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SHOW NOTES FOR EPISODE 229: ASK BILL! SOLO 401-KS, OUT-OF-STATE INVESTING, HOUSE MOMS & CLOSED CIRCUIT TV
This is our monthly Fun Fact Friday “Ask Bill!” episode, where Bill answers specific real estate investing questions received during the month from e-mails, in-person conversations, phone calls or through online portals such as BiggerPockets.com and Quora.
One of our goals here at the Old Dawg’s REI Network is to help to educate/enlighten fellow real estate investors, to share what little knowledge we have by answering your questions, and to help other investors to broaden their understanding of real estate investing and to, hopefully, avoid some of the mistakes that can cost you later.
In today’s “Ask Bill” episode, Bill answers questions about investing in real estate tax-free within a 401-K account, a single mom wants to invest out-of-state to raise money her kids’ college and another out-of-state investor wants to create “eyes” in her 40-unit property with closed circuit TV and a House Mom.
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Listen for details!
Question #1 – Investing Through a 401-K (multi-part question)
Bill,
Thank you very much.
I listen to you podcast all the time and I want to thank you for all the knowledge you provide. Also, I want to ask you the following questions regarding how to invest in Real Estate with retirement accounts:
- I am 57 and in a position to withdraw from my 401K because I am no longer with the employer which set up my 401K. However, if I use my retirement funds from my 401K the IRS will consider any withdrawals from (my) 401K as income. . So if I invest $200K from my 401K, the IRS will take as income and at the end of the year, I will be in a much higher tax bracket. How can I avoid it?
- Regarding Estate Planning, how can I structure the ownership of the real estate that I want to buy from my 401K in such a way that in the event of my passing the Real Estate passes to my family. I was told to use a self direct IRA but I understand that to use self directed IRA or 401K the deeds have to be in the name of the Self Direct IRA or 401K to avoid penalties and be in compliance but what happens to the ownership in the event of my passing. Will it work if I place as beneficiary of the Self direct account IRA or 401K a Trust for my family?.
- Do you know of any institutions where I can open a Self Directed Retirement Account 401K or IRA?.
Thanks for your time and for having such a great podcasts. I look forward to your reply on the above.
Thanks again.
Antonio
Answer to Question #1
Antonio,
Thank you for listening to our podcast and for your kind words.
Disclaimer: First, I will state I am not and attorney or CPA and that you should check with your attorney or CPA first and foremost.
Regarding your first question on how not to be taxed on the money you withdraw from your 401-K
You don’t have to take a distribution from your retirement account to invest in real estate. You can setup a self-directed IRA or 401k, do a direct rollover from your old 401k (which will not have any tax implications) then you can buy real estate inside of your new self-directed retirement account.
Regarding your second question on estate planning, if you pass away that the funds would go directly to your family without penalty.
Just like with any other retirement account when you open self-directed IRA or 401k you will be required to designate a beneficiary. If you pass away, the beneficiary (it can be an individual or a trust) will inherit the IRA with all of its assets. As the new owner of the IRA, the beneficiary will have full control over those assets. Also, I would highly recommended setting up a living trust, that way, if one spouse passes away, the surviving spouse will receive 100% of the assets without going through probate.
In response to your third question on recommendations of institutions who set-up self directed IRA and 401-Ks
Sense Financial is an excellent boutique financial firm specializing in self-directed retirement accounts with checkbook control. The founder and president of Sense Financial, Dmitriy Fomichenko, was a guest on one of our shows (episode #131) and he offers a complimentary consultation to all Old Dawg listeners. Just tell him I sent you.
Here is a link to the podcast:
131: Investing Power of the Self-Directed Solo 401-K August 28, 2017
Question #2 – Out-of-State Investing
Hi Bill- my name is Veronica. I’m a 49 yr old single mom of 5 with two more kids left at home. They are 11 and 14. I just purchased my first single fam. rental last Oct. in Sacramento Ca. I really wish I knew then what I’ve learned up to now. I have been reading lots of books and listening to Bigger Pockets. I came across the podcast you were on and found your website. I’ve been listening to your podcasts. Thank you so much for what you’re doing to help so many people. My goal is to create enough passive income to retire early and have college tuition for my kids. I would like to get started in out of state investing in multi-fam. properties. I just finished David Greene’s book “Long Distance Real Estate Investing.” I live in California where prices are too high so I want to invest out of state. I was wondering if you could give me some tips on what locations to start looking in. I’m looking for a state that is landlord friendly with good rental cash flow potential. I’m lacking the confidence of knowing which market to invest in from out of state and where to start. I will be using my HELOC for down payments and leveraging with bank loans. Your advise would be so much appreciated. Veronica
Answer to Question #2
Veronica,
Thank you for your email and for listening to our show! And congratulations on your bold step into real estate investing! As a father of 7, I can appreciate your motivation to use real estate investing as a means to attain financial independence and help out with your children’s education. I also have two children still at home, a boy, Kenson, age 14 (he’s actually the voice you hear rapping in the background with the music for our Rap-it-Up segments on my Monday shows). And I have an 18 year old girl, Francesca, who is a senior in high school. They both were adopted while we were living in Haiti. And college is a big concern for them. They both are very gifted athletes. Francesca is a sprinter in track and field and Kenny, my son, is a freshman running back for his high school football team. We are all praying that they can help leverage their strong athletic ability for college scholarships (along with cash flow from my rental properties). I also have 3 out of 4 daughters who are not yet married and 3 boys, one, Jordan already on his own and the father of two (of four) of my grandchildren, and another, Elijah,who just starting out in college in Idaho, who also wants to become a real estate investor and is currently seeking a property to “house hack”… So, I can hear the cha-ching cha-ching sound for years yet to come.
