Entrust Administration, Inc. News and Articles

A Non-Recourse Loan vs. An Investment Partner For Real Estate Investment

Some of you may have considered a non-recourse loan for your real estate investment, either because you are short on cash and/or want to use loaned monies as leverage for your investment. While it’s true a non-recourse loan is an option for real estate investment, there are other available options that prevent your IRA from being subjected to UDFI (Unrelated Debt-Financed Income) tax.

A non-recourse loan is a secured loan (debt) utilizing a pledge of collateral, typically real property, for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. The UDFI tax is a subset of UBIT. Under IRC § 514, the IRS will assess a tax on any income that is derived from the use of, “acquisition indebtedness,” in passive self-directed IRA investments. For example, if you use $30,000 of funds from your self-directed IRA and borrow $70,000, using a non-recourse note, to purchase a $100,000 rental property that generates $10,000 annual rent, the IRS would assess UDFI tax on about $7,000 of the profit. That is because 70% of the investment came from leverage. The tax rates for UDFI ranges from 15-38%. Solo/Individual 401k accounts and other qualified plans are exempt from UDFI. You can consult your CPA or tax professional for more details

An alternative option to a non-recourse loan is an investment partner. Below is a list of investment partners to consider:

•    Self-Directed IRA Holder(s)
•    Qualified Plans (i.e. 401K, 457, 403B, etc..) and IRA Holder(s)
•    Private Investor(s)

Someone from this list can partner with you in a TIC (Tenants In Common) relationship, in which case your interest rate may be lower and the terms may be more flexible than a lender, without being subject to UFDI. You would still be employing the concept of using OPM (Other People’s Money), but without the added tax cutting into your profit. Relative to the percentage of ownership of the property among all parties, the profits and expenses must be split accordingly. For example, if you decide to partner with your spouse’s or other investors’ IRA and/or private funds to make a real estate purchase and the ownership between both parties is 50/50, all expenses, rents and profits must be split in accordance to these ownership percentages.

There are investors in your community and local investment clubs who are losing money in the stock market, have employers who are no longer matching their 401K’s and/or are not making a great return that are looking for alternative investment options.

The above listed information is NOT intended to be tax or legal advice as Entrust do not provide legal and/or tax advice. The variables are designed to educate investors and for you to factor in these variables when making your investment. For more information call me at (916) 509-7271 or come into our office for a free no-obligation consultation.

By Lamarr Baxter, Business Development Manager
lbaxter@theentrustgroup.com

What is Your Season of Investing?

Investing has four distinct seasons: trading, long-term growth, holding, and divesting.  Unfortunately for the investor, these seasons do not necessarily come in order and an investor might be in several seasons all at the same time. To complicate the situation even more, different buckets of money may be in different seasons simultaneously. And finally, your personality and investment choices will dictate which season you are in, unless you are very disciplined about your financial management. Learning the investment seasons is a little more complicated that the seasons of the year, but just as important.

Trading, long-term growth, holding, and divesting—spring, summer, winter, and fall. The metaphor is not exact, but surprisingly close. Failing to learn the signs may leave you caught unprepared in a summer financial drought when children head off to college; or you may get surprised by a winter blizzard when cash runs low in retirement. Learning the signs of each investing season can reward you with prosperity and security.

Trading—the springtime of optimism

In the spring green buds blossom, hope springs up, and (in the folly of youth) we believe we can beat the market. Timing, day trading, puts, calls, commodities, short selling, collars, forex, options, stop-losses, and “can’t lose” market programs all beckon to the youthful investor with the temptations of quick, easy profits.  It’s spring in the financial world and everything looks green. This is trading. A few people make a good living by trading and a few more manage to break even doing trades, but most people lose money on their trades. Even if the trades break even, fees will usually tip the balance into the red.

Successful trading requires intensive study, iron discipline, and constant attention to get the timing right. Most people have a career and a family, so the daily, even hourly, attention required for successful trading is simply not available. Also, most people do not have the discipline to execute a trading program strictly, which is required for long-term success at trading. If you doubt us (and you should), just compare your annual results with a good mutual fund. Statistically, most of us don’t beat the performance of a good mutual fund, and most mutual funds don’t beat the market averages. By any statistical measure, trading is the spring season of investing, when hope triumphs over history.

Long-term Growth—the Summer Growing Season

In the summer, nature gets down to the business of growth. Plants and animals must build enough resources to last the coming fall and winter. Long-term growth is not fast-paced, or even particularly glamorous. It is all about finding green fields and harvesting those green fields as long as possible.
For an investor, long-term growth is staying ahead of taxes and inflation. The single most important concept for long-term investing is the power of compound growth. Investors choose a few successful strategies that utilize the power of compounding and tax deferral to grow faster than inflation and taxes. Any investment that beats inflation and taxes, even if by only a fraction of a point, will create substantial wealth over time. The second most important concept is over time. Compounding works over time. It needs an entire season to grow a healthy asset. Successful investors understand the power of compounding and give their investments time to utilize that power.

