Large SFH for sale near large university campus, 5 BR/3.5bath, plus 1/1 garage unit. As it is half a block from edge of campus, after I rent this once, it should rent itself (student word of mouth will handle the rest). $3000 per month rent for the house would be snapped up in a second, $500 for the garage unit. So 3500 x 12 - $42,000 per year income. My only concern is spring semester housing arrangements are locked so I have to limp through until May/June before I could rent this out, but it would take 60-90 days to close anyway.
I have an angelic, hard money, private lender lined up. They would loan close to 100%, and would do a non-recourse loan (at lower rate than I could get from a bank on a conventional mortgage). This would enable me to buy through a self-directed Roth (also maybe with a Coverdale Educational Savings Account included). They would allow me to defer repayment until I got the place leased out and had cash flow, but I have some funds available to cover rent in the short term. Lender is NOT a related party.
Mortgage would be ~$1500 per month ($18k/yr). I am budgeting annually $14,000 for taxes, insurance, and maintenance (and that would be a very high estimation, it might be closer to half that, but I would keep that much reserved from repayment to cover unforeseen expenses and allow Roth IRA to cover them -- would put the money reserved funds into CDs or something).
So expenses would be $32k, leaving me $10k annual positive cash flow. I plan to plow all positive (non-reserved) cash flow into loan repayment, because I want to get this paid off quickly for 2 reasons. First, my lender would be loaning their own retirement funds, and I want to give them the ability to "call the loan" after a few years (10 years or so), in the event they needed to consume their retirement dollars. They would give me reasonable time (3-6 months) in which to go get conventional financing if I have not repaid the loan in full.
Second, I hope to get this paid off in 8 years, to coincide with when my oldest child starts college, and have the rental income available to pay for college expenses (if he went to this school, I know he could never live in this property if owned by my Roth/kids' Coverdale).
To pay off in 8 years, I need to cover tax, insurance and maintenance (TIM) costs from a source other than rental income. I have two options for this:
First option, I have another Roth investment (oil and gas royalties) that pays about $7200/yr (but is up and down with market forces on a monthly basis). That, plus adding $5,000 new money to Roth annually and $2,000 to Coverdale, earmarked for TIM, would make up all TIM costs annually and allow me to put all rental income into repaying the loan. LLC docs would require additional contributions from the Roth/Coverdale, like a note. All of the TIM expenses would be lost as far as tax deductions.
Second option, I could set this up so my Roth (maybe kids' Coverdale, too) invests in an LLC and I, individually, own half of the LLC (might do 40/40/20 with me and my Roth owning 40 each and the Coverdale owning 20). That would allow me (individually) to claim at 40-50% of the TIM costs on my tax returns, and I think I could pay and claim 100% of them (make sure the LLC docs permit that). Accounting-wise, the LLC would end up with unequal capital accounts as a result, and that would require the LLC to make unequal distributions to balance that out (would be about $112k after 8 years based upon above numbers). Basically 4 years of rent (after TIM expenses) would be distributed to me to "balance the books" and make up for earlier disproportionate payments. This would come at a time when I needed that $$ to pay for a kid in college, and would be fine by me. If I did it this way, I probably would not put the kids' Coverdale into this mix at all.
Once one kid graduates from college, another will be ready to start. As I understand it, I can withdraw Roth IRA funds to pay for a child's college expenses, so using the rental income into a Roth then out to college would be okay. Of course, a Coverdale can pay for college, and after one kid graduates I can change the beneficiary to next child, and then have until the last one is 30 before I have to distribute any remaining funds (with 10% penalty) or designate another family member (grandchild by then would be highly likely).
Even with diverting cash flow to pay for college, my retirement nest-egg would be well set -- with the equity in the real estate, and would have the cash flow after kids were out of college.
WHAT AM I MISSING? I figure I am overlooking some income tax issues, likely UBIT taxes on the Roth/Coverdale. Any way to minimize those based upon the setup outlined above?
Do you see one option above as being preferable to the other? Or do you see a third option I have not considered?
I have given this a LOT of thought but I am new at this, so input and constructive suggestions are always welcome! Thanks in advance, and a happy and prosperous new year to all!
