S ELF -D IRECTED R ETIREMENT P LAN L OANS Presented By: 4/13/2015 Ryan Sahd Senior Vice President FirstBank 1
T WO B ENEFITS Knowing about Self-Directed IRAs benefits: 1. You – By putting your real estate expertise to work within your own Traditional/Roth IRA, SEP IRA, Solo 401(k), or HSA, you may be able to retire with more savings and/or sooner. 2. Your Business – By working with IRAs, you are opening up a new source of business, and, in many cases, you have already created the relationship!
C LIENT C ONTACT O PPORTUNITY Ask Each Client 3 Questions 1. Are you interested in investment real estate? 2. Did you know that you can buy investment real estate in your IRA? 3. Would you like me to keep you informed of investment property I come across? Nobody knows how! You can help!
T HE W INNING T EAM Real Estate Professional + Self-Directed IRA Administrator + Non-Recourse Lender = IRA with Real Estate
T AX - DEFERRED / FREE PLANS ELIGIBLE FOR SELF - DIRECTION 1. Traditional 2. Roth 3. Simplified Employee Pension (SEP) 4. Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) 5. 401(k) Plan 6. HSA – Health Savings Accounts 5
T HE IRS D OES NOT E NDORSE OR A PPROVE I NVESTMENTS … 6
Statutorily Disallowed Assets Life Insurance Collectibles any work of art, • any rug or antique, • any stamp or coin*, • any alcoholic beverage, or • any other tangible personal • property specified by the Secretary for purposes of this subsection. * Exception US Government Minted Gold Or Silver Eagle, Gold and palladium bullion
P OSSIBLE A SSETS
R EAL E STATE I NVESTMENT C HOICES • Single family and multi-unit homes • Apartments • Condominiums • Commercial property
R EAL E STATE I NVESTMENT C HOICES • Improved or unimproved land • Mortgages, lease/options • Foreign property investments • Trust deeds • Leveraged and un-leveraged property
R EAL E STATE I NVESTMENT C HOICES • Fix & Hold • Fix & Flip or Redevelop • Hold for appreciation • Short sales, foreclosures • Auctions
W AYS FOR AN IRA TO PARTICIPATE IN R EAL E STATE Hold title to Real Estate. Tenants-in-Common with a partner entity. Loan money to a borrower who uses Real Estate as collateral. Invest in an entity that is investing in Real Estate.
N O S ELF -D EALING No transactions between you or other disqualified persons and your IRA. You & Disqualified IRA persons No Self Dealing A personal benefit derived from your plan that does not come to you as a distribution is not permitted. 13
Defining Disqualified Grandmother Grandfather Grandmother Grandfather Persons Uncle Uncle Aunt Dad Mom Sister Cousin Brother Sister IRA Spouse In-Law Holder Niece Nephew Daughter Son Son Daughter In-Law In-Law Grandson’s Granddaughter’s Grandson Granddaughte r Spouse Spouse
Disqualified Persons Not just personal finances, but any entity that they own or control: • Ownership usually means owning 50% or more, but in some cases, it could be less. • Contro l usually means a financial decision maker, highly compensated individual, involved in high level entity decisions.
IRS R EG . S ECTION 4975 – P ROHIBITED T RANSACTIONS Selling something you own to or buying from IRA Lending money, extending credit to IRA Providing services for IRA – No Sweat Equity Personal (DQ person) use of plan assets Use of assets by Fiduciary Getting “paid” by your IRA 16
P ROPER T ITLING Both offer and closing documents are titled in the name of the IRA: New Direction IRA, Inc. FBO Client Name, IRA -OR- New Direction IRA, Inc. FBO Account No. 12345678 -OR- New Direction IRA, Inc. FBO Client Name , IRA, Account No. 12345678 Earnest money must be paid from the IRA or by a non-disqualified person. 17
D EBT IS A LLOWED IN IRA S BUT THE RULES ARE NOT WIDELY KNOWN . • Not all lenders lend to IRAs • Non-recourse loans only • No personal guarantees • Taxes may apply (UBIT)
W I T HE IRA – T $ A C LOSER L OOK H 4 $300,000 5 L 3 IRAs, all with the same net 0 E value. , V 0 E 0 R 0 A G $150,000 $ 150,000 $150,000 E RE IRA Stock IRA RE IRA
W HY R EAL E STATE ? 4/13/2015 There are many reasons people look to real estate as an investment tool: Maximize the return on investment Diversify investment portfolio Stabilize the fluctuations in value of investments Tangible asset they can see Have money in retirement but not enough liquidity outside retirement to purchase real estate 20
