4 Ways to Avoid Offering a Personal Guarantee on a Real Estate Loan

The recession, the wave of residential foreclosures, the ongoing commercial real estate market crash, and the raft of bank failures are driving a wave of loan conservatism. On the part of lenders, personal guarantee demand is higher than ever. On the other hand, borrowers are even more focused on avoiding guarantees. Neither side can be blamed, but investors still can expect under the right circumstances to avoid signing personal guarantees. How can this be accomplished?

4 actions on the part of investor can avoid personal guarantees including:

The total collateral offered by the asset,
Reduced leverage,
Restricted uses of cash flows, and
Project reserves

Banks and other lenders are seeking collateral to protect their investment covering a loan failure. Loans are expected to be a significantly lower risk than an investment. Therefore the idea is that a loan will be made good by the borrower with collateral, personal income, business income, or through the sale of other assets. Unfortunately, the recession has proven that this isn’t as simple a result when times are tough as we might have expected.

So, the key is to look at the loan process and securitization and offer lenders a solution that delivers more certainly the end they are pursuing.

In some cases, the quality of the asset is so strong that the lender will accept it without further consideration. This is why class A performing properties are so popular. Combine asset quality with an asset falling in a federally guaranteed loan program and instantly guarantees are off the table.

Over the past two years, we have watched Fannie Mae and Freddie Mac change their loan program parameters. As investors, a wise reaction is that perhaps our target projects should not rely on these solutions alone. This leads to perhaps the most proven method to avoid guarantees. Set up an investment where the collateral is perceived to stand on its own regardless of market condition. The most straight forward way to accomplish this is leverage conservatively in favor of the lender; a 50% leverage level on a conservative appraisal is attractive to most lenders with or without a guarantee if the property is a performing asset.

For REO assets and workouts and with negotiation other projects, restricting the use of cash flow to project reserves and debt pay down can offer a good means to avoid a guarantee. How this is structured can vary, but the principal is that if the asset is improving, if the cash on hand is strengthening, or if the loan balance is falling at an accelerated rate, no guarantee should be required.

The last and in some respects simplest method is lenders may forego guarantees if the cash reserve provides protection strong enough to suit their needs.

These concepts together or individually offer paths to avoid guarantees and consequently improve investor asset security.

Blake Ratcliff (US Naval Academy Graduate & Marine Officer, Serial startup entrepreneur, COO/CEO, multifamily / residential investment founder, and property manager).

Buy Real Estate With Your IRA and Use It Today?

You have seen this on the Internet and wonder, “Is it possible to use your IRA to purchase real estate that you can actually live in?” The answer to that question is NOT a simple “yes.” There are two ways to buy real estate with your IRA:

#1 Purchasing as personal property but paid for with your account

The advertising that states you can buy real estate with your IRA and live in it is not actually referring to the purchase of real estate within the IRA. What it is talking about is a little known rule for IRAs whereby you can take distributions from your Plan before reaching the age of 59 ½ years without penalty. This type of transaction is called a 72(t) Distribution.

In IRS Publication 590, included in the list of allowed distributions without penalty is one in which you establish an agreement with the IRS for you to take equal payments from your IRA account. The IRS states:

Annuity: You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 59 ½. You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply.

The payments under this exception must generally continue until at least 5 years after the date of the first payment, or until you reach age 59 ½, whichever is later. If a change from an approved distribution method is made before the end of the appropriate period, any payments you receive before you reach age 59 ½ will be subject to the 10% additional tax.

Those who sell annuities primarily market the 72(t) Distribution concept. The IRA is actually investing in an annuity that guarantees a series of payments which are taken as distributions. This is how it is used for real estate purchases:

Sellers of annuity contracts will have the individual transfer their annuity based IRA into a self-directed IRA, which in turn will purchase an annuity contract that guarantees a fixed payment in order to meet the required payment agreed upon with the IRS

The individual will find a piece of real estate and buy it using a mortgage guaranteed by their personal assets with payments from the annuity used to pay the mortgage on the property.

How is this different from real estate held in your IRA? The substantial differences are:

1. You must have enough wealth to guarantee the mortgage on the property to begin with.

2. This is not an IRA investment. The real estate is outside of your IRA. Sale of the property, unless it is your primary residence, will follow all the rules of any investment sale.

3. The IRA is being liquidated to make the distribution payment. You may not put those funds back into the IRA after taking them out.

4. There is generally little flexibility on the rate of return or how you invest the IRA after the annuity is purchased and the 72(t) Distribution election is made.

5. You will be taxed on the distributions at your current tax rate rather than at your tax rate at retirement.

6. You have a mortgage on your credit rating as well as the need to come up with a down payment.

#2 Purchasing real estate as an investment within your self-directed account

Using a self-directed custodian, you may, if you choose, buy and sell real estate within your IRA. The proceeds of each sale go back into your account, tax-free, to be used for the next purchase. There is no time limit on how long real estate is held nor is there any requirement for “like kind” purchases with the proceeds as there is in a Section 1031 Exchange. Taxes occur when you take distributions from the IRA at age 59 ½ or later, at which time they are taxed at your income tax rate at that time. With this type of investment, however, there is a requirement that this be an investment and that the IRA owner cannot use it personally while it is still in the IRA.

