in finding the right partners. Here are some key factors to consider when seeking out potential partners. What commonalities exist between your company and potential partners? Seek out companies that offer products or services that cater to a similar industry or niche. This increases your chances of working together because these companies will have a similar customer profile. They can also easily identify what customer needs exist in the space. When you initiate the discussion of forming a strategic partnership, they can tell immediately if this is an opportunity that will benefit their clients. Another factor to consider is the nature of the business itself. Does this company provide a product or service that complements your business? For example, if you are a lender that specializes in real estate investment loans, partnering with a company that provides proprietary data on foreclosure inventory throughout the country is a no brainer. Finding a partner with a complementary product or service allows you to provide additional value to your customers with minimal effort. You are giving them access to additional resources they might not otherwise have just by working with you. This creates a clear advantage over your competitors. A final factor to consider is this: Are the companies you perceive as competitors truly your competition? One of the most common mistakes companies make is overlooking a potential referral partner because they assume they are a direct competitor. Much like your company has a specialty, a “competitor” also has their established niche. There are often things that your competitor can’t or won’t do, which creates a unique opportunity for your business. For example, RCN Capital has established referral relationships with numerous other lenders that, on the surface, seem to offer similar loan programs. However, maybe these lenders can’t lend nationwide and receive loan requests from states they can’t do business in. The lenders will send those requests to RCN. RCN will reciprocate by sending requests for programs we don’t offer, like loans for small-balance commercial properties, to those lenders. These pseudo-competitors often make the best referral partners because their customer profile is nearly identical to your company’s. Plus, you have an additional resource for customers that may be looking for something you aren’t currently offering. Approaching Potential Partners Once you’ve completed your research and identified potential partners that align with your goals, it’s time to pitch the idea of a partnership to your prospects. When drafting a proposal, clearly outline the benefits for all parties. It can be easy to focus on what benefits you want the other company to bring to the table, but to form a long-lasting relationship, you must create a win-win scenario for both sides. Developing a mutually beneficial partnership often starts by initiating an open conversation with your referral prospect. Start by highlighting the synergies that exist between your companies. Discuss the mutual goals a partnership could accomplish. From there, develop a plan of action with clearly defined deliverables. Remember to consider how much effort will be required from each company to achieve these objectives. Potential partners may not be able to devote as many resources as you may think, so it’s important to be flexible with your ask in these situations. If either you or your prospect are concerned the partnership would tax company resources, come up with a plan that starts with smaller deliverables spread out over a longer period. You can agree to revisit and modify the partnership on a quarterly basis once you know what is and isn’t working. It is common for partnerships to start slow and ramp up over time. Finally, once you have come to a verbal agreement, put everything in writing to protect both companies. Putting the agreement in writing also gives everyone one more chance to review the terms of the agreement before proceeding. Things that weren’t taken into consideration in your initial discussions might come to light when other members of the company review the agreement. A written agreement not only solidifies the terms of your partnership but also helps provide future clarity for the relationship. The agreement gives both parties something to refer to should there be any question of what needs to be done and when it needs to be accomplished. There is nothing wrong with including language stating the agreement can be amended at any time to allow flexibility and room for the partnership to grow. Communication Is Key Once your partnership agreement has been executed, it’s smooth sailing, right? Yes and no. One of the most important things to remember is that communication is key to maintaining a successful partnership. Many referral relationships fail because of lack of communication. Never assume that no news is good news. You took the effort to initiate a partnership, so make the effort to maintain it. As your referral relationship

