Private Money Blueprint
Coaching Program
Module 6 – Using IRA Money and
Pooling Funds
Communicate With Us
• Susan –
[email protected]
• Trevor –
[email protected]
• Patrick –
[email protected]
My Background
• Started investing in real estate in 1994 • Started in mortgage business in 1999 • Opened my own brokerage in 2002 • Began raising private money in 2004
– First one to one, fractionalized then private mortgage pool to make rehab loans in CO
– Funded more than $24MM in rehab loans in 4 years with private money all raised by me and one loan officer
• Closed residential divisions of Lassiter Mortgage in September 2008 including the private lending division • Coaching, commercial consulting/financing, speaking
and REI training.
Our Agenda
• Pooling Money from Private Lenders
• Pooling Vehicles
• Using IRA Money for Your Investments
• Self-Directed IRA’s (SDIRA)
• Working With SDIRA Lenders
Pooling Money
• BE CAREFUL!
• Employ an attorney or professional
advisory service
• Three Best Ways to Pool
– Fractionalized Note
– Syndication
– Private Placement Memorandum (SEC
Exempt Filing)
Fractionalized Note
• 10 or fewer investors in a trust deed investment • Check your local statutes
• In CA, governed by statute Section 10229 of the Business and Professions Code. • Each investor receives certified copies of the original promissory note and deed of trust along with copies of the title insurance policy and fire insurance endorsement. • A Fractional Interest Note and Deed of Trust is held as an undivided interest with the
investors named on the Note, Trust Deed and Title Insurance Policy. • No more than 10 persons who meet the criteria of income or net worth may be
fractionalized in a transaction. • Qualifying questions are either:
– My investment in the transaction does not exceed 10% of my net worth, exclusive of home, furnishings and automobiles, or
– My investment in the transaction does not exceed 10% of my adjusted gross income for federal income tax purposes for my last tax year, or in the alternative, as estimated for the current year.
• Regardless of the investment amount, the purchasers (investors) shall have identical rights to:
– Lien Position – Foreclosure – Interest Rate (prorated)
Syndicate
• Syndicate! The REI buzzword of 2009. • Equity partner – gets a piece of your deal. • You and your equity partners form an LLC. • You are the manager (syndicator) and they are the
members.
• Make sure you spell out clearly in the operating agreement how distributions and disputes are handled. • You may get an “acquisition fee” and/or a management
fee
• This is how the commercial deals get done.
• One of my clients raised $2MM from 9 equity partners to purchase 156 units in Kentucky
Private Placements - PPM
• "Regulation D" is a United States Federal program created under the Securities Act of 1933, indoctrinated in 1982, that allows companies the ability to raise capital through the sale of equity or debt securities.
• There are 3 basic "Rules" which are relied upon to raise capital. These rules allow for different amounts of capital, different types of investors and different methods for conducting an offering: 504 (up to $1 million), 505 (up to $5 million) 506 (ANY AMOUNT) • The Reg D programs were designed to provide an exemption to sell
securities privately without registering the securities and also to provide the appropriate documentation for properly accepting and using the capital.
• Online Resources: RegDResources.com, GrowThink.com, PPMFast.com
Types of Reg D Offerings
• There are 2 basic types of Regulation D Offerings
(which can also be combined)
• An "equity" offering is where the company sells partial (or a majority) ownership in the company (via a security, stock or LLC membership units) to raise capital. The investors receive a return when the company profits and those profits are shared.
• A "debt" offering is where the company raises debt financing by selling a promissory note to investors with a set annual rate of return, and a maturity date for when funds will be paid back to investors. A debt offering is much like a business loan, but instead of a bank providing the financing, a group of investors lends funds to the company.
Reg D Offering – Step 1
• Pre-Offering Stuff:Most real estate investors are not professional money raisers. Your credibility is key and a Reg D offering communicates professionalism.
• The very first step in an offering is properly setting the structure
• Structuring usually includes: – setting share price or note amounts – determining how many “units” or “shares” to sell – which Reg Dprogram to use
– setting the maturity date and rate of return for promissory notes (in debt situations)
– share allocations to principals (so they maintain a set amount of control in the company)
– minimum and maximum offering amounts which set the effective range of the offering, minimum amount of investment per investor, etc.
Reg D Investing – Step 2
• Document Creation:Preparing an offering involves the creation of the following Regulation D offering documents:
– Private Placement Memorandum: The Private Placement Memorandum, or "PPM", is the document that discloses all required information to the investors about the company, proposed operations, the transaction structure, the terms of the investment (share price, note amounts, maturity dates, etc.), risks involved, etc. – Investor Questionnaire:This is completed to determine if they are an accredited or unaccredited investor,
how much they plan to invest and where it is coming from.