Holding—autumn is time for harvesting profits and protecting assets

In the autumn, nature focuses on getting ready for winter. Autumn is for finding caves and burrows to protect the resources harvested during the summer. Autumn is certainly not for taking risks to recoup resources lost during spring frolics of trading, or even missed opportunities in the summer of long-term growth.  The two concepts for autumn are harvesting and protecting your assets. Whatever resources you have grown in the summer of long-term growth, now is the time to reap the profits and protect your assets.

The holding season typically begins about two years before you need the funds. During the holding season you harvest the profits by rotating your funds out of stocks and bonds. You protect your new assets from market risk by holding cash to pay the upcoming expense. The holding season gives you time to unwind investments profitably and to protect your cash from large market corrections. Market returns average 3-7% annually, while market corrections average 10%-40% in a short period. As a result, within a narrow, two year time horizon, your risk of loss becomes larger than your opportunity for gain.

The risk of a large, unexpected drop may be low, but it is real. The stock market roller coaster ride of 2008-2009 certainly demonstrates that. Even after the market’s spectacular rise since March, 2009 (from 6,000 back over 10,000 for the Dow Jones Average) investors who stayed fully invested through the drop and the climb have seen their assets drop about 30%. Prior to that, the stock market saw another large drop in 2001—the dot com bust—only seven years earlier.

These sharp corrections occur often enough that you must use the holding season to protect funds you will need within two years. For example, funds for a child’s college education should be moved into cash starting two years before that first college tuition bill comes due.

Another example is your “rainy day” fund. Experts advise keeping a rainy day fund of 6-12 months operating expenses in case of job loss, unexpected health care expenses, or other unplanned expenses. Since these financial shocks are, by their nature, unexpected surprises, your rainy day fund is always in the holding season, and should always be in cash.

Divesting—wintertime, living off your nest egg.

 In the winter animals live off the resources harvested in the summer and protected in the autumn. Many animals hibernate, slowly consuming the resources they carefully put away in the summer. Even insects hibernate. They lower their consumption, live at a slower pace, and enjoy the peace that comes in the season of winter.

For investors, divesting resources throughout retirement is just as specialized and challenging as each other season. Reducing consumption and planning divestitures to minimize taxes are critical factors in making sure your money lives as long as you do. However, since you may expect to live 20 years or more in a comfortable retirement, you cannot simply move everything into cash. Some of your retirement funds must keep working in the financial markets to provide long-term growth for your later years.

Long-term divesting is really a combination of two other seasons—holding and long-term growth. Each year you move one year’s worth of living expenses from long-term growth assets into cash.  The remainder of your assets stay invested, providing long-term growth for later years.

Long-term Investments—Good Summer Crops

With an understanding of the seasons of investing, we can now describe some of the features of long-term investments that grow well in the summer season if investing:

Self-adjusting for future changes—let’s agree that we cannot predict the future. For those who can, this article is unnecessary. Ideally, our long-term investments should be self-adjusting. They should accommodate changes in inflation, employment, and the inevitable business cycles. For instance, some bonds, such as TIPS, have interest rates that track inflation. Rental rates on some investment properties tend to track inflation. Dividend yields on some large-cap stocks tend to track inflation. No investment is perfectly self-adjusting, but some are much better than others.
Long time horizon—Since most of us have careers and families, we don’t have the time or interest to track our investments daily, or even monthly. Investments with long time horizons give us the freedom to make adjustments only a few times each year. Any investment with an expiration date is suspect.

Low volatility—Volatility, also known as beta, is simply how much the price bounces around. Investments with high volatility include most short-term trading vehicles, such as foreign exchange rates (forex), commodities, options and futures. High volatility increases the premium on good timing and increases the penalty for bad timing. But, even assuming the investor gets the timing right, highly volatile investments tend to increase stress and lead the trader into ever riskier trading. Not a strategy for long-term growth.

Forced savings—Some investments have built-in savings reinforcers. Automatic monthly purchases of mutual funds, paid by automatic withdrawals from the checking account, build the habit of saving. Likewise, automatic payroll deductions for individual retirement fund deposits make saving regular and easy. A fully-amortized mortgage payment for income property has a principal payment built-in. Each of these reinforces the habit of savings and uses the power of compounding to achieve long-term growth.
Tax advantaged—Taxes consume a significant portion of any return; and taxes may increase in the near future, to pay for all the new government expenditures. Some investments increase overall return by providing tax deferral as well as current income and growth. Retirement funds are the shining star of tax-deferred investments. IRA contributions are not taxed when made. Thus, the investor has an interest-free loan from the government until the money is withdrawn many years later. Real estate investments also can provide some tax deferral.

