Speaker Introduction. Disclaimer. What types of plans can be self-directed? Employer plans: SEP IRA SIMPLE IRA Individual 401(k) Roth 401(k)

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1 Speaker Introduction Commercial Real Estate and Other Alternative Investments to Grow Your Self-Directed IRA H. Quincy Long is President of Entrust Retirement Services, Inc. Attorney at Law licensed in Texas since 1991 Certified IRA Services Professional (CISP) Former fee attorney for American Title Company Author of numerous published articles and co-author of the book Real Estate Investment Using Self-Directed IRAs with Dyches Boddiford and George Yeiter Disclaimer What is a Self-Directed IRA? The Entrust Group, Inc. and its franchisees ("Entrust") do not provide investment advice or endorse any products. All information and materials are for educational purposes only. All parties are encouraged to consult with their attorneys, accountants and financial advisors before entering into any type of investment. An IRA in which the IRA owner directs all investments in the account. There is no legal distinction between a selfdirected IRA and any other IRA except with a truly selfdirected IRA the account agreement allows the broadest possible spectrum of investments. What types of plans can be self-directed? What types of plans can be self-directed? Traditional IRA (including rollovers) Roth IRA Employer plans: SEP IRA SIMPLE IRA Individual 401(k) Roth 401(k)

2 What types of plans can be self-directed? What types of plans can be self-directed? Special plans: Coverdell Education Savings Account (ESA) Health Savings Accounts (HSA) ALL of the above accounts can be selfdirected! Loafing is the only way to beat the income tax! Roth IRA A better way is to have a Roth IRA! There are worse problems to have! But wait there s hope! Roth Conversions in Traditional IRAs (including SEP IRAs), SIMPLE IRAs that are more than 2 years old, and since 2008 any former employer s 401(k) or other qualified plan, 457 plans, and 403(b) plans can all be converted to a Roth IRA. The restrictions against converting with MAGI of more than $100,000 and on married persons filing separately are eliminated. Conversion income is added to taxable income 50% in tax year 2011 and 50% in tax year 2012 unless the taxpayer elects to pay all the taxes in tax year Tales from The Money Vault $12,000 converted on Estimated taxes on conversion: $3,360 (28%) Purchase price of mobile home : $11, Net cash on sale of mobile home : $25, Plus note paid off : $5, Total profit on mobile home deal: $18,520.78

3 America is the land of opportunity! Can IRA investments be taxable? I want you to pay taxes! Everybody can become a taxpayer! Unrelated Business Income Tax (UBIT) Unrelated Business Income (UBI) Unrelated Debt Financed Income (UDFI) Owning a Business Renting Personal Property Debt Financed Rental Income Debt Financed Capital Gains Unrelated Business Income Tax Unrelated Debt Financed Income (UDFI) Can affect income from pass-through entities like partnerships, LLCs, and grantor trusts 401(k) Exemption

4 Tales from The Money Vault Tales from The Money Vault Purchase Price: $438,900 Loan Amount: $307,000 Loan Terms: 8.15% fixed, non-recourse, annual payments Cash from IRA: $137,391 Sales Price 18 Months Later: $614,460 Net Profit Before UDFI Tax: $124,462 UDFI Tax : $12,591 Net Profit After Paying UDFI Tax: $111,871 Cash on Cash Return on Investment: 81.43% Tales from The Money Vault Don t t be confused about UDFI taxes! Initial Investment: $50,000 Partnership Distributions: $59,321 Current Estimated Equity: $31,598 Estimated ROI: 82% Total UBIT Paid to Date: $ If your IRA pays cash for the property No tax is due on income from the investment! What can I invest in with my IRA? What investments are you knowledgeable about? You can buy that in your IRA!

5 I know a person who says he is going to invest in taxes... because it s the only thing that s sure to go up! Investment Choices Real Estate, including debt-financed Real Estate Notes Secured/Unsecured Notes Limited Liability Companies Limited Partnerships Private Stock And a whole lot more Steps to Purchasing Real Estate Assets in a Retirement Plan Steps to Purchasing Real Estate Assets in a Retirement Plan 1. Open a self-directed IRA 2. Contribute or move funds into the self-directed IRA 3. Locate an investment 4. Make offer in the name of the IRA or other plan Note: The earnest money comes from the IRA 5. Complete a Buy Direction Letter and submit to Entrust along with the 6. At closing, review and approve all closing documents 7. After your approval of all documents, Entrust signs the closing papers and wires funds to the escrow company or attorney 8. Asset is recorded in the name of your IRA, for example: Entrust Retirement Services, Inc. FBO John Smith IRA # All expenses come from your IRA and all income stays in your IRA read and approved sales agreement Case Studies Rental Property Real Estate Note Entity Investments John Wood and his associate Jay Wright want to purchase an office condo for $250,000 within their SEP IRAs. 1. They each transfer $150,000 from their IRA brokerage accounts to their Entrust SEP IRAs to purchase the property.

