I practice what I preach. My own portfolio is a great case study for Captal IRA

As a self directed IRA investor since 2004, I feel lucky to have moved much of my retirement savings from the stock market to real estate. About half of my self directed IRA is in real estate holdings, while the other half is being lent out to a real estate developer. My self directed IRA is presently 78% of my retirement portfolio, and as I read the financial news, and the economic news, I am toying with the idea of making it 100%. The June 2011 edition of Smart Money Magazine has two articles that push me in that direction. On page 18, the magazine makes note of the fact that while discount stock brokers have reduced per transaction fees, the mutual fund managers have not reduced their fees in the last five years. The average fund cost in this article is $144.00 per $10,000 invested, or $1,440 per $100,000.00 invested. This is only the administrative fee. Many have other fees, as well. Our yearly adminstrative fee for the same $100,000.00 is $440.00. That is a difference of 1% a year, or 10% over ten years, not compounded. Do the math. That is $10,000.00 more in your account if you only do as well as the fund manager. My real estate and lending portfolio is trouncing my mutual fund portfolio every year. It is more work to find and manage real estate, but for me, the sweat equity will ensure a better retirement someday.



The second article is equally or more compelling. On page 32, Jack Hough, writes about sweeping government budget reforms. Basically, we are so deep in a deficit hole that there will need to be major increases in taxes and spending cuts at the federal and state level in order to get our budget in order. Without out significant changes, we will be headed for an economic disaster on par with Greece, Japan, and Ireland. As the interest on the deficit continues to rise, the turnaround becomes more difficult. The next administration will be forced to make massive cuts that most of us are experiencing at the state level. Yet somehow, the stock market has risen from its 2009 lows. Is the market rationale? With high unemployment, skyrocketing debt, and a bad real estate market, I don’t see how the stock market is going to continue in the same direction.



The sector I feel most comfortable with right now is real estate. Individuals that lost their homes need to rent, young people need to rent until they can find work, and since the real estate market is depressed, the pricing is good. Maybe that is why we don’t have a single client telling us they made the wrong move with real estate. While the stock market seems irrational, real estate makes sense.

Freddie and Fannie... Yay or nay?

Gary Shilling recently distributed an email about the future of Fannie and Freddie, as well as the U.S. housing market. This is an excerpt from his post, which I thought was worth duplicating for my readers. “The U.S. Treasury-HUD white paper cited earlier indicates that the Administration, like many other Democrats as well as Republicans, wants a significantly smaller role for government in housing finance, including a “winding down” of Fannie and Freddie and a smaller role for the FHA. House Republicans want Fannie and Freddie eliminated and only the FHA left as a source of federal backing. Currently, federal agencies including Fannie and Freddie guarantee 87% of new mortgages.

As discussed in our new book, The Age of Deleveraging, back in mid-2008, many FDIC-insured institutions were heavily leveraged but still had an average capital-to-asset ratio of 7.9%. In contrast, Freddie and Fannie had less than 2%, so for each buck of capital, they owned or guaranteed $50 in mortgages. Lobbyists from the two convinced Congress that they didn’t need more capital since defaults would be tiny as house prices rose forever. But when the housing sector nosedived, Fannie and Freddie’s houses of cards fell apart. So in September 2008, both were seized by the government in a legal structure called conservatorship. They are regulated, indeed controlled, by the Federal Housing Finance Agency. Initially, each had up to $200 billion backing from the Treasury, but it later was made open-ended through 2012.

Washington regarded Freddie and Fannie as part of the government. Assistant Treasury Secretary Michael Barr said that because they are “owned by the taxpayers in the biggest housing crisis in 80 years, it is logical that they be used to stabilize the housing market.” But since the two technically remain private corporations, their finances remain off the federal budget and their huge prospective losses from sour mortgages don’t need to be counted in the federal deficit. It’s ironic that the government is using Fannie and Freddie as the biggest off-balance-sheet financing vehicles in the economy at the same time it blasted banks for using off-balance-sheet entities in earlier years.

Also, by using these GSEs to support housing, with an open credit line to the Treasury, the Administration doesn’t have to approach Congress for funding bit by bit. The Treasury simply injects enough money, quarter by quarter, to cover their losses. As of Feb. 25, 2011, that was $153 billion for the pair, and the Congressional Budget Office estimates the losses through 2020 at almost $400 billion. Treasury Secretary Timothy Geithner in March 2010 said, “There is a quite strong economic case, quite strong public policy case for preserving, designing some form of guarantee by the government to help facilitate a stable housing finance market,” even after Fannie and Freddie are restructured or unwound.
More Private Capital

Nevertheless, the February 2011 white paper advocated a number of short-term measures to attract private capital into the mortgage market—with higher costs for house financing and its detrimental effects on home ownership. These include allowing the maximum loan limits to fall to $625,000 from $729,750 as scheduled on October 1, increasing downpayments on Fannie and Freddie guaranteed loans to 10%, and increasing FHA insurance premiums, which subsequently was announced to rise by 0.25 percentage points on 30- and 15-year loans to 1.15% on low downpayment loans.