PS. Anyone know of a good custodian for a Coverdale account if I go that route? I have a GREAT custodian for my Roth royalty investment at this time ($100 initial fee, $50 annual fee), but they won't do a Coverdale.
I have an angelic, hard money, private lender lined up. They would loan close to 100%, and would do a non-recourse loan (at lower rate than I could get from a bank on a conventional mortgage). This would enable me to buy through a self-directed Roth (also maybe with a Coverdale Educational Savings Account included). They would allow me to defer repayment until I got the place leased out and had cash flow, but I have some funds available to cover rent in the short term. Lender is NOT a related party.
Mortgage would be ~$1500 per month ($18k/yr). I am budgeting annually $14,000 for taxes, insurance, and maintenance (and that would be a very high estimation, it might be closer to half that, but I would keep that much reserved from repayment to cover unforeseen expenses and allow Roth IRA to cover them -- would put the money reserved funds into CDs or something).
So expenses would be $32k, leaving me $10k annual positive cash flow. I plan to plow all positive (non-reserved) cash flow into loan repayment, because I want to get this paid off quickly for 2 reasons. First, my lender would be loaning their own retirement funds, and I want to give them the ability to "call the loan" after a few years (10 years or so), in the event they needed to consume their retirement dollars. They would give me reasonable time (3-6 months) in which to go get conventional financing if I have not repaid the loan in full.
Second, I hope to get this paid off in 8 years, to coincide with when my oldest child starts college, and have the rental income available to pay for college expenses (if he went to this school, I know he could never live in this property if owned by my Roth/kids' Coverdale).
To pay off in 8 years, I need to cover tax, insurance and maintenance (TIM) costs from a source other than rental income. I have two options for this:
First option, I have another Roth investment (oil and gas royalties) that pays about $7200/yr (but is up and down with market forces on a monthly basis). That, plus adding $5,000 new money to Roth annually and $2,000 to Coverdale, earmarked for TIM, would make up all TIM costs annually and allow me to put all rental income into repaying the loan. LLC docs would require additional contributions from the Roth/Coverdale, like a note. All of the TIM expenses would be lost as far as tax deductions.
Second option, I could set this up so my Roth (maybe kids' Coverdale, too) invests in an LLC and I, individually, own half of the LLC (might do 40/40/20 with me and my Roth owning 40 each and the Coverdale owning 20). That would allow me (individually) to claim at 40-50% of the TIM costs on my tax returns, and I think I could pay and claim 100% of them (make sure the LLC docs permit that). Accounting-wise, the LLC would end up with unequal capital accounts as a result, and that would require the LLC to make unequal distributions to balance that out (would be about $112k after 8 years based upon above numbers). Basically 4 years of rent (after TIM expenses) would be distributed to me to "balance the books" and make up for earlier disproportionate payments. This would come at a time when I needed that $$ to pay for a kid in college, and would be fine by me. If I did it this way, I probably would not put the kids' Coverdale into this mix at all.
Once one kid graduates from college, another will be ready to start. As I understand it, I can withdraw Roth IRA funds to pay for a child's college expenses, so using the rental income into a Roth then out to college would be okay. Of course, a Coverdale can pay for college, and after one kid graduates I can change the beneficiary to next child, and then have until the last one is 30 before I have to distribute any remaining funds (with 10% penalty) or designate another family member (grandchild by then would be highly likely).
Even with diverting cash flow to pay for college, my retirement nest-egg would be well set -- with the equity in the real estate, and would have the cash flow after kids were out of college.
WHAT AM I MISSING? I figure I am overlooking some income tax issues, likely UBIT taxes on the Roth/Coverdale. Any way to minimize those based upon the setup outlined above?
Do you see one option above as being preferable to the other? Or do you see a third option I have not considered?
I have given this a LOT of thought but I am new at this, so input and constructive suggestions are always welcome! Thanks in advance, and a happy and prosperous new year to all!
PS. Anyone know of a good custodian for a Coverdale account if I go that route? I have a GREAT custodian for my Roth royalty investment at this time ($100 initial fee, $50 annual fee), but they won't do a Coverdale.
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