Private Money Blueprint Coaching Program

Module 6 – Using IRA Money and Pooling Funds

Communicate With Us

• Susan – susan@theinvestorinsights.com• Trevor – trevor@thereibrain.com• Patrick – patrick@mustknowinvesting.com

My Background• Started investing in real estate in 1994• Started in mortgage business in 1999• Opened my own brokerage in 2002• Began raising private money in 2004

– First one to one, fractionalized then private mortgage pool to make rehab loans in CO

– Funded more than $24MM in rehab loans in 4 years with private money all raised by me and one loan officer

• Closed residential divisions of Lassiter Mortgage in September 2008 including the private lending division

• Coaching, commercial consulting/financing, speaking and REI training.

• http://www.TheInvestorInsights.com

Our Agenda

• Pooling Money from Private Lenders• Pooling Vehicles• Using IRA Money for Your Investments• Self-Directed IRA’s (SDIRA)• Working With SDIRA Lenders

Pooling Money

• BE CAREFUL!• Employ an attorney or professional

advisory service• Three Best Ways to Pool

– Fractionalized Note – Syndication – Private Placement Memorandum (SEC

Exempt Filing)

Fractionalized Note• 10 or fewer investors in a trust deed investment • Check your local statutes• In CA, governed by statute Section 10229 of the Business and Professions Code. • Each investor receives certified copies of the original promissory note and deed of

trust along with copies of the title insurance policy and fire insurance endorsement. • A Fractional Interest Note and Deed of Trust is held as an undivided interest with the

investors named on the Note, Trust Deed and Title Insurance Policy. • No more than 10 persons who meet the criteria of income or net worth may be

fractionalized in a transaction. • Qualifying questions are either:

– My investment in the transaction does not exceed 10% of my net worth, exclusive of home, furnishings and automobiles, or

– My investment in the transaction does not exceed 10% of my adjusted gross income for federal income tax purposes for my last tax year, or in the alternative, as estimated for the current year.

• Regardless of the investment amount, the purchasers (investors) shall have identical rights to:

– Lien Position– Foreclosure – Interest Rate (prorated)

• Sample Fractional Deed of Trust in Resources Section

Syndicate• Syndicate! The REI buzzword of 2009.• Equity partner – gets a piece of your deal.• You and your equity partners form an LLC.• You are the manager (syndicator) and they are the

members. • Make sure you spell out clearly in the operating

agreement how distributions and disputes are handled.• You may get an “acquisition fee” and/or a management

fee• This is how the commercial deals get done.• One of my clients raised $2MM from 9 equity partners to

purchase 156 units in Kentucky

Private Placements - PPM• "Regulation D" is a United States Federal program created under

the Securities Act of 1933, indoctrinated in 1982, that allows companies the ability to raise capital through the sale of equity or debt securities.

• There are 3 basic "Rules" which are relied upon to raise capital. These rules allow for different amounts of capital, different types of investors and different methods for conducting an offering: 504 (up to $1 million), 505 (up to $5 million) 506 (ANY AMOUNT)

• The Reg D programs were designed to provide an exemption to sell securities privately without registering the securities and also to provide the appropriate documentation for properly accepting andusing the capital.

• Online Resources: RegDResources.com, GrowThink.com, PPMFast.com

Types of Reg D Offerings• There are 2 basic types of Regulation D Offerings

(which can also be combined)• An "equity" offering is where the company sells partial

(or a majority) ownership in the company (via a security, stock or LLC membership units) to raise capital. The investors receive a return when the company profits and those profits are shared.

• A "debt" offering is where the company raises debt financing by selling a promissory note to investors with a set annual rate of return, and a maturity date for when funds will be paid back to investors. A debt offering is much like a business loan, but instead of a bank providing the financing, a group of investors lends funds to the company.

Reg D Offering – Step 1• Pre-Offering Stuff: Most real estate investors are not professional money

raisers. Your credibility is key and a Reg D offering communicates professionalism.

• The very first step in an offering is properly setting the structure

• Structuring usually includes: – setting share price or note amounts – determining how many “units” or “shares” to sell – which Reg D program to use – setting the maturity date and rate of return for promissory notes (in debt

situations) – share allocations to principals (so they maintain a set amount of control in the

company) – minimum and maximum offering amounts which set the effective range of the

offering, minimum amount of investment per investor, etc.

Reg D Investing – Step 2• Document Creation: Preparing an offering involves the creation of the following

Regulation D offering documents:

– Private Placement Memorandum: The Private Placement Memorandum, or "PPM", is the document that discloses all required information to the investors about the company, proposed operations, the transaction structure, the terms of the investment (share price, note amounts, maturity dates, etc.), risks involved, etc.

– Investor Questionnaire: This is completed to determine if they are an accredited or unaccredited investor, how much they plan to invest and where it is coming from.