The Administration believes that given the fragile state of the housing sector, it will take at least five to seven years to move to a longer term structure of housing finance. It offered in the white paper—but did not discuss in detail—three options, which no doubt will be hotly debated going into the 2012 elections.

The first is a privatized system with Fannie and Freddie eliminated. Their $1.5 trillion combined mortgage portfolio, out of the $10 trillion mortgage market, is already set to fall 10% per year. Government financial support would be confined to FHA and VA loans, which accounted for 23% of mortgages last year, targeted to help narrow borrower groups. Private lenders would originate and securitize mortgages without government guarantees. Interestingly, small banks oppose this option because they believe it would concentrate the business in the hands of large lenders, much to their detriment.

The second option would create a mostly private mortgage market as well as FHA/VA involvement, with a government “backstop mechanism to insure access to credit during a housing crisis.” Option three involves a privatized market as well as FHA-VA participation. New, privately-owned companies would buy mortgages from lenders and securitize them. Those securities would be guaranteed by the government as long as they met standards. These new private entities would essentially replace Fannie and Freddie.

Regardless of how government legislation and regulation unfold, the nation’s zeal for homeownership may be weakening outside as well as inside Washington. Homeowners have learned the hard way that for the first time since 1930s, house prices nationwide can and do fall. Zeal for a sound home financing system involves measures that discourage homeownership. And the likely leap in the percentage of renters and falling portion who own their abodes will reduce the power of homeownership advocates.

While this perception of the housing market should certainly be taken into consideration, it should far from dissuade investment in real estate. If used properly, this perception can strengthen portfolios for savvy investors. Contact me to learn how.

Which state has the hightest death tax? Thats right, I said Death Tax...

The answer……………

NEW JERSEY…(followed by Maryland)

Yes, the state most famous for it’s shoreline, as well as the characters from two television shows about the shore (see “Jersey Shore” and “Atlantic City”) does not just have the highest tax on real estate. It is also the highest when it comes to death taxes. It is no surprise that New Jersey also has the highest rate of emigration of all fifty states. People are leaving the state so fast that Governor Christi decided to give the wealthiest 2% a tax break in hopes that they would stay. 

But citizens of New Jersey may not be able to just cross the border. The neighboring states of Pennsylvania and Maryland also grab some hefty taxes upon death. Yet, it is not surprising that Florida, which invites the world of retirees to its beaches and sunshine, is not charging a death tax.

The key is to not focus solely on the federal estate tax. Watch out for state death taxes. And if you own property or a business in more than one state, consult with your estate planning adviser to ensure you establish domicile where you want. State tax residency rules are complex and like estate tax rules, they vary from one jurisdiction to another.

Specific Details on Death Taxes

Let’s look at some specifics on death taxes for a few minutes. There are currently three categories of death taxes:

1.     Federal: With the relatively generous $5 million federal estate tax exemption for 2011 and 2012, most people are free of any federal estate tax worries -- until at least 2013. 

2.     State Inheritance Tax: Twenty States have them. If you live in one of these places, your estate can be exempt from the federal estate tax but still be exposed to significant state death taxes. Indiana, Iowa, Kentucky, Maryland, New Jersey, Pennsylvania, and Tennessee all have high inheritance taxes with low exemptions. Indiana is the highest at 20%.

3.     State Estate Tax: Sixteen states and the District of Columbia have their own estate taxes. Like the federal estate tax, these state estate taxes are based on the entire value of your estate in excess of the applicable exemption. Exemptions vary from a low of $338,333 to a high of $5 million. 

a.     Three states have exemptions of less than $1 million. This means they start taxing the estate quickly. (Ohio at $338,333; New Jersey at $675,000; and Rhode Island at $850,000). 

b.    Six states have $1 million exemptions (Maine, Maryland, Massachusetts, Minnesota, New York, and Oregon), and so does DC. 

c.     Three states have $2 million exemptions (Illinois, Vermont, and Washington). 

d.    Two states have $3.5 million exemptions (Connecticut and Delaware). 

e.      $5 million exemptions (Hawaii and North Carolina).

As you can see, Maryland and New Jersey charge both an estate tax and an inheritance tax. In Maryland, the inheritance tax exemption is $150 and the maximum tax rate is 10 percent (in addition to the 16 percent maximum estate tax rate). In New Jersey, the inheritance tax exemption is zero and the maximum tax rate is 16 percent (in addition to the 16 percent maximum estate tax rate).

States without Death Taxes

If you are not in New