Which method or real estate purchase is right for you?

If your intent is to use your IRA now for the purchase of a second home to use now, for example, the 72(t) option could be for you. If your attraction to real estate is for building wealth within a tax-deferred account by buying and selling for a profit and growing your IRA, then a 72(t) is probably not what you want. The tax-deferred status of IRAs is specifically designed for the purpose of tax-free growth. You lose this status when the real estate is purchased outside the IRA and funded with taxable distributions from an annuity.

Are there other options available?

Must you purchase an annuity contract in order to take a 72(t) Distribution? The answer is no. It is possible to do a 72(t) Distribution from any IRA, regardless of the assets held. For ease of distribution, the investments in the IRA should have sufficient liquidity available to make the mandatory distributions. You, or your advisor, need only to be able to make the calculation of the required annual distribution amount. It is a relatively simple calculation, and most tax advisors can advise you. Your self-directed custodian can hold any investment of your choosing for the purposes of the 72 (t) Distribution-purchasing mortgages, income property or any cash-producing asset, for example. Consider that the purchase of an appreciating asset that also produces cash flow sufficient for your distributions may allow the account to grow for your future retirement needs while still funding the 72(t) Distribution. Making your investments inside a self-directed account allows you to keep maximum flexibility rather than locking you into the purchase of annuity contract. As an example, consider the following for your IRA:

Purchase a condo for cash within your IRA for $150,000
Your IRA rents the condo for $800 per month, which nets $700 per month cash flow into the IRA.
You determine that the required monthly distribution for a 72(t) will involve taking $700 per month from your IRA account.
You use the $700 to make payments on your “second home” mortgage.
The condo appreciates at a rate of 5% per year, making your IRA worth $190,000 in five years even while paying out the required distributions.
Your IRA is going up in value because it contains real estate.
You have your second home to use now.

Conclusion

Choosing the right option is important, especially when one of the choices is electing a 72(t) Distribution which involves a commitment to the IRS to take mandatory distributions. Seek input from your tax and financial advisors before embarking on investments either inside or outside of your IRA in order to quantify the tax consequences of the various options. For information on self-directed IRAs and the IRS rules applicable to those types of investments contact your local self-directed IRA administrator.

Catherine Wynne is President of New Direction IRA, Inc, which provides account administration and recordkeeping services for Individual Retirement Arrangements and other plans to clients who want to control their own investment decisions. New Direction is committed to providing clients and their financial advisors with the best information and quality education. We believe that informed clients will be more likely to recognize and take advantage of investment opportunities available to their self-directed IRAs and other self-directed qualified plans. We provide information not only through our web site, but also through seminars and workshops throughout the West, as well as radio shows, books and CD-ROMs.

How To Save Money On Car Insurance For Young Drivers? Read To Know

The cost of car insurance policy is determined by many factors typically examined by insurance companies online such as driver’s age, the location where he mostly drives a car on, the make and model of car, driver’s driving experience, etc. Insurance companies take into considerations these factors to figure out if driver will be a high risk. Usually, young drivers are considered risky as they are less likely to have good driving experience and skills. This is why it is challenging to qualify for cheap car insurance for young drivers. But, the interesting thing is that today many online insurance companies specialize in offering various discounts which you can earn to reduce your insurance cost or simply get cheap car insurance for young drivers. Before applying for insurance policy, it is advisable to get some knowledge about the same.

If you install security or safety devices in your car, you are less likely to get injured or your vehicle is less likely to get easily stolen or damaged. Many online insurance companies offer discounts for the same. Moreover, if you want to save money, you should think of joining a recognized driving course. This will improve your driving experience as well as skills and also could get you one more discount. One more way to get best affordable auto insurance is to drive less. If you drive less, the possibilities of accidents or similar circumstances leading to insurance claims will get reduced. Some insurance providers also offer discounts to students who score good grades. Besides, your driving location also affects insurance cost. Even make and model of car will affect what you will pay for insurance policy. Some vehicles are expensive to be insured while other cars are not too expensive.

Thus there are many aspects which you should work on to save money. But, most importantly, you need to locate insurance company which offers the most affordable auto insurance rate and also multiple discounts. One of the easiest ways to locate best insurance company in your local area which is willing to provide affordable car insurance with many discounts is to take free professional assistance of a reputable online car insurance service. These services which are closely connected with a huge online network of insurance providers that offer cheapest car insurance quotes will help you to get easy and quick access to best insurer.

The risk factor associated with you will affect your insurance cost significantly. So, it could be advisable to see if you can reduce the risk taken by insurance company by following some expert guidelines and improve your eligibility for affordable auto insurance rate. Get assisted by experienced car finance specialist to know what these guidelines are and how to get cheap car insurance for young drivers.

