Why do you need private money in the 1st place for RE Investing??

Below this article you will find a link for private lender education.

Why you need do you need private money in the 1st place?

I look at real estate investing as 4 legs of a stool.

The 1st leg is finding motivated sellers. These sellers are either pretty houses or ugly houses, meaning needing no work or needing a lot of work. If they're pretty, they either have a lot equity or no equity. If they are ugly they either have a lot equity or no equity.

The 2nd leg is finding hungry buyers. These are either all-cash buyers for wholesaling, terms buyers for lease to own or owner financing.

The 3rd leg is for private lender money acquisitions. At the bottom of this article is a link to help you learn about private lender acquisitions, and how to market for them.

The 4th leg is about joint venture partners. This is where somebody puts up all the money and you do all of the work. It could be a Dr. that has an extra couple hundred grand liquid, and pays for acquisition and rehab. You do other work as the real estate investor, and generally split the net net profits.

So let's get into the 3rd leg private lender money. You need to know some terms 1st.

What is a custodian?

A custodian is a special company approved by the IRS that will let people that have traditional IRAs with stockbrokers convert these IRAs into different IRAs called self-directed IRAs or SD IRAs. Custodians do not give investment advice like stockbrokers, they only put the paperwork together and hold money in trust like an escrow account.

Prohibited Transactions and Disqualified Persons are important topics to consider when working with a Self Directed IRA.

Failing to understand Prohibited Transactions, or to find an advisor or firm that does, may lead to the disqualification of your self-directed IRA, resulting in possible taxes and penalties. This article will outline the importance of disqualified person(s), prohibited transaction(s), and common mistakes self-directed IRA owners should avoid with their self-directed IRA. The prohibited transactions rules are intended to ensure that the assets of a plan are invested in a manner that benefits the self-directed IRA itself and not the self-directed IRA owner. This is intended to prevent a person, such as the IRA holder, from using the assets of their self-directed IRA for personal benefit. It is incredibly important that the IRA holder not engage in any ‘transaction’ with his or her IRA. Consequently, transactions involving the self-directed IRA must be “arms-length” and free from any direct exploitation by the self-directed IRA owner.

What are disqualified persons?

Disqualified Person(s)

An IRA owner may not invest in property that he/she, a relative, or his/her business, already owns. Prohibited transactions are transactions that occur between the self-directed IRA and disqualified person(s). The following are, generally, considered disqualified persons.

The IRA holder
The IRA holder’s spouse
The IRA holder’s ancestors and lineal descendants
Spouses of the IRA holder’s lineal descendants
Investment managers and advisors
Anyone providing services to the plan (IRA), e.g., the IRA trustee or custodian
Any corporation, partnership, trust, or estate in which the IRA holder has a 50% or greater interest


What are prohibited transactions?
Prohibited Transactions

Understanding what constitutes a prohibited transaction is very important when it comes to making investments within a self-directed IRA. A prohibited transaction can bring into question the tax-deferred status of the account, resulting in the disqualification of the self-directed IRA and severe tax and penalties. Prohibited transactions fall into two general categories: Prohibited Investments and Prohibited Transactions. The Internal Revenue Code (IRC) defines a prohibited transaction to include any direct or indirect:

Sale or exchange, or leasing, of any property between a plan and a disqualified person;
Lending of money or other extension of credit between a plan and a disqualified person;
Furnishing of goods, services, or facilities between a plan and a disqualified person;
Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan in his own interest or for his own account, or
Act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or
Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving income or assets of the plan.

Often, self-directed IRA custodians communicate to the self-directed IRA holders that they should consider their self-directed IRA separately from themselves as individuals. It is important to understand that for purposes of the IRS code you and your self-directed IRA are separate entities whose interests are not related. Understanding this nuance will reduce the number of potential issues that may arise when you make investments using your self-directed IRA.

Common Prohibited Transactions

Borrowing money from an self-directed IRA
Using the self-directed IRA as security for a loan
Selling personal assets to the self-directed IRA
Buying property in the self-directed IRA for personal use
Purchasing property from a disqualified relative i.e. Spouse, Children, Parents of the self-directed IRA holder.
Issuing a mortgage on a disqualified relative’s residence

Penalties

When an IRA is involved in a transaction that is considered ‘prohibited’, the IRA loses its tax-exempt status and the IRA holder is deemed to have received a distribution on the first day of the tax year in which the prohibited transaction occurred. The value of the IRA is treated as if was distributed to the IRA holder and must be included in the IRA holder’s income for that year. Unless the IRA holder has reached age 59½ or is disabled, this distribution is subject to the 10 percent penalty tax on early distributions. These are hefty penalties that can rapidly diminish the benefits of the self-directed IRA.

Individuals who consider making, or have made, alternative asset investments in their self-directed IRA must be vigilant and responsible for each action they take. Becoming aware of the prohibited transaction and disqualified person rules will help them avoid tax consequences by not tripping over these fundamental rules. Individuals should contact a knowledgeable self-directed IRA custodian, attorney, CPA, or financial advisor, with a track record of working with self-directed IRA’s, for more details.

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How can you get private lender money?

Well I like to go to CPAs and give them free reports on self-directed IRAs, and asked them if they would be interested in you getting a quick 30 minute presentation on how to get 6 to 8% on their money with real estate security instead of no security with Wall Street

Here's an example of a private lender deal:

Free and clear house, needs no work, you can buy at all cash for $.80 on the dollar. You want to no money down deal.

Let's say appraisals 100,000 and you can buy it for 80,000.

You have a private lender that has not created a self-directed IRA yet.

You show them how they can cash in their IRA for $80,000 worth of stock and mutual funds and bonds, create a brand-new IRA at no penalty for a few hundred dollars called a self-directed IRA, and be a private lender, being a bank, and getting 6 to 8% on their money, and if you do not pay them on time, they can get $100,000 house, for an $80,000 investment. There will be some costs to repossess the house, but you can reassure the lender that if you default it will get the house back without a foreclosure.

See http://www.bankrate.com/calculators/mortgages/mortgage-payment-calculator.aspx

Your payment is $479.64 for 30 years with a rate of 6%.

Say Taxes are $1000 per year and Insurance is 1500 per year.

You do need to figure maintenance and vacancy.

What if market rent for this hundred thousand dollars house was $1000 a month, and your total outgoing costs were $750, including maintenance and vacancy.

You have $250 positive cash flow conservatively speaking.

Private lender marketing is an important part of real estate investing.

Ask yourself this question:

If I had access to 10 private lenders who would give me hundred percent of what I needed to buy all-cash for 80% loan-to-value properties, how much money could I make?

See http://www.briangibbonsreicoach.com/category/private-lending-training/ for free training on Private Lender Acquisition Funding Training.