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Non Recourse Loans | UBIT + The Impact On Your Compound Interest - YouTube
Channel: Donnell w. Self Directed Investment Strategies
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IRA and 401K
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Basics, non recourse loans, Ubit and
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the impact on your compound interest and
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why an IRA just might not be right for
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you. this and more starting now,
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we've talked a lot about compound
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interest producing non traditional investments.
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You remember what they are,
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what if you go to make a non traditional investment
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into a reIT or a rental property and
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your self directed retirement account doesn't
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have enough in it?
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What do you do? ARE YOU even able to follow through
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with an investment like that? quick example,
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you have 100,000 in your self directed ira.
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And this is in traditional dollars.
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Your objective is to start growing Roth
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profit. So how do you go about it?
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How do you start growing Roth profit?
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Well you have to first convert traditional dollars
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into Roth and remember that's just a
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decision.
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And remember Roth profit is just another
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way of saying tax free profit.
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You have a choice, you have a choice to
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convert all of your traditional dollars
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over the roth or you can convert a
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portion of your traditional dollars to
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roth. In this example,
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we're going to convert 50,000 of our
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100,000 to Roth dollars.
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And why are we doing that?
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Because the tax implications hurt less
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meaning, in order to convert traditional dollars
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to Roth, you have to pay taxes on the
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amount that you convert. 50,000 is easier
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for us to pay, than to pay taxes on
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the full $100K. So in this example we're converting
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half of our traditional dollars to
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roth. If you are unsure as to how to
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convert traditional dollars over to
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Roth, please go back and take a look
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at my earlier videos to walk through how
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SO okay,
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we've got $50,000 in Roth dollars now,
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we want to invest it, to grow us some
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Roth profit.
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So you've come across this rental property
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on the market for $90,000. based off our
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assessment it's gonna take about $10,000 to
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get this property ready to sell.
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And in addition the property Appraises
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for right around $150,000.
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So let's step through this.
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I've got $50,000 and Roth dollars.
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This property costs $90K, I want to put
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$10,000 into it and eventually sell this
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property for $150K and in turn making about
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$50,000 in Roth profit.
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Not too bad.
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but there's a problem.
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I only have $50,000 to apply and I
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know in my original account I do have
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$100K but I don't want to use that.
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My objective here is to grow Roth profit.
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I've got $50,000 in my self directed Roth
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Ira and I want to use this specific dollar
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amount to invest in this property.
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Well did you know your retirement account
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is allowed to borrow and I don't want
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to confuse you.
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I get it.
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Your retirement account is not a person
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but your retirement account is allowed to
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borrow. It's allowed to leverage funds
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from other places.
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So the good part is, this means that your
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retirement account is not limited to
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the amount that's in it.
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Your account is allowed to borrow in
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the form of a non recourse loan.
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Okay. So what's a non recourse loan?
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I'll explain.
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But in order to explain a non recourse loan,
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I want to step for a moment. today when you
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go to a bank to borrow money.
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What happens?
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Well you've got... they run your credit,
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right? You got to fill out all this paperwork
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and they do or they don't approve you
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and you have to fill out all of this
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and sign all of these documents with
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your signature and your social security number
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and then they provide you with a loan.
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Right? well what does your signature and
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your social on that application do?
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well if for any reason you were to
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default on that loan,
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the bank has a recourse.
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What's the banks recourse?
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The banks recourse is to come after you
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because you signed your name and your
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social and said,
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hey if I don't follow through on our
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agreement,
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you have every right to come after me.
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So the banks recourse is to come after
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you because you gave them your guarantee by
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signing this document.
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Well, if you remember when I walked through
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the differences between Iras and
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401Ks and some of the rules,
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there were two rules that you always have
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to keep in mind.
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One being prohibited transactions.
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There are some things that you cannot invest
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in using your retirement account,
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The other is disqualified persons.
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Do you remember who the disqualified persons
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are? Well,
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do you remember who the number one disqualified
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person is?
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The number one disqualified person is
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you? As the owner of the retirement account.
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So if I'm going to use my self directed
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Roth ira to invest in this property,
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I cannot be involved in that property,
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even though I am acting on behalf of
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my retirement account.