Log on to FreeCarInsuranceQuote.ca to get more information on young driver affordable car insurance in Canada. It offers various discount on premiums to lower down your monthly payments and helps you to save money. The interest rates are also so minimal compare to market rates. Visit us soon.

Real Estate’s Secret Niche

Real estate investing has many different facets. There is investing for the long term, the short term and our secret real estate niche.

By long term, we normally think of holding an investment and then renting it out. Most purchases for the long term are made using leverage, a small down payment and the balance covered with a mortgage. The monthly rent should cover the mortgage payments, taxes, insurance and repairs and eventually pay down or off the balance. A disadvantage is you have the ownership problems of dealing with tenants and toilets.

In the short term, there are several investment techniques. Most folks are somewhat familiar with “flipping”. You find a property that is in distress, buy it, fix it up and sell it and hopefully make a profit on your efforts.

However, there is a secret real estate niche where savvy investors are making guaranteed double digit returns. This is possible without needing to deal with tenants and all of the other problems.

A guaranteed double digit return sounds too good to be true. But, I can speak from personal experience and assure you it is true. Over the years, my wife and I have made unbelievable returns and then shared the techniques with a few friends.

This niche is tax lien certificates. It works like this: when home owners don’t pay their real estate taxes on their property the local county government puts a lien on the home. This is called a “tax lien” and usually gives them a period of time in which to make good.

Since the taxes are needed right away, someone has to come out of pocket. In this case, someone such as “you” gets the opportunity to pay the outstanding real estate taxes (often just a few $100’s to seldom more than a few $1,000). What is in it for you? The county government has set up a program that gives you a guaranteed profit to do so. There two ways for you to win.

First, you pay the taxes for the homeowner now, and they pay you back within an established period of time with interest on top of what you paid. The interest rate that is guaranteed and collected by the county government is much higher than normal, as high as 24% in some states.

Second, in the event the homeowner fails to pay you back, the county government will deed you the property, free and clear. And, all you have invested is the small amount of the taxes.

Real Estate SEO (Search Engine Optimization): Making a Smart Choice

As a real estate professional, you qualify as a prime prospect for most companies
offering real estate SEO (search engine optimization) services.

You want more sales and more listings and they want you to
believe that they can give that to you.

If you haven’t already gotten calls, emails or letters from a few real estate SEO
companies telling you that they can get your real estate website into the top ten of
this or that search engine… get ready, because they’re coming…

A lot of real estate professionals struggle with whether or not to make an
investment in a company to manage their SEO campaign.

Will it be worth your investment? Will you get burned?

There is no right decision, but there are smart ones and dumb ones.

Here are a few things to think about as you make your decision about real estate
SEO:

1. SEO is just one piece of the internet marketing puzzle. Hiring a
company to optimize your real estate website for the search engines is not
necessarily a bad thing, just understand that it is only one part of your internet
marketing plan. Focusing too much on SEO leaves a lot of money on the table.
Having good rankings makes it seem like your website will be a successful generator
or real estate leads. Not so.

In the past, search engine optimization WAS pretty much synonymous with internet
marketing. SEO WAS marketing on the internet – that was all you needed to do to
get noticed and get leads. Times are different now.

Understand that your marketing has to be right FIRST, before you even set foot onto
the internet and spend time and money bringing prospects to your real estate
website.

That means you need to identify your market, create a message suited perfectly for
them and deliver that message with the media that they are known to respond to.

That must be done before you even think about SEO.

——————

2. There are no SEO guarantees. Many SEO companies that are out there
cold-calling realtor lists often guarantee results or give the impression that there is
some guarantee of results.

There are no guarantees. Results-based guarantees from a Search Engine
Optimization company are a good sign for you to run the other way.

Don’t even waste your time talking to them.

——————

3. Listen to exactly what the company you are speaking with is offering.
Most SEO companies that call you will make bold promises about improving the
rankings of your website. Many of them are very good at what they do. Sounds
simple enough, right?

But what exactly is your goal – Good rankings or more real estate business? Don’t
get caught up in the myth that better rankings = more sales or more leads or
listings. Better rankings equals better rankings. That’s it.

In a nutshell, know that SEO is important and good search engine rankings are
important… but SEO is not a silver-bullet for your real estate business. It will not fix
your marketing and although a well optimized real estate website might bring a
flood of prospects to your door, what good is it if they never knock and ask to come
in?

——————

4. Marketing is marketing is marketing… Always has been, always will be.
The internet hasn’t changed anything about that. What the internet does do is give
you a very efficient delivery system to use for your marketing message.

Whether or not you seek outside help for your internet marketing campaign, the
important thing to remember is that you don’t abdicate responsibility for your own
marketing by “outsourcing” it. Outsourcing your own marketing, even on the
internet, is not a smart decision. After all, marketing is by far the most leveraged
activity you can possible engage in.

Marketing IS the business you are in.

You are the mastermind. You come up with the plan… THEN you hire someone to
do the implementation.

Jason Leister, the Real Estate Technology Guru ™, is owner of Computer Super Guy, LLC, a Chicago-based technology firm that helps real estate professionals profit with technology.