Wealth Building

Passive Income Strategies

wbs1 In recent years more and more people have realized the horrific reality that their traditional retirement accounts and other unsecured investments (i.e. stocks) will not yield the growth & prosperity they promised. In addition, for the first time ever retirees are finding out they will receive less social security benefits than what they actually contributed. Those who seek refuge for their savings in bank accounts & CD’s have joined the masses that regrettably feel these low yielding accounts are their only safe option. Unfortunately, this has forced much of our elderly population to go back to work in order to survive.
Fortunately, a much better alternative exists.

Here are a few core strategies for passive real estate investing:

Buy & Hold

Buying and holding rental property can create cash flow for today, long-term wealth, and huge tax savings. Consider using joint ventures and equity financing rather than the traditional approach of bank financing. Long-term, every investor needs to buy assets and switch from active/transactional income streams into passive/residual income streams in order to become financially free.

Real estate has historically created more wealth than any other investment platform. This exchange or transfer of wealth has happened over and over again and most clearly during the tough economic times of recession.

I believe we are experiencing the greatest transfer of real estate wealth of our generation. Understanding the dynamics at play in the current market and how to position to leverage the voids in the market with low downside risk is the key to your wealth and income.

Self-directed Retirement Account Investing

Discover what only 2% of Americans know about creating true WEALTH

In order for you to use your retirement accounts to invest in real estate a third party custodian must first administer them. One custodian we commonly work with is Equity Trust Company. You can visit them on the web at www.trustetc.com or simply contact us and we’ll help you set up your account.

What is a self-directed IRA?
A self-directed IRA is technically no different than any other IRA (or 401k). A self directed IRA is unique because of the available investment options.
Most IRA custodians only allow approved stocks, bonds, mutual funds and CDs. A truly self directed IRA custodian, such as Equity Trust, allows those types of investments in addition to real estate, notes, private placements, tax lien certificates and much more.

What are the benefits of a self-directed IRA?
In addition to the tremendous IRA benefits (tax-free profits, tax deductions, asset protection and estate planning), you are able to invest tax-free in investments that you know and understand, which through the power of compounding interest, will create true wealth for you and your family.

Why haven’t I heard of a self-directed IRA before?
While the concept of investing in real estate and other assets in retirement plans has been around for more than 30 years, the concept hasn’t received large attention because most custodians who offer IRAs (banks and brokerage firms) focus on mutual funds and CDs because they have vested financial interests in you selecting those investments from them.

Because the majority custodians focus on stocks and CDs there is a misperception that that is your only investment option for retirement plans, which is not the case.

You Must Know: A Custodian is Required for All IRAs
Not just anyone can hold IRA assets. All IRAs must be held by a custodial entity such as a bank, credit union, trust company or an entity that is licensed and regulated by the IRS as a “non-bank custodian.”
IRS Publication 590 clearly states what those entities are:
“An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements.

The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian…” –Source: IRS Publication 590

What does this mean to you?
When researching a self-directed IRA custodian make sure to ask and receive answers to the following questions:

What are your financial resources? Can I see your financial statements?
How are you insured (FDIC, SPIC)?
Do you have error-and-omissions insurance?
Are you audited—how and by what entity? When was the last audit completed?
Are you part of the Better Business Bureau?
Who are the company’s principals and what is their experience?
Do you have references?

IMPORTANT: Know the Difference between Self-directed IRA Custodians and Self-directed IRA Administrators or Promoters

As stated above an IRA custodian must adhere to and meet stringent IRS requirements and allow for regulatory oversight and audits. IRA custodians that meet these standards, have authority to hold title to assets, investments or property, and to issue funds (write checks, issue wires, etc.).

In addition to custodians, the self-directed marketplace includes many self-directed IRA administrators and promoters. These firms are different from custodians and are limited in the services it can offer. By not meeting IRS requirements for a custodian or trust, a self-directed IRA administrator or promoter cannot hold title to assets, investments and property, and cannot issue funds.