6 2. John and Jay make an offer to purchase the office condo in the name of their SEP IRAs, as follows: Entrust Retirement Services, Inc. FBO John Wood IRA # and FBO Jay Wright IRA # John and Jay each complete a Buy Direction Letter. They send the Buy Direction Letters and the contract which has been read and approved by them to Entrust. 4. Entrust signs the contract and sends it to the title company along with an earnest money deposit of $10,000 ($5,000 from each account). 5. At closing, John & Jay review and approve all closing documents, then the title company sends them to Entrust for signature. 6. Entrust signs the closing documents and wires the SEP IRA funds to the title company to close (1/2 from each account). 7. The title company records the deed and the 2 IRAs are now the owner of record, as follows: Entrust Retirement Services, Inc. FBO John Wood IRA # (as to an undivided 50% interest) and FBO Jay Wright IRA # (as to an undivided 50% interest) John hires a property management company to oversee the unit. 1. The property management company finds a tenant to lease the unit. 2. Rents and expenses are handled by the property manager. 3. Office condo has a positive monthly cash flow of $850 ($425 for each SEP IRA) which is tax deferred. 4. The property management company submits the net rent proceeds to Entrust for the benefit of John and Jay s SEP IRAs. 5. John & Jay track their accounts via their online statements. Two years later, tenant offers to purchase the property for $395, A sales contract is prepared for $395,000 and submitted to Entrust for signature after having been read and approved by John and Jay, along with a Sell Direction Letter. 2. On day of closing, John and Jay review and approve all closing documents. Entrust then signs the documents and returns them to the title company. Proceeds, after closing costs, are wired back into their SEP IRA accounts.

7 Realized Return for each SEP IRA Initial investment $125,000 Cash flow over 26 months ($425 x 26) $ 11,050 Gains from Sale ($187,500* - $125,000) $ 62,500 Proceeds to each SEP IRA after sale $198,550 * Net proceeds after closing costs Tax deferred gain of $73,550 (59%) over 26 months! John and Jay s IRAs pay no taxes on the gains. They can reinvest the full amount of their profits on the next deal, free of taxes. If the accounts involved were Roth IRAs, Roth 401(k)s, or in some cases a Coverdell ESA or an HSA, the gain is TAX FREE FORVER! John and Jay are in total control of the process from beginning to end, but Entrust is the actual buyer and seller of the property. John and Jay did not take money from their IRAs to buy property and put the money back into their IRAs the IRAs simply bought an asset and later sold it at a profit. IRAs can partner with other IRAs or even non-ira money. All expenses and proceeds must be split in accordance with their ownership percentages. John and Jay could have had the checks deposited directly into their IRAs instead of hiring a property management company. Case Study: Real Estate Note Case Study: Real Estate Note Jack Brown has $100,000 in an IRA and wants to loan $98,000 to an investor as a first mortgage on a $140,000 investment home. 70% LTV (loan to value) 12% interest rate Interest only payments with balloon payment in 1 year Minimum loan term of 3 months 1% origination fee Buyer pays all costs for legal and Entrust fees 1. Jack completes a Buy Direction Letter for the new note. 2. Title company or a lawyer of Jack s choosing prepares note and closing docs showing the IRA as the Lender : Entrust Retirement Services, Inc. FBO Jack Brown IRA # Jack approves all closing docs and Entrust wires funds to title company. 4. The deed of trust is recorded and held by Entrust, along with the original note and closing documents.

8 Case Study: Real Estate Note Case Study: Private Company You cannot loan your IRA money to yourself or any other disqualified person. You and the borrower are free to set your own loan terms. IRAs can loan money unsecured or secured by assets other than real estate, such as equipment or mobile homes. Max N. Vestor wants to invest his IRA in Pay or Go Apartments, LLC which will purchase and lease and apartment building. The manager of the LLC will be his friend Slick Samuels. Case Study: Private Company Case Study: Private Company 1. Max completes a Buy Direction Letter and submits it to Entrust along with copies of the Articles of Organization, subscription agreement and operating agreement for Pay or Go Apartments, LLC. 2. The subscription agreement and operating agreement have been signed by Max as read and approved before submission to Entrust. 3. Entrust prepares a disclaimer and indemnity agreement and an instruction letter for Max to sign. 4. Max returns the signed disclaimer and instruction letter to Entrust. Case Study: Private Company Case Study: Private Company 5. Entrust signs the subscription agreement and operating agreement as the member of the LLC. The member is listed in the documents as: Entrust Retirement Services, Inc. FBO Max N. Vestor IRA # The original subscription agreement and operating agreement along with a copy of the instruction letter are returned to Slick Samuels along with a check for Max s IRA investment. You should not be the manager of an LLC owned by your IRA. If the LLC operates a business, such as the sale of mobile homes, or owns debt financed property, investment returns may be subject to Unrelated Business Income Tax (UBIT).

9 Case Study: Private Company You cannot guarantee any debt on behalf of your IRA or on behalf of an entity owned by your IRA. Neither you nor any other disqualified person may work for and get paid a salary from an LLC owned by your IRA. O.P.I. OTHER PEOPLE S IRAs Create your own private financing source Partnering with OPI More sales Raising investment capital

10 There are TRILLIONS of dollars in retirement accounts! At every gathering there are MILLIONS of dollars available for investment. 5 Key Points 1. IRAs can hold all types of investments, not just securities, including real estate. 2. Partnerships and split ownerships are allowed. 3. IRAs and other Entrust self-directed plans grow tax deferred or tax free. Spread the knowledge about self-directed plans, then help them invest their money! 4. All plans qualify and partial transfers are allowed. 5. Use other people IRAs to Make More Money Now! Thank you for your attention, and please drive carefully out there How can I get more information? because Uncle Sam needs all the taxpayers he can get!!! For More Information: QLong@EntrustTexas.com

11 How can I get more information? For FREE Information on Investing in Apartments with Your IRA or Others :