RE Purchase

[K-t-F]

I have always swayed people away from investing in RE. Here is the plan...

Invest $100K of plan $ in rental properties AND use the plan as collateral for a loan to purchase the balance of the property. Or that is what I think their plan is. I have searched for more specific posts but none address the second part which is to use the plan as collateral for the mortgage.

Thanks!

[SteveH]

Well I know that you can not pledge the plan as collateral. You may be able to find a private lender that would loan the plan money which would be fine, but it would probably be a high interest loan beacuse the lender couldn't come back on the plan for the balance if they stopped paying. The lender's only recourse would be the property. I don't think it is out of the realm or possibility though. If the plan were to put down 50% on the property I am sure there would be lenders that would take a chance on that.

The other option would be to "partner up" with someone. I know a real estate firm that will purchase a rental property with an investor. The investor puts up the 20% down, and the real estate agent/firm will obtain the loan for 80% of the property. The real esate firm will operate as the landlord. All rents and expenses from the property will be the sole responsibilty of the real estate firm. They will be responsible for keeping the proerty maintained and also rented. In exchange for this the investor will receive a 50% interest in the equity of the property. The real estate firm will receive the other 50% of the equity.

It is really a pretty unique approach to real estate. It allows investors that want to be in real estate not have to act as the landlord. It also allows the investor to limit their risk quite a bit. If the property must be sold for whatever reason, the real estate firm guarantees that the investor will at least receive their investment back. If you look at a rental property purchase price of $100,000, the investor puts up $20,000. Let's assume after one year the property has increased in value 5% to $105,000. The investor is entitled to $2,500 of the equity which is a 12.5% return on their $20,000 investment. If the property is sold there are no taxes due because it is inside of a qualified plan. Pretty neat if you ask me.

This "partnering up" option allows the plan to operate completely as an investor. It makes a lot more sense to me so that the plan isn't operating as a landlord.

[namealreadyinuse]

PATA, Who is purchasing the balance of the property? The plan? Sponsor? Participant?

Neither the sponsor nor the participant can use the plan as collateral. The plan should be able to purchase the property if it could get the mortgage.

[K-t-F]

That is the scheme... the plan is going to be the sole holder of the mortgage. It is a true investment. I told the financial advisor to inform the trustee that his sister's husband's nephew can not live there. They understand. The plan will obtain the mortgage and the mortgage will be paid from rental income. I have never heard of a plan taking out a mortgage on any type of RE.

Thanks... any other thoughts would be appreciated!

[Belgarath]

I don't have time to look it all up now, but at the least you should investigate as to whether this is "debt financed income" that will be subject to UBTI treatment. Along with all the other normal fiduciary prudence rules, PT rules, etc., etc...

[RCK]

Off hand, I agree with the UBIT or UBTI concern.

I can't research, but here's the link to the IRS' publication on the topic.

http://www.irs.gov/pub/irs-pdf/p598.pdf

[K-t-F]

hmmm... this was supplied to me with regards to investing in Real Estate.

http://www.irs.gov/irm/part4/ch50s11.html#d0e500995

I have not read it through yet...