Self-directed IRA administrators and promoters are only responsible for marketing and selling, data entry, producing statements, and basic reporting. To complete transactions, a self-directed IRA administrator must establish a relationship with a self-directed IRA custodian or trust that is allowed to hold IRA funds and investments.

An administrator or promoter must pass investor’s funds to and from a custodian to complete transactions. With little required oversight for self-directed IRA administrators and promoters, having an extra step to pass funds back and forth could be risky for investors.

Private Lending

Saavy investors have been utilizing this investment opportunity for years. In fact, there have been entire companies built around this powerful strategy.

This is a very safe investment that produces a high rate of return while at the same time provides higher level of security and liquidity.

You’ve seen how unsure and volatile the stock market can be. Do you want your future to be controlled by unpredictable events?

Well, maybe it’s time to consider alternatives…

Private Loans Secured by a Mortgage

So, what is a Private Loan?
It is a loan made to a real estate investor that is secured by real estate. Private Loan Investors are given a first or second mortgage that secures their legal interest in the property and secures their investment. We are not talking about high Loan-To-Value (LTV) ratios the banks and savings and loan institutions make on homes. We offer very low LTV ratios to our Private Lenders to increase security of the loan. Our standard LTV ratios are under 75% of the value of the property securing the loan and frequently as low as 50%. This means additional security on the investment.

For example, if a property is valued at $100,000, our Private Lender will never have to loan more than $75,000 dollars on the property. That’s a 75% loan-to-value ratio. This is obviously a much safer approach from that taken by conventional lenders. These banks get into trouble because they make loans at an 85%, 90%, or even 100% loan-to-value ratio leaving them no equity for transfer costs, if they are ever forced into a position where they have to take back the collateral property.

You, as a lender, will never lend more than 75% LTV. As a lender, it is in your best interest to minimize risk and maximize return and this is why a loan should never be made without a 25% safety net. We don’t violate this rule, because your value your security.

What kind of documents should I receive as a private lender?
Your closing package should contain the following:

A copy of the mortgage. The original will be recorded.
An original Promissory Note.
A hazard insurance endorsement naming you as mortgagee.
Title insurance policy

These documents provide you with the security you need and the return which you desire.

Summary
I hope we’ve enlightened you on the incredible power of making private mortgage loans. If it appeals to you, you can get started right now. While most people are complaining about the low rates they are getting on their CD’s and other low paying investments, you could be receiving a return of up to 12%.

“Are you ready to take action?”
So what’s it going to be? Are you going to continue to let other people control your money so you only get a return that barely keeps up with inflation? Or are you going to take control and make sure that when you get ready to retire, you can do what you want without worry about money. If you are retired, here is a great opportunity to squeeze every interest dollar out of your savings that you can. Private lending is an incredible way to build wealth in a way that most people aren’t aware exists. You’re not one of those people who are uninformed anymore. If you have any more questions, please do not hesitate to call us at (407) 352-3220 or contact us via email at skyhighplanning@gmail.com

FREQUENTLY ASKED QUESTIONS

Why don’t’ you get traditional loans?
A: There are many reasons but the main one is time and negotiation leverage. Many of the homes we are purchasing are in need of quick sale within 10-14 days. A traditional bank requires 30-45 days to close a loan. Also, our leverage is far greater when we purchase using cash funds. Many traditional home sales fall out of contract because of financing issues. This allows us to negotiate a much lower purchase price and reduce our risk. We have learned in our business that it’s not the cost of money that matters, but quick access to the funds so we can capitalize on opportunities.

Our company can acquire good deals in properties because we can act with lightning speed and can close with cash.

How can you afford to pay such high returns?
A: We make our money on the purchase. Yes we pay very high returns but it allows us purchase 20-30% below a retail purchaser. That instantly creates thousands of dollars in equity at purchase. Also, we cut out the middlemen in a typical transaction such as, commissions, mortgage broker fees, loan fees, and our attorney costs are lower because there is less work for them to review.