Jeff Tesch Takes the Reins at RCN Capital

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To achieve continued success, he’ll rely on the same principles that have established him and the firm as industry leaders. It was early 2010. Jeff Tesch received a phone call from Don Vaccaro, co-founder of RCN Capital. Vaccaro wanted Tesch to help him run a new private lending company. Nearly four million foreclosures had been filed the year before, due to the 2008 housing crash. Institutional lenders had responded by tightening lending requirements. With traditional funding restricted, private capital was becoming increasingly more important. Vaccaro recognized the opportunity. He had built a successful software company and had the money to lend to fix and flippers. He believed the newly formed company would be a place where his money was secure, and he could control the return on his investment. And he knew he wanted Tesch, an old acquaintance, to be part of the new venture. So, he invited Tesch to become managing director. “I knew Jeff. He had management experience with his Subway franchises, had invested in real estate and had some prior banking experience,” said Vaccaro. “Jeff makes decisions based on empirical data, rather than assumptions. He can simplify a discussion into a few key words, and I like that.” Taking the ReinsFast forward nearly a decade, and RCN Capital (originally named Rehab Cash Now) will welcome Tesch as its new chief executive officer on July 1. Vaccaro, will officially resign as CEO, leaving the company in Tesch’s hands. From the beginning, Tesch has established RCN as a national brand in private lending while creating industry-wide best practices and a customer-centric approach to lending. Tesch learned the importance of maintaining a company brand right out of college, when he purchased a Subway franchise while still in his early 20s. “I won’t say it was turnkey, but they had everything figured out for you,” said Tesch. “So, it was really all about you marketing your business, hiring the right employees and painting the brand.” Tesch said the No. 1 thing college did not teach him about business was the human resource element. “None of that was really taught to me in college. I kind of learned that on the fly. … I figured out how to promote people to an area of responsibility, make them empowered and give them the ability to make their own decisions,” he said. Aside from hiring the right people, Tesch knew it was equally important to ensure a great customer experience—another lesson from his days as a franchisee. “You can be the best marketer in the world, but if you don’t have those great repeat customers, that would be a real problem.” Years later, Tesch would transfer all these skills to the lending world. Subway Leads to Real EstateTesch eventually owned seven Subway franchises. With the profits from his restaurants, he began to invest in real estate. As a borrower of money, Tesch learned what not to do. “What I realized was using private lending or hard money was a very unsatisfying experience. So, when we went to start RCN in 2010, I took that knowledge of how to treat customers and made that the basis of how we were going to build this lending company,” Tesch said. “How would you be treated when you went and applied for a loan? How would you be treated when you got a commitment letter? How would you be treated at the various points in the process of dealing with the company?” Tesch used the answers to these questions to structure the RCN customer experience models. That customer-centric approach distinguished RCN in the private lending space, he said. Tesch ensures his employees deliver excellent customer service at every point—that they offer the same pricing they quote, close loans on time, distribute rehab draws quickly, expedite wire transactions and send payoff letters in a timely fashion. “All those different items are how a customer grades the lender experience,” Tesch said. “If our prices aren’t competitive and we don’t treat our customers the right way, they will drive on down the road.” A Conference MeetingDuring the first year, the company was mostly making loans in and around the Northeast, where antiquated real estate laws can be restrictive for investors. Tesch knew that to scale the company, he needed to be able to close loans nationwide. The first issue he had to solve was how to get valuations on multiple properties around the country. Tesch found the answer shortly afterward at a mortgage conference in Las Vegas, when he met the CEO of Appraisal Nation, Mike Tedesco. The pair found an immediate connection through their mutual love of ACC basketball. “From there, Mike went on to explain what they do as a company,” said Tesch. “And that was how we solved our first big problem, which was getting valuations and in every county across the nation.” Tedesco said the synergy between the two created a valuable partnership. “For us, Jeff was a huge advocate. We provided a conduit to gain access to other markets, and Jeff helped us grow the private lending space.” Strong friendships developed between Tesch and both Tedesco brothers, including John Tedesco, senior vice president of Appraisal Nation. “Jeff has a high level of integrity, vision and leadership,” said John, the older Tedesco. Mike Tedesco played up Tesch’s young, vibrant energy: “Jeff has all these multiple facets to him. He is a successful businessman, but he likes to have fun. He knows more about techno music than my 22-year-old son.” Tremendous EnergyMike Tedesco said Tesch brings “tremendous energy” to his relationships. He’s a master at establishing key partnerships and believes they are essential to growing a business. Tesch credits close friend and attorney Jon Hornik for resolving the second hurdle on RCN’s path to expansion. Tesch needed an expert in private lending who would ensure proper execution of the loan documents and adhere to the laws in each state. While attending a hard money lending conference in Florida, Tesch met Hornik. “He was well-versed in the nationwide

HomeLight Acquires Eave

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Real estate technology platform HomeLight, based in San Francisco, has acquired Eave, a digital mortgage startup with a proprietary software platform that automates 70 percent of the mortgage process. Additionally, HomeLight has launched a home loans division that will operate in six states, including California, Colorado, Washington, Oregon, Pennsylvania and Texas. HomeLight is a resource for home sellers and buyers who use its Agent Matching service to hire real estate agents and its Simple Sale™ product to tap into a network of pre-approved cash buyers. It has helped list more than $10 billion in homes. The company has more than 150 team members across offices in San Francisco, Scottsdale, Brooklyn and Seattle. The acquisition of Eave allows HomeLight to offer products and services across the complete buying and selling cycle, from search to close. Eave offers a full underwrite in just 24 hours, a 30-minute application, guaranteed 21-day close, low interest rates and experts to guide clients through the process. Both companies built their technology platforms from the ground up in order to solve specific pain points throughout the home buying and selling process. “We’re thrilled to bring Eave’s stellar product and team into the HomeLight family,” said Drew Uher, founder and CEO of HomeLight. “By harnessing Eave’s proprietary mortgage technology, we believe we can significantly improve the home-buying process for everyone involved: buyers, sellers and agents alike.”