– Subscription Agreement: The Subscription Agreement explains the terms and conditions of the offering. It is the "investment contract" for purchasing the securities. Typically an investor will complete this document. and then attach a check for the investment.

Promissory Note: In debt offerings you need to have a Promissory Note outlining the terms of the loan arrangement with the investors. The note is the actual "loan document" between the company and the investor.

Form D SEC Filing: The Form D is the form filing that is sent to the SEC in Washington, DC. It notifies the SEC that you are using the Regulation D program and provides them basic information on the company and the offering. This is not an approval document or registration, it just notifies the SEC that you have a Regulation D Offering in place.

State Form Filing: Most states require a specific form to be filed along with a copy of the SEC Form D and the PPM. Nearly all states charge a fee ranging from $50 to $495. In most states the form does not need to be filed until capital has been received from an investor in that state. After receiving the capital you typically have 15 days to file the appropriate documentation.

Reg D Offering – Step 3• Marketing – Be Careful!• A fundamental requirement of Regulation D is that there be no

general solicitation or advertisement used in connection with the solicitation of an investment.

• NO ONE will give you a straight answer to “what is a general solicitation?”

• You may not provide offering materials on a website, unless the offering materials are only provided to prospective investors who have a pre-existing substantive relationship with the issuer

• Issuers establishing websites are advised to keep nominal information on the home page of a website, indicating the name of the issuer and requesting the viewer to provide their name and password to access additional information on any interior page.

• The interior pages of the site are only available to prospectiveinvestors that complete a questionnaire establishing that they are "accredited investors."

Accredited or Sophisticated• In order for an individual to qualify as an accredited

investor, he or she must accomplish at least one of the following: – Earn an individual income of more than $200,000 per year, or a

joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income.

– Have a net worth exceeding $1 million, either individually or jointly with his or her spouse.

• A sophisticated investor is the type of investor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.– Typically, a sophisticated investor must have either a net worth

of $2.5 million or have earned more than $250,000 in the past two years to qualify.

Plan Assets Rule• Plan Assets Rule • The rule is that if more than 25% of the fund is

funded with pension plans (i.e. 401(k) and Profits Sharing), IRAs, Keoghs, SEPs, etc., the fund's assets will be treated as "plan assets" themselves.

• Our attorney said that was bad. ☺• We chose to limit our plan assets to 15% to be

on the safe side since we had a dividend reinvestment option.

Rule 504• Provides an exemption to raise a maximum of $1

million in a 12 month period. • You can raise only $500,000 by the sale of securities to

persons residing in the states of Montana and Alaska, which have no disclosure laws applicable to the offering.

• For the states that do have disclosure laws, which are 48 out of the 50 states, a business can raise up to $1,000,000.

• Rule 504 has no disclosure requirements, no limit on the number of purchasers, and no investor sophistication standards.*

• Rule 504 is the most commonly used Regulation D exemption as an intrastate offering i.e. 80% of the investors and the project reside in the same state.

Rule 505

• Provides an exemption to raise a maximum of $5 million in a 12 month period.

• This exemption limits the number of nonaccredited investors to 35 but has no investor sophistication standards.

Rule 506• Provides an exemption for limited offers and

sales with no maximum dollar amount of the offering.

• This exemption does not limit the number of accredited investors, but the number of nonaccredited investors may not exceed 35 investors.

• All nonaccredited investors must be sophisticated.

• The sophistication is determined with an investor questionnaire

My 506(d) – Mortgage Pool• We offered a PPM to make rehab loans in Colorado• The PPM contained information about the financial

characteristics of the borrowers and the transactions that took place in that pool.

• This is not for the faint of heart or anyone that has no cash. I spent over $10,000 having our PPM prepared by a local attorney.

• When just starting out before you have a track record, just do one to one or small syndication deals and NEVER TOUCH THE MONEY!

• My surprise aka the investors don’t “get it”

Using IRA Money• You or your investors can utilize previously untouchable money to

invest in real estate by rolling it over into a self-directed IRA• It is possible to use funds from most types of retirement accounts:

– Traditional IRA – Roth IRA – SEP IRA – Keogh – 401(k) – 403(b)

• Most employer sponsored plans such as a 401(k) will not let you roll your account into a new vehicle while you are still employed. However, some employers will allow you to roll a portion of yourfunds. Contact your current 401(k) provider.

IRA Approved Investments• Pre-Foreclosures • Foreclosures • Lease Options and Sub Lease Options • Rental Property • Multi-Family Units • Raw Land • Tax Liens and Deeds • Notes• Commercial Real Estate • Residential Real Estate • International Real Estate • Mortgages • Loans• Businesses • Limited Liability Companies • Limited Partnerships • Franchises • Private and Public Stock • Mutual Funds • Hedge Funds

Prohibited Transactions• 4975(c) (1) of the Internal Revenue Code identifies prohibited transactions

to include any direct or indirect:– Selling, exchanging, or leasing any property between a plan and a disqualified

person. For example, your IRA cannot buy property you currently own from you. – Lending money or other extension of credit between a plan and a disqualified

person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.

– Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.

– Transferring or using, by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intend to use.

– Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.

– Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.

How It Works• Set up a Limited Liability Company (LLC) in the state of your

choice.• Prepare a specialized Operating Agreement that meets the

specific requirements for a Self Directed IRA LLC.• Establish a Self Directed IRA account with an independent

IRA Custodian that permits truly self directed investments. • Fund the new Self Directed IRA account or transfer funds

from your existing retirement account to the new custodial account.

• Direct your new Self Directed IRA custodian to make an investment in your new Self Directed IRA LLC.

• Find a suitable investment vehicle in which you want to make your investment.

• Purchase the new investment in the name of your Self Directed IRA LLC.

IRA Custodians

• Some of the most popular are:• PENSCO Trust Company • Sterling Trust Co. • Equity Trust Company • Fiserv Trust Company • Trust Administration Services Corporation • Millennium Trust Company• Sunwest Trust Company• Self-Directed IRA Services, Inc

– I prefer using a SDIRA “facilitator” for true checkbook control.

Custodian Drama• Your private lender has to submit a request to the

custodian to fund the real estate transaction.• This can take up to 2 weeks. If you’re lucky.• Facilitator such as Guidant Financial allows “true

checkbook control” and eliminates the need for a custodian. Faster and cheaper in the long run.

• Your private lender has a checkbook in the name of their LLC and writes the check or wires the funds immediately.

• http://www.LassiterRecommends.com/Guidant• More expensive to set up but you and your private

lenders will save a ton of time and money in the long run.

SDIRA “Pooling”• Since buying a property may require more funds

than you or your private lender currently has available in an IRA, you also can have your IRA purchase an interest in the property with other individuals who have SDIRA’s

• Can be a spouse, business associate, or friend. Internal Revenue Code (section 4975) specifies that only "lineal descendents" be disqualified. Sister – yes; kid – no.

• You cannot place property that you already own into your IRA.

Non-Recourse Loans• If you do not have enough money in your SDIRA to buy

a property and can’t find a partner with a SDIRA, you may apply for a non-recourse loan.

• Available from North American Savings Bank http://www.IRALending.com– 70% LTV, residential and small multifamily, hates condos, rates

between 7.875% and 8.125%, must cash flow, no new construction and must have “curb appeal” ☺

– Matt Allen10950 El Monte, Suite 210Overland Park, KS 66211Phone: 913-327-2041Toll Free: 866-735-6272Email: mallen@nasb.com

Find SDIRA Lenders

• The story of Rick.• If they have money in a mutual fund, YOU

take charge!• Get them on the phone with Guidant –

they provide excellent education and will walk your lender through the entire process (30 days)

• Follow Up!

Use A Broker?• Your private lender can make the loan directly

(research state laws) or through a broker.• Broker may charge a few bucks but will prepare

all the documents – note, deed of trust, etc and will ensure state law compliance.

• You may also use an attorney OR your title rep until you feel comfortable preparing the note and deed of trust (or mortgage) on your own.

Lender Direct• Meet with your new private lender and present them with

a package that includes:– Loan amount requested– Purchase contract– Comps or appraisal– Repair estimate if a rehab– Exit strategy details that includes their ROI - % and $ amount– Whatever financial info on yourself you want to share– Prefilled promissory note and deed of trust or mortgage with their

mortgagee clause (name and address of LLC)– Whatever state disclosures are required.* These loans are

“business loans” and not bound by RESPA.– Hazard binder– Preliminary title report

• Answer the Big 3: How much will I need, How much will I make and When do I get my money back?

Tips

• As with all private loans, do not touch the money.

• Show your potential investor that s/he can make secure returns with you and not have to rely on the wild fluctuations of the stock market.

• Gather social proof – testimonials, letters, etc from other private lenders that have done business with you.

• Always be building your credibility kit!

Questions

• Your Questions

Next Module – BONUSES!

• Bonus Week 7: – Using Lender Luncheons To Recruit More

Private Lenders

• Bonus Week 7b:– Analyzing deals step by step tutorial

Action Plan1. Determine whether you are looking for equity partners

or rate/term loans2. Ensure that you have met w/ an attorney who has

experience in these transactions within 2 weeks from today

3. Present to (or call) no less than 2 potential private lenders over the next 2 weeks

4. Re-evaluate what you have taken action on up to today… realize that action is what makes money… people who always learn and don’t take action on what they learn are called librarians

5. Write up your goals for the next 90 days and write specific action steps that you’ll need to take to reach those goals