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And I know it gets confusing,
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but follow me,
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if your retirement account is short on
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money and that bank is going to loan
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money to your retirement account,
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they are loaning that money to your retirement
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account based off the strength of the
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opportunity.
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They cannot run a credit check on you.
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It doesn't matter what your DTI IS.
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It doesn't matter if you have any other
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purchase transaction problems.
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It doesn't matter how much you have
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in savings. when your retirement account
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is going to get a loan from a bank,
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their lending to your retirement account
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based off the strength of the opportunity.
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What does the property of praise for?
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What's the ARV?
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What's their lTv? your personal information
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plays no role in acquiring this loan
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for your retirement account.
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Does that make sense?
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And if that's the case then what do
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we do? The bank will loan money to
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your retirement account based off the
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strength of the opportunity.
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Whoever the lender is cannot ask for
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your personal guarantee,
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the lender will take the property as
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collateral and therefore there is no
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personal recourse. when it's time to
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sign documents, Then what?
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and if you can't use your
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Social Security number,
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who actually signs these documents?
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Well what you have to remember is you
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wear multiple hats in this situation.
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And in this case one of those hats is
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as trustee and or manager of your retirement
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account. meaning you're the sole decision
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maker. You decide what does or doesn't happen.
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And therefore when it comes time to
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sign, you have the ability to apply your
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signature,
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but you're applying your signature as
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trustee, you're applying your signature as
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manager whatever the case may be.
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And so therefore you are acting on
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behalf of your retirement account.
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In this case,
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it's a self directed Roth ira.
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What does self directed mean?
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Self directed means you have control.
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Self directed means you make all of
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the decisions. so you have to sign but
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you're signing on behalf of your retirement
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account. That makes sense.
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And if you think this is confusing to
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you, this can get quite confusing to
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banks who have never dealt with a
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self directed retirement account before
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in a transaction like this.
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But trust me,
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this is exactly how it's done.
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See commercial non recourse loans usually
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have a loan to value ratio of anywhere between
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55% and 75% and note: private loans,
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meaning loans that you're not necessarily getting
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from some type of
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FDIC INSURED INSTITUTION
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private loans that you may be getting from
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a business partner have no lTV limits.
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And lastly any non disqualified person
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can be a non recourse lender. i'm saying that
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slow because I want to make sure you
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understand what I mean.
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Any non disqualified person can be
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a non recourse lender. so let's jump
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back into this example.
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Okay so we get this $50,000 non recourse
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loan from the bank and you pair that
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with my self directed Roth ira that has
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$50,000 in it.
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I now have $100,000.
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I need to buy this property so I purchase
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it for $90k I apply 10,000 to it,
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it's ready to go.
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But you know what?
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I changed my mind. instead of selling it,
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I want to rent it out,
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I want to collect some residual income
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for a little bit,
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so I rent the property out and I'm collecting
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$1000 a month in rent,
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that's $1000 a month in Roth profit.
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Going back into my self directed Roth
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ira and I collect this rent for the
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next two years,
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$1000 a month over two years.
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That's $24,000 in Roth profit.
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What do I mean by Roth profit?
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that's $24,000.
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Tax free.
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Once I meet all of the criteria.
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So my $50,000 that I had originally invested
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has made me $24,000 in Roth profit.
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In two years. after those two years I
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decide to sell.
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put the property on the market for $150,000.
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It immediately sells,
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you know why? because I've got renters in It.
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It's cash flowing, so it immediately sells
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for $150K. I pay the bank back and the
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interest that i owe the bank I pay out
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of my rents.
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So my $50,000
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Self directed Roth Ira just made $50,000
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in Roth profit.
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Once I pay the bank back there are 50,000
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and again Roth profit tax free forever.
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Guess what happens?
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There's this tax that comes along, because
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I've leveraged meaning because I've
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borrowed money using my retirement dollars.
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There's this tax that comes along called
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UBIT, unrelated business income tax,
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UBIT comes along and taxes my profits, As
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well as my two years of rents.
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It puts a tax on my profits and the two
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years of rents based off the percentage of
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the leverage that I used.
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Let me rewind that a little bit.
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I had $50,000.
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I got a $50,000 loan,
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got a property for $100K.
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So I borrowed 50% of the purchase price
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from the bank.