F IRST B ANK P ROGRAM R EQUIREMENTS Plan Qualifications Property Qualifications Underlying Participant Qualifications 21
F IRST B ANK P ROGRAM R EQUIREMENTS 4/13/2015 Plan Qualifications Self-directed plans should be in place prior to application Only single member plans or member/spouse are allowed. No multiple employee plans. Often, separate plans can partner together to purchase a property. Plan documentation is subject to review and approval by FirstBank attorneys. Liquidity in the plan is a necessity. 22
F IRST B ANK P ROGRAM R EQUIREMENTS 4/13/2015 Property Qualifications 1-4 family residential properties and quality commercial properties are eligible. Properties may be located throughout the Front Range from Colorado Springs to Fort Collins, as well as select mountain communities. 75% of projected rents must cover PITI payments (for 1-4 family residences). No lease is required at closing (for 1-4 family residences). Commercial properties may be subject to pre-lease requirements. Maximum Loan-to-Value (LTV) and Loan-to-Cost (LTC) is 65%. 23
C ASH F LOW C ONSIDERATIONS 4/13/2015 Purchase Price - $200,000 (3bed 2 bath SFR) 65% Mortgage - $130,000 35% IRA Contribution - $70,000 + Closing Costs Monthly Rent - $1,400 Minus 25% in Expenses* - $350 Discounted Rents - $1,050 Monthly PITI - $924 (PI = $708) Coverage Ratio - 1.13 (1.0 minimum) Net Cash Monthly Cash Flow - $126 Net Annual Cash Flow - $1,512 (Goes back into IRA) *25% expense factor accounts for vacancies and upkeep. Remember, all expenses need to be paid for out of the IRA, which is why initial liquidity and ongoing positive cash flow is key. Long-term tenants and properties with low upkeep will increase annual cash flow. 24
G ROWING Y OUR IRA (S EVEN Y EAR G ROWTH E XAMPLE ) 4/13/2015 Initial Asset Value: $200,000 Initial Leverage: $130,000 Initial IRA investment: $70,000 Loan balance after 7 years: $114,617 Conservative 7 year cash flow earnings: $10,584 Asset Appreciation (at 5% per year): $70,000 7 year asset liquidation value (Net of Sales Cost): $253,800 Effective IRA balance after 7 years: $149,767 ($253,800 - $114,617 + $10,584) IRA grew $79,767 in 7 years, which is an average growth rate of 13% 25
S TEP -B Y -S TEP 4/13/2015 1. Submit personal financial statement to FirstBank 2. Transfer funds to qualified custodian 3. Have custodian send IRA statement and disclosures to bank 4. Prequalification letter issued based on statement balance 5. Make offer and go under contract with IRA as purchaser (i.e. NDIRA, FBO John Smith, IRA) 6. Bank generally needs an additional week to close, all other dates are standard 7. 1 week prior to closing, IRA beneficiary reads and initials off on all loan documents 8. All documents then sent to the custodian for signing (remember the custodian is the borrower) 9. Documents sent to title company for real estate closing 26
F IRST B ANK P ROGRAM R EQUIREMENTS 4/13/2015 Underlying Participant Qualifications Although you cannot personally guarantee the loan it is important for FirstBank to understand the character of the underlying participant. An analysis of personal debt service, net worth, and credit is required (Personal Financial Statement) The underlying participant(s) must meet minimum credit standard of a 680 fico. 27
F IRST B ANK P ORTFOLIO L OAN A DVANTAGES Local underwriting and decision making No limits on number of properties Efficient process Local loan servicing FirstBank is a relationship lender, not a transaction oriented bank
P ORTFOLIO M ORTGAGE L OANS FIRM-5 & FIRM-7 (ARM) terms available 30 year amortization No balloons Stable index (1-year U.S. Treasury Index) Annual and Lifetime caps on rate adjustments 5, 7, 10, year fixed Acceptable collateral properties: 1-4 Family, townhome, and condominiums
M ORTGAGE M ODIFICATION Modify your FirstBank interest rate to the current market rate for any portfolio product. No underwriting required 1% modification fee + $250 doc prep fee Amortization doesn’t change unless accelerated term is selected Processing takes two-three weeks No appraisal required
F IRST B ANK H ISTORY Began 1963 in Lakewood, CO Family and employee owned Grown organically – Slow and steady Largest locally owned bank in Colorado Over 130 locations in Colorado Branches in Arizona and California
Q UESTIONS 4/13/2015 32
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