We also employ marketing strategies as soon as we purchase the home. Typical realtors don’t start this process until it’s too late. Often times we are able to find our own buyers allowing us to secure a strong sales price and save on sales commissions. Our renovation process is also down to a science with crews that know we are not retail clients. We pay wholesale prices to all contractors and typically get bulk discounts on all materials.

We are buying so conservative and under valued that we are able to offer our buyers a fully renovated home at or below everything else in the neighborhood. We walk away from 100’s of “Close” deals and will not buy unless it makes sense for everyone involved.

Are you really helping sellers?
A: Absolutely. With your cash funding we can offer something very few buyers can. We are buying on their timeline in as little as 7 days. Knowing we’re going to renovate the home we are buying As Is, which is very important to sellers that live in older outdated homes. They will not have to pay any junk fees either (i.e. attorney fees, closing costs, home warranties, inspection fees, realtor commissions etc.). We are not the perfect fit for everyone but for the right seller these features are vital.

Do you help renters purchase?
A: You bet. This is one of our biggest strategies to find homebuyers. Rent rates continue to increase and renters see the value in home ownership. We teach renters how much money they can save by owning a home and how important it is to their future financial freedom.

What if the market gets worse and values go down?
A: This is a great question and valid concern. However, our strategy is not to speculate 3 years down the road. Our goal is to purchase quick and sell even faster. Most of our projects are complete in 1-2 months and will be sold in 4-5 months. The market doesn’t tend to shift that dramatically in the matter of months it’s typically a longer process for an area to decline. Remember we’re buying in strategic areas where inventory is already low and demand high to greater minimize our risk.

What interest rate do you typically pay your private lenders?
A: We currently pay 4-5 times what a typical bank CD is paying. Our rates will fluctuate very little all depending on the purchase price and rehab involved. Most of our lenders are paid from 8-12%. The lower the purchase price we pay a little higher rate to make sure our lenders make it worth their time.

When will I get paid?
A: Typically we pay one large lump sum at closing. This is much easier to manage for both of us, especially if we’re working out of a retirement account. Most of our investors prefer this payment method. We can also pay monthly just like a typical mortgage.

What’s your minimum investment?
A: We prefer to borrow at least $50,000 when working with our private lenders. However, we have gone below that amount in the past to get you comfortable with us and us with you. This will show you how simple the process is and prepare you for the next one.

How long until I see my money again?
A: The majority of our loans are set up on a 6-12 month note. It depends on the size of the project. If we are doing a teardown and rebuild we are going to have to wait on the county inspectors for a lot of approvals thus causing delays. We account for all of those details upfront and will give you estimated time frame for the return on your investment.

What if I want a longer note?
A: If your goal is to be completely passive and keep you money at work for several years we have other great opportunities. Occasionally we will buy cash-flowing rental homes using private equity funding on a 10-15 year note. The other option we can talk about is funding a small business loan and we can supply you with a junior lean on one our current inventory rental properties.

Do you guarantee my interest for 10 years if I get into a 10-year note?
A: We guarantee your interest for as long as we own the property. If we sell in five years for example you will have earned 5 years of interest. There will not be a pre-payment penalty. We retain this right for both of our protection. The Real Estate industry changes frequently. If we see another real estate boom occurring and pricing rapidly increasing, it may be in our best interest to sell and realize a large profit.

What if I’m on a short-term note and the home sells after only 1 month?
A: It’s extremely important to us that we do not waste your time. This does occur occasionally where the stars line up and we find a buyer immediately. In this scenario we provide you with two options we can either move the note to another property or pay you a minimum of 3 months interest. Most investors see the strength of our purchase ability at that point and simply move the note to another property.

