Your Questions Answered

In todays email:

• ❓️ Your questions, my answers: I answer questions from newsletter subscribers like you.

Your Questions

In this newsletter, I will answer many of the questions that I have been receiving from subscribers like you. In today’s newsletter I will answer 4 questions. There will be more Q&A in subsequent newsletters.

1. I want to buy real estate in my IRA. How can I do that?

There are two main ways you can do this…open a self-directed IRA account or establish a Solo 401k. I will discuss both below.

SELF DIRECTED IRA: First, you’ll have to establish a self-directed IRA account, which allows you to buy real estate in it. Typically, you would set up a custodial account with company that allows these types of transactions. You can’t just use your traditional Fidelity or Schwab account to do this.

When I quit my job in the corporate world, I set up a self-directed IRA (SDIRA) with Equity Trust Company and rolled my 401k from my prior employer to my custodial SDIRA account. Now, if you roll it from a 401(k) to a traditional IRA there is no tax implications. However, if you roll it into a Roth IRA, you’ll have to pay taxes upon transfer. I decided it was best to pay tax now and have it grow tax free for life.

In this self-directed IRA, I have purchased rental properties, mortgage notes, done private lending, invested as a limited partner in apartments and so much more.

SOLO 401K: The second way you can do this is to setup a Solo 401k and this is typically done using a SEC attorney with the proper documentation which allows real estate purchases, etc. A big benefit of the Solo 401k over the IRA is the amount you can contribute. In 2023, aggregate contributions can reach up to $66,000 if under 50 and $73,500 if you are 50 or older. Whereas in an IRA the limits are $6,500 and $7,500 for 50 and 50+, respectively.

To be eligible to open a solo 401(k) plan, you typically need to meet the following requirements:

a. Self-employment: You must have self-employment income from a sole proprietorship, partnership, or as an independent contractor.

b. Business structure: You must operate your business as a sole proprietorship, partnership (with only spouses as partners), or a limited liability company (LLC) where you are the only employee.

c. No full-time employees: Your business should not have any full-time employees other than you and your spouse. However, certain exceptions apply.

For more details, read my book call “IRA 401K Income Builder”.

2. Looking to seller finance a property that has an underlying loan on the property. The property mortgage is escrowed for the taxes and insurance - do we keep the escrow in place?

First, it is important to understand that when a property is sold, and the deed transfers, then the insurance is no longer valid since the insured has to match the name on title. The buyer would have to get their own insurance for the property.

Second, you need to understand that there is a provision in most mortgages, called the “due on sale” clause, which basically says that if the property transfers, then your loan may be due and payable in full. The key word here is “may”. However, most lenders do not exercise the “due on sale” clause if the mortgage is paying on time in full and not delinquent. There is the possibility of the lender calling it due but very improbable.

You need to set up escrow for the buyer which is essentially the property taxes plus the insurance divided by 12. This amount would be added to their principal and interest payment for a total PITI payment (principle, interest, taxes, insurance).

Now with that being said, you can keep the escrow in place and continue to pay taxes and insurance through your current mortgage company. However, you are paying double insurance since the insurance policy you’re paying on is no longer valid. Some people continue to keep the insurance policy in place to avoid the mortgage company calling the loan due.

One way to avoid the double insurance issue is to deed your property into a trust before you sell it, and then assign the beneficial interest of the trust to the new buyer. Then the buyer gets insurance policy naming the trust as insured. This reduces the risk of the lender finding out the property was transferred but is not 100%.

When doing these types of complicated transactions you need to work with a good attorney and CPA to help navigate.

3. What happens to a mortgage note when a borrower files bankruptcy? How do you get paid?

In a bankruptcy scenario, the mortgage note owner or lender typically has a secured interest in the property. This means that they have a legal claim to the property as collateral for the loan. The lender’s ability to receive payment depends on the type of bankruptcy and the actions taken during the bankruptcy process:

 Chapter 7 Bankruptcy: The borrower’s non-exempt assets are typically liquidated to repay creditors, and the mortgage note may be discharged if the borrower chooses not to reaffirm the debt. This means the borrower is no longer personally liable for the mortgage debt, but the lien on the property remains. If the borrower decides to surrender the property, the you as lender can pursue foreclosure and sell the property to recover the outstanding debt.

 Chapter 13 Bankruptcy: The borrower proposes a repayment plan to repay their debts, including the mortgage. The lender receives payments from the borrower or trustee as per the approved plan. The borrower continues making regular mortgage payments, which are included in the plan, and the lender receives those payments directly. If the borrower stops paying, then you as lender can file a “motion for relief” to pull the house out of bankruptcy, and start the foreclosure process.

As the mortgage note holder or lender, you have to file what’s called a “proof of claim” with the bankruptcy courts to ensure that you get payments, especially in chapter 13 cases. You have 70 days to file the proof of claim from the date the bankruptcy was filed.

4. When should I sell a house with land contract versus seller financing?

The major difference between land contract and traditional seller financing is that the deed does not transfer until the loan is paid in full with a land contract. Many land contracts have a forfeiture clause (depending on the states laws) which allows the seller to get the property back upon the buyer defaulting on the payments. This process is typically much faster than a mortgage foreclosure. So if your property is located in a state with a long foreclosure process then best to sell with land contract. You also want to find out the forfeiture laws in that state. In a few states, a land contract must be foreclosed like any other mortgage.

Disclaimer: These answers are based on my 30 years of experiences in the real estate field. I am not an attorney or accountant. This information is provided with the understanding that we are not engaged with rendering legal, accounting or investing advice.

 IF YOU HAVE A QUESTION, PLEASE RAISE YOUR HAND AND ASK BY SIMPLY REPLYING TO THIS EMAIL.

Last weeks POP QUIZ was…What is a quiet title?

ANSWER: The purpose of a quiet title action is to "quiet" or clear any competing claims or liens on the property. It helps establish a clean and undisputed ownership title. The court examines the evidence and legal documents related to the property's history to determine who has the rightful ownership.

Once the court issues a quiet title judgment, it confirms the current owner and removes any doubts or conflicting claims. This judgment helps ensure that the owner can possess, use, and sell the property without any legal obstacles related to its ownership.

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