With these few guidelines, you can identify good investments for your own summer of long-term growth. Best wishes for a bountiful harvest.

By RBS Homes, www.RBSHomes.com

Private Notes and Your IRA

Over the next few months, I’ll be hosting educational webinars on how to hold notes within your IRA. We will be looking at how to create a note, which documents are needed, and what the closing looks like. The series will also address what makes a good loan, what not to do in a loan, and how you (the IRA holder) can potentially create higher returns with potentially higher security. Later in the series, we’ll talk about pools versus individual loans and how to find discounted notes.

If you’re unfamiliar about the “note business” and therefore never considered it, this webinar series is the perfect forum to find out if it’s right for you. This series is also helpful if you’ve begun to explore alternative ways to use your retirement funds and want to gain more information.

Just think of how many notes you’ve already signed in your life: real estate loans, auto loans, personal loans, student loans. Wouldn’t it have been helpful to understand a bit more about the documents, the process, and what the underwriters look at?

Many individuals have used private money lending to build up their retirement accounts. Now is the time to see if it’s right for you. Register today for our upcoming webinar on “Private Notes and Your IRA.”

Entrust believes that education is the key to success. I hope you’ll join us for this educational series.

By Kimberly Dressel, Entrust Administration, Inc.
kdressel@theentrustgroup.com

Stepping Out of the Investment Box

I recently presented to a group of focused real estate investors. I knew what to expect because I had presented to this group before. What I love about them is that they all want one thing: great returns on their investments! Their focus is on how they can get returns back into their IRAs and 401(k)s.

The day was scheduled to be four hours of real estate education. The topics ranged from what types of properties cash flow, to alternative funding options, to becoming a landlord. The organizer scheduled Reggie Lal as a guest speaker. Mr. Lal is the founder of Be the Smart Investor and is a well-respected real estate investor in the San Francisco Bay Area. Reggie completely understands the value of using self-directed IRAs for real estate investment. He, himself, has done so numerous times. His presentation was a very nice compliment to mine as the self-directed provider.

What was great to see was that the attendees really understood the value of having cash-flowing real estate investments working for their retirement account and generating tax-free or tax-deferred income. We also talked about using one’s retirement plan to lend money if you didn’t want to become a landlord. And we discussed purchasing tax lien certificates if your funds are restricted to smaller investments or partnering with your IRA or pooling funds with others.

That Saturday was informative, educational, and beneficial to the investors. Entrust prides itself on helping investors look outside the traditional realm of investing, and this session did just that!

By Kimberly Dressel, Entrust Administration, Inc.
kdressel@theentrustgroup.com

Green with envy!

More and more people are understanding how our actions affect the environment and are changing their daily habits. Rather than amassing plastic shopping bags that then get tossed, people have adopted bringing their own reusable bags when they go grocery shopping. Going to the local farmers' market to buy organic or local products with less packaging has become common. And energy-efficient hybrid cars are popular with all age groups and incomes.

Now you can take it even a step further by self-directing your IRA funds into a green company. Think of the possibilities of investing in a company that might make a better solar panel for homes or improve water use for organic farming. Not only does this type of investment provide a value environmentally, it could potentially yield a high return. And by investing the funds in your retirement account, the profits and gains are tax free or tax deferred, depending on the type of retirement account you have.

Recently, we've noticed a lot of investors are looking into tree farms located in and outside of the United States. Green companies have become very popular for investors, and the types of businesses can range from steering wheels to laundry soap manufacturers. Green affects all these industries:

• Food and food services
• Electronics for homes and offices
• Energy technologies
• Automobiles
• Beauty and home products

Of course, any investment, self-directed or otherwise, involves risk. Always do your due diligence before investing. Find a green company that is important to you, and see if it makes sense in your retirement future.

Wouldn't you be tickled green if you self-directed your retirement plan into a company that produced a product or service to better the world's future while securing your own future?

Kimberly Dressel, Business Development Executive

Generating Cash Flow Now and Later

Entrust California was the proud and only sponsor of the largest event for investors in 2009 held recently in San Francisco. This event featuring the three amigos, John Schaub, Pete Fortunato, and Jack Miller, gurus in the real estate and paper investing arena was a unique opportunity for us at Entrust to get a beat on the marketplaces throughout the U.S. from people who actively invest in today's market.

Now is the best time to be a real estate investor with your IRA. The opportunities in both real estate and private lending are excellent and with falling prices and great market opportunities cash flow is back!

Banks are selling real estate cheap right now. They want the real estate off their books.