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ubit comes along and taxes 50% of
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my profits because I used 50% of the
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purchase from a loan from the bank.
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That make sense?
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ubit comes along in taxes the profits and
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the two years of rents based off the
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percentage of leverage that I used to
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purchase the property.
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Now what does that mean in english?
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50% of the $100,000 that was used to purchase
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that property came from the bank.
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So therefore the Irs
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Comes along in taxes 50% of my
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profits and 50% of my net rents at
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a percentage rate of up to 37%.
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Now hopefully it won't be 37%.
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But the truth is,
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I don't know.
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Iras can lower your ability to fund investments,
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grow your retirement and decrease taxable
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income. Please consult your self directed
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investment strategist if you've ever
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had or are at risk for any of the following
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self employed income,
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disqualified persons, actually making money
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with your retirement account.
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ubit, anxiety around not knowing if
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you'll have enough to retire.
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Iras require a custodian and are subject
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to rules you may or may not approve of.
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Tell your consultant
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If you foresee a large investment, as
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making too much money can become a
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serious taxable symptom with an ira.
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Being limited on maximum annual contributions
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to Iras may sometimes cause the following
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side effects,
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frustration,
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night sweats and serious mood swings.
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Don't create an ira if you have an
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allergic reaction to paying more in taxes.
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and remember this is regardless of
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whether or not we're talking about Roth
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or traditional dollars,
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even though my profits are growing tax
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free because I'm using Roth does not
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exclude me from ubit,
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in a self directed Roth ira. in
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self directed Roth ira,
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I'm exempt from capital gains.
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I'm exempt from income tax but I
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am not exempt from ubit. so okay,
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you've paid this tax, but you want to
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know a little something.
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You know the easiest way to not be
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impacted by the unrelated business income
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tax. Would be if you were to do this
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exact same transaction using a self directed
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401K. And that's whether it's Roth
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or traditional doesn't matter ubit
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does not apply to leverage real estate
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transactions inside of a 401K.
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So in other words,
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having a 401K.
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Is like getting a 37% increase in your
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profits. So when wondering if an ira
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is right for you.
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Please consult your self directed strategist
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and of course that would be me.
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We can review your personal situation to
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make sure you're making the best decision
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for you and your financial future.
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And also remember this is a great win
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here. Your retirement account is not
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limited to the amount of dollars that's
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in it. using leverage in the form of
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a non recourse loan,
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unlocks infinite doors for you and your
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investment opportunities. and what's UBIT?
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Well we won't get in to UBIT here.
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so join me in my next video.
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The same way we addressed non recourse loans.
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I will address ubit and break it
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down in a very similar fashion.
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The moral of the story here is you may
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only have $10,000 or less in your retirement
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account, Don't be discouraged. if you
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see an opportunity to grow your retirement
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dollars, but lack all of the funds to
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make it happen.
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Your self directed retirement account,
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whether that's an Ira or 401K.
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With traditional or Roth dollars in
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it has the ability to borrow,
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it has the ability to leverage funds
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to make that deal happen and therefore it
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allows you to generate compound interest
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and grow your retirement account exponentially
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fast, even though you don't have much
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in it. So please let this be encouraging for
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those of you who may not have much in
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your retirement account because it's
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not about the money that you have,
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it's about investing in the right vehicle.
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It's about preparing yourself for acquiring
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the right knowledge and most importantly taking
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action. which requires you to be the
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right you.
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okay, So what do I mean?
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I can give my knowledge away all day.
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I can share with you opportunities that
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will bring you an abundance of growth and
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compound interest.
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But if you haven't done the necessary work
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and prepared yourself to receive this
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information,
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it's going to be impossible to achieve
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the right results.
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Picked that up from my mentor,
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Jeff fagin,
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it's simple math.
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The right vehicle plus the right knowledge
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plus the right you will produce the
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right results.
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But I think you need a visual of this
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because they aren't all equal.
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The most important piece in this equation
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is the right you. without the right you
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these other variables don't matter.
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So join me in my next video where I
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will break down ubit.
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What is it?
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where did it come from?
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And how do you avoid it?
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I'm Donnell with self directed strategies.
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Don't forget to like and subscribe and
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share this content as we continue our
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quest for exponential growth of compound interest.
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So til next time.
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