– Subscription Agreement: The Subscription Agreement explains the terms and conditions of the offering. It is the "investment contract" for purchasing the securities. Typically an investor will complete this document. and then attach a check for the investment.
Promissory Note: In debt offerings you need to have a Promissory Note outlining the terms of the loan arrangement with the investors. The note is the actual "loan document" between the company and the investor.
Form D SEC Filing: The Form Dis the form filing that is sent to the SEC in Washington, DC. It notifies the SEC that you are using the Regulation D program and provides them basic information on the company and the offering. This is not an approval document or registration, it just notifies the SEC that you have a Regulation D Offering in place.
State Form Filing: Most states require a specific form to be filed along with a copy of the SEC Form D and the PPM. Nearly all states charge a fee ranging from $50 to $495. In most states the form does not need to be filed until capital has been received from an investor in that state. After receiving the capital you typically have 15 days to file the appropriate documentation.
Reg D Offering – Step 3
• Marketing – Be Careful!
• A fundamental requirement of Regulation D is that there be no general solicitation or advertisementused in connection with the solicitation of an investment.
• NO ONE will give you a straight answer to “what is a general solicitation?”
• You may not provide offering materials on a website, unlessthe offering materials are only provided to prospective investors who have a pre-existing substantive relationship with the issuer • Issuers establishing websites are advised to keep nominal
information on the home page of a website, indicating the name of the issuer and requesting the viewer to provide their name and password to access additional information on any interior page. • The interior pages of the site are only available to prospective
investors that complete a questionnaire establishing that they are "accredited investors."
Accredited or Sophisticated
• In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following:
– Earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income. – Have a net worth exceeding $1 million, either individually or
jointly with his or her spouse.
• A sophisticated investor is the type of investor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.
– Typically, a sophisticated investor must have either a net worth of $2.5 million or have earned more than $250,000 in the past two years to qualify.
Plan Assets Rule
• Plan Assets Rule
• The rule is that if more than 25% of the fund is
funded with pension plans (i.e. 401(k) and
Profits Sharing), IRAs, Keoghs, SEPs, etc., the
fund's assets will be treated as "plan assets"
themselves.
• Our attorney said that was bad.
☺
• We chose to limit our plan assets to 15% to be
on the safe side since we had a dividend
reinvestment option.
Rule 504
• Provides an exemption to raise a maximum of $1
million in a 12 month period.
• You can raise only $500,000 by the sale of securities to persons residing in the states of Montana and Alaska, which have no disclosure laws applicable to the offering. • For the states that do have disclosure laws, which are 48
out of the 50 states, a business can raise up to $1,000,000.
• Rule 504 has no disclosure requirements, no limit on the number of purchasers, and no investor sophistication standards.*
• Rule 504 is the most commonly used Regulation D exemption as an intrastate offering i.e. 80% of the investors and the project reside in the same state.
Rule 505
•
Provides an exemption to raise a
maximum of $5 million
in a 12 month
period.
• This exemption limits the number of
nonaccredited investors to 35 but has no
investor sophistication standards.
Rule 506
•
Provides an exemption for limited offers and
sales with no maximum dollar amount of the
offering.
• This exemption does not limit the number of
accredited investors, but the number of
nonaccredited investors may not exceed 35
investors.
• All nonaccredited investors must be
sophisticated.
• The sophistication is determined with an investor
questionnaire
My 506(d) – Mortgage Pool
• We offered a PPM to make rehab loans in Colorado• The PPM contained information about the financial characteristics of the borrowers and the transactions that took place in that pool.
• This is not for the faint of heart or anyone that has no cash. I spent over $10,000 having our PPM prepared by a local attorney.
• When just starting out before you have a track record, just do one to one or small syndication deals and NEVER TOUCH THE MONEY!
Using IRA Money
• You or your investors can utilize previously untouchable money to invest in real estate by rolling it over into a self-directed IRA • It is possible to use funds from most types of retirement accounts:
– Traditional IRA – Roth IRA – SEP IRA – Keogh – 401(k) – 403(b)
• Most employer sponsored plans such as a 401(k) will not let you roll your account into a new vehicle while you are still employed. However, some employers will allow you to roll a portion of your funds. Contact your current 401(k) provider.
IRA Approved Investments
• Pre-Foreclosures • Foreclosures
• Lease Options and Sub Lease Options • Rental Property
• Multi-Family Units • Raw Land • Tax Liens and Deeds • Notes
• Commercial Real Estate • Residential Real Estate • International Real Estate • Mortgages • Loans • Businesses • Limited Liability Companies • Limited Partnerships • Franchises • Private and Public Stock • Mutual Funds • Hedge Funds
Prohibited Transactions
• 4975(c) (1) of the Internal Revenue Code identifies prohibited transactions to include any direct or indirect:
– Selling, exchanging, or leasing any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you. – Lending money or other extension of credit between a plan and a disqualified
person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
– Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.