We at Entrust were in full force at this event. Our local offices had the unique advantage of fully understanding the mindset of the IRA Investor using their IRA or Individual (k) to invest in real estate related investments to generate cash flow today and into the future.

Visit with your local office representative to learn more about self-directing your IRA to invest in what you know best.

For more information, contact:
Business Development
800-392-9653 x 254

bizdev@TheEntrustGroup.com.
www.entrustcalifornia.com

Recalibrate your Retirement.

Wishes of financial freedom. Many of us in our 50's and 60's looked forward to those lazy crazy hazy days of summer and song. To the golden parachute of a pension that will carry us well into our old age.

Unfortunately, things did not necessarily turn out as we planned. We have had to get a reality check. Not only do we need to recalibrate our thoughts of what we will do in retirement we have to get creative in order to grow that nest egg into something that will last.

I don't know about you, but I sure don't want to have my eyes clued to CNN or CNBC worrying about what the market did today or where my next dollar is coming from. All of us have a responsibility to ourselves to plan for income, cash flow, taxes, which let's face it will only get higher, and for appreciation or growth as a hedge against inflation when it comes.

If you agree with me read on.....

One way to do this is by investing in hard assets. Many of us have used our personal savings to invest in the market, but did you know you can use your IRA or 401 (k) plan to invest in great assets with the opportunity to achieve your desired financial goals?

With a self-directed retirement account you have the ability to invest in your own backyard, or in investments you believe in, understand and want to have in your portfolio. Many of those investments like real estate, gold, foreign currencies, along with the traditional investments you may already have are allowed in an IRA or 401 (k) plan.

What is self-direction? One thing it is not is investing through a major brokerage house or mutual fund company that says you are self-directing. You may think you are but what is happening is you are self-directing into their families of funds for example. You don't get to choose!

Truly self-direction is one where you identify the investment. You work with an administrator who specializes in self-directed accounts and is an expert processing and facilitating your transaction on behalf of your plan. The income from the investment that you select, goes back into your IRA. Any profit from the sale of that investment comes back into your IRA on a tax deferred or tax free basis (depending on whether the account is a traditional or a ROTH IRA or individual (k)) helping to solve the tax issue of growth that you would not necessarily have with personal funds.

This may sound complicated to some of you but it is not. Think of your IRA as another identity. One you cannot tap into until you reach the ripe retirement age that allows you the access to your cash penalty free and just in time to meet those retirement objectives.

There is so much negative news and uncertainty. Investing in assets that can create cash flow or in some cases assets that bring you security and peace of mind makes sense as part of a financial strategy.

To take the mystery and mystique out of understanding how truly self-direction in an IRA works talk to Entrust. Entrust Administration is California's choice for self directed IRA administration. With several offices throughout California and close to 30 years experience, our staff has been thoroughly trained to assist in you in this process. With continuing education both online and live instruction, now you can take advantage of the leader in self-directed plans.

Make it your personal goal to help yourself by utilizing tax enhanced tools to compound wealth. Recalibrating your retirement both in time and dollars gives you the satisfaction of saying "I am in control. I get to choose where and how to invest my hard earned dollars today for the financial freedom of tomorrow!"

by Lisa Bromma, Consultant

IRS Credits and Deductions you Might be Missing

This month's Tax Tips:

Here are some deductions that you might want to consider when preparing your tax return. Consult your tax professional to know exactly what you qualify for.

Job Hunting
With job losses at an all-time high, there is a lot of job searching going on. Did you know that the expenses for job searching are actually tax deductible? You can also deduct moving expenses if you have to move more then 50 miles for a job.

Insurance Premiums
Self-employed individuals who are not covered by an employee plan get to deduct 100% of their health insurance premiums.

Tax Preparation Expenses
The most commonly missed deduction is for the fees and costs of filing your taxes. This includes e-filing, software, and even professional tax preparation fees. Make sure to save any receipts you get now for next year's tax return.

IRA Contribution Deadlines
Reduce your current taxable income while helping build your nest egg for retirement. Make sure you fund your 2008 contributions to your Individual Retirement Plan before April 15th. If you don't have a retirement plan, you can open one before April 15th for 2008. You have until then to maximize this benefit which allows you to put more away today then ever before! Start compounding more dollars tax-deferred or tax-free!

Don't put your all your retirement dollars all in one basket. Diversify your retirement portfolio with alternative assets such as Real Estate, Gold, Private Placements, and much more!

For more information on how to take advantage of the power of self-directed retirement plans, visit our education page. Click here

Remember that while Entrust provides excellent educational resources, we do not endorse or sell any investment products. We always encourage you to consult your legal or tax advisor.

Entrust Administration, Inc. Business Development Team
bizdev@theentrustgroup.com