That’s what’s so cool about real estate investing! If you do it right, the funds you generate can not only provide for your retirement and meet those family expenses like college, weddings, maybe even help your kids purchase their first homes, but your rental properties can become a legacy that can be passed on to our kids after we’re gone.
Also, thanks for turning me on to David Green’s book on out of state investing. I’m currently working on getting him on the show.
So, enough about me… haha… on to your specific questions…
Investing Out-of-State
I’m obviously a big believer in out-of-state investing because that’s what I do. But you do need to be prepared. Some of the biggest challenges include:
- Finding the RIGHT properties in the RIGHT market. How do you do this?
- Emerging markets – I always try to buy in “emerging markets” – (see episodes listed below) those are areas with good population growth, strong local economies, low unemployment, a variety of strong employers from a broad range of industries. This means, you can increase rents and build equity at the same time.
- Do you buy turnkey? – I did when I started but did not have the best experiences. It sounds great! You get a house in an emerging market, it’s already rehabbed, it already has tenants and a property manager and team in-place. Sound too good to be true? Unfortunately, for me and, after 4 different property managers, it did sound better than it was in reality. I’m not saying turnkeys can’t be good. All I’m saying is you really really need to do your due diligence first before contracting with a turnkey firm.
- Your other option is to find the property yourself and build your own team. It starts with a great agent/broker who will diligently look for the right properties that meet your criteria.
- Building the RIGHT team.
- Property management is key. By far the most important. Whether it’s provided by your turnkey company or you find one yourself.
- See the following episodes and blog articles:
- 085: Finding the Best Property Manager March 20, 2017
- 074: Hiring the Right Property Manager for Your Rental Property February 10, 2017
- 10 Best Questions to Ask Prospective Property Management Firms November 8, 2017
But you also need other in-state team members like a good in-state real estate attorney, building inspector, local banker, real estate agent or broker, title and escrow people, etc. See episodes:
- 068: 7 Tips for Successful Out-of-State Investing January 20, 2017
- 066: The Pros and Cons of Out-of-State Investing January 13, 2017
- 020: Building a Great Out-of-State Team August 5, 2016
- 018: Why I Buy Out-of-State Properties July 29, 2016
Picking the Right Landlord Friendly State/City
I talk a lot about emerging markets on this program. That’s key. Again, do your research. The markets are always changing. In previous episodes, I have highlighted some areas that are pretty hot right now: See episodes:
- 095: How to Find Hot Emerging Markets for the Best Deals April 24, 2017
- 178: Top US Emerging Real Estate Markets for 2018 February 9, 2018
- 126: Top 15 Fastest Growing Sub-Markets August 11, 2017
And you very intelligently mentioned “landlord friendly” states. That is very important for out-of-state investors! For example, In states that are not so friendly to landlords, including California, New York, Illinois and New Jersey, if a renter is without, say, hot water, they can legally withhold rent until it is fixed (or pay to fix it and deduct that from the rent). Another example of a city that is more anti-landlord is Baltimore, Maryland. In Baltimore City, the eviction process takes at least three months, often longer, while the landlord must carry the mortgage and the tenant simply lives for free. And when a judge does agree to allow an eviction to move forward, the landlord is not automatically granted a money judgment – they have to apply through another court process to recover past due rent. For many Baltimore landlords it is not worth the trouble. In California, an evicted tenant can sometimes stay up to a year rent free through the eviction process.
Here is a list of some of the most landlord friendly states:
- Texas
- Indiana
- Colorado
- Georgia
- Kentucky
- Mississippi
- Arizona
- Florida
- Arkansas
To find out more about landlord friendly states, see:
- 034: Landlord Friendly States September 23, 2016
Question #3 – Closed Circuit TV and House Moms
Hey Bill!
I just listened to your ‘house mom’ show. What kind of camera system did you put in?
Our property manager wants us to do a cloud-based system and I can certainly see the benefit of that but it does add additional monthly costs. We have a DVD type system in another property. Just curious what you went with?
This is on a 44 unit and we are struggling with the same thing with needing more ‘eyes’ on the property. We are looking for a part time on-site manager. How do you compensate your house mom?
Thanks,
Melissa
Answer to Question #3
Dear Melissa,
Thanks for listening!
Our camera system on our 22-unit is not a cloud-based system. We have a W Box/Dahua 16 channel DVR w/1 TB hard drive system. Because we have three floors, we have have installed 13 cameras (but it can handle up to 16 cameras). We also signed up with Spectrum as our Internet provider because they could provide 100 mbps upload and download speed, which is really needed if you are going to view multiple screens/camera views on your phone or PC. So far, it has been excellent.
We had some incidents with tenants that I was able to go back and view through the system to verify what happened. We ended up evicting 5 tenants that were violating their lease and or involved in illegal activities because of the system.
Regarding our House Mom, she works for us in exchange for free rent (which costs me $450 for the studio apartment we provided her).
I have a copy of the agreement letter I developed for her in the House Mom episode show notes on the Old Dawg’s website if you want to see the details of the arrangement. We have a 90-day probationary period built into the arrangement if it doesn’t go well.
I can honestly say, that thus far, it has worked out well for us and for her.
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