– Transferring or using, by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intend to use.
– Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.
– Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.
How It Works
• Set up a Limited Liability Company (LLC) in the state of your choice.
• Prepare a specialized Operating Agreement that meets the specific requirements for a Self Directed IRA LLC. • Establish a Self Directed IRA account with an independent
IRA Custodianthat permits truly self directed investments. • Fund the new Self Directed IRA account or transfer funds
from your existing retirement account to the new custodial account.
• Direct your new Self Directed IRA custodian to make an investment in your new Self Directed IRA LLC.
• Find a suitable investment vehicle in which you want to make your investment.
• Purchase the new investment in the name of your Self Directed IRA LLC.
IRA Custodians
• Some of the most popular are:
• PENSCO Trust Company • Sterling Trust Co. • Equity Trust Company • Fiserv Trust Company
• Trust Administration Services Corporation • Millennium Trust Company
• Sunwest Trust Company • Self-Directed IRA Services, Inc
– I prefer using a SDIRA “facilitator” for true checkbook control.
Custodian Drama
• Your private lender has to submit a request to the custodian to fund the real estate transaction. • This can take up to 2 weeks. If you’re lucky. • Facilitator such as Guidant Financial allows “true
checkbook control” and eliminates the need for a custodian. Faster and cheaper in the long run.
• Your private lender has a checkbook in the name of their LLC and writes the check or wires the funds
immediately.
• http://www.LassiterRecommends.com/Guidant
• More expensive to set up but you and your private lenders will save a ton of time and money in the long run.
SDIRA “Pooling”
• Since buying a property may require more funds
than you or your private lender currently has
available in an IRA, you also can have your IRA
purchase an interest in the property with other
individuals who have SDIRA’s
• Can be a spouse, business associate, or friend.
Internal Revenue Code (section 4975) specifies
that only "lineal descendents" be disqualified.
Sister – yes; kid – no.
• You cannot place property that you already own
into your IRA.
Non-Recourse Loans
• If you do not have enough money in your SDIRA to buy a property and can’t find a partner with a SDIRA, you may apply for a non-recourse loan.
• Available from North American Savings Bank
http://www.IRALending.com
– 70% LTV, residential and small multifamily, hates condos, rates between 7.875% and 8.125%, must cash flow, no new construction and must have “curb appeal” ☺ –Matt Allen 10950 El Monte, Suite 210 Overland Park, KS 66211 Phone: 913-327-2041 Toll Free: 866-735-6272 Email: [email protected]
Find SDIRA Lenders
• The story of Rick.
• If they have money in a mutual fund, YOU
take charge!
• Get them on the phone with Guidant –
they provide excellent education and will
walk your lender through the entire
process (30 days)
Use A Broker?
• Your private lender can make the loan directly
(research state laws) or through a broker.
• Broker may charge a few bucks but will prepare
all the documents – note, deed of trust, etc and
will ensure state law compliance.
• You may also use an attorney OR your title rep
until you feel comfortable preparing the note and
deed of trust (or mortgage) on your own.
Lender Direct
• Meet with your new private lender and present them with a package that includes:
– Loan amount requested – Purchase contract – Comps or appraisal – Repair estimate if a rehab
– Exit strategy details that includes their ROI - % and $ amount – Whatever financial info on yourself you want to share – Prefilled promissory note and deed of trust or mortgage with their
mortgagee clause (name and address of LLC) – Whatever state disclosures are required.* These loans are
“business loans” and not bound by RESPA. – Hazard binder
– Preliminary title report
• Answer the Big 3: How much will I need, How much will I make and When do I get my money back?
Tips
• As with all private loans, do not touch the
money.
• Show your potential investor that s/he can make
secure returns with you and not have to rely on
the wild fluctuations of the stock market.
• Gather social proof – testimonials, letters, etc
from other private lenders that have done
business with you.
Questions
• Your Questions
Next Module – BONUSES!
•
Bonus Week 7:
–
Using Lender Luncheons To Recruit More
Private Lenders
•
Bonus Week 7b:
– Analyzing deals step by step tutorial
Action Plan
1. Determine whether you are looking for equity partners or rate/term loans
2. Ensure that you have met w/ an attorney who has experience in these transactions within 2 weeks from today
3. Present to (or call) no less than 2 potential private lenders over the next 2 weeks
4. Re-evaluate what you have taken action on up to today… realize that action is what makes money… people who always learn and don’t take action on what they learn are called librarians
5. Write up your goals for the next 90 days and write specific action steps that you’ll need to take to reach those goals