Is this IRS approved to use retirement accounts in this manner?
A: These are established tax guidelines and it is completely legal. However, we always recommend the services of a custodian to invest retirement funds tax deferred or tax-free. We have been pleased working with Equity Trust Company (www.trustetc.com) and there are others like the Entrust Group. Our attorneys or us will be glad to answer questions about this or help get you setup right.

How do you make sure my investment is really safe?
A: We always follow these safe guidelines that we’ve talked about. Your money will grow two, three, or even four times faster than your current investments while you maintain control.

Each one of the properties we acquire is put through a rigorous financial evaluation in order to determine the profitability before the property is ever purchased.

How do I know your Loan to Value Estimate is correct?
A: It’s our policy not to borrow more than 70% of the value of a property using private lender money. That leaves at least a 30% cushion of equity. We will provide you with a full analysis of the property condition, estimate of repairs including contractor quotes, comparative market analysis, and ARV (after repair value). If we were buying at 80% we would be purchasing 15+ homes a month but we’re looking for the diamonds in the rough. That extra 10% is how we minimize our risk.

Who buys Insurance?
A: We do. We also pay for a title search and title policy on the home.

How much is it going to cost me to lend to you?
A: Absolutely nothing. It is our policy to pay for all the closing costs so that your entire investment goes to work for you. We will pay for the closing agent, doc prep fees, notary fees, overnight mail fees, bank wire fees and recording costs. We do not charge any fees or commissions to our private lenders. If you make a $100,000 loan, you send a check for $100,000 to the closing attorney and you get a mortgage for $100,000.

What kinds of insurance policy do get on the home?
A: For a rental investment that is a long-term note we always keep a valid hazard insurance policy on the property to protect against causalities. You’ll be named as a mortgagee and notified if the insurance was ever not keep in full force. Insurance distributions would be used to rebuild or repair the property, or used to pay you off.

If we purchase a renovation then we have to get a more expensive builders risk policy (Vacant Dwelling Policy). It’s important that you buy the correct insurance for different scenarios and we are well versed in that. Everything else remains the same as the previous policy.

Will my money be pooled with other investors?
A: No. We do not pool funds. Your funding will be tied to one piece of property secured by a deed of trust.

You mentioned Junior Lien what is that?
A: It’s a loan secured by real estate that is positioned behind a senior mortgage. You are probably used to hearing the term first and second mortgage. The second mortgage is a junior lien because it’s in 2nd position. The senior lien or first mortgage must be paid prior to the 2nd lien.

If you default on the loan how do I acquire the property?
A: In the unlikely scenario this happened we’d simply transfer ownership of the property to you if possible. If we did not (or could not) then you have all the legal rights of a secured lender. The best way to legally protect your interest in case of a default would be to hire an attorney. They normally would seek to get your investment back, any unpaid interest, any collection costs, all your attorney fees and maybe even more. A legal representative could advise you if it makes sense to foreclosure or seek ownership in the property to protect or recoup your investment.

I’m excited what’s the next step?
A: If we haven’t already it’s important to sit down and discuss all these details in person. We will need a clear definition of what your goals are IE: long term investment or short term, and the amount you are comfortable initially investing. At that point we will present you with any current opportunities that fit that criteria or contact you as soon as we have one that fits.

I know someone that would be a perfect fit can I refer someone to you?
A: Word of mouth is typically how we are able to work with private lenders like you. We do offer a $1,000 referral fee if you refer someone to us and they become a lender. In our business it’s important we find a steady stream of lenders. Many times once you’ve done a few deals with us and learn how we’re purchasing so low and you will attempt to do it on your own. If that’s your goal we’re happy to help you any way we can.

All materials available on this web site and provided by Sky High Investing, Inc are for informational purposes only. Sky High Investing, Inc does not provide legal advice.
Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a lawyer if you want professional assurance that our information, and your interpretation of it, is appropriate to your particular situation.
You are solely responsible for ensuring that your business practices comply with all applicable, local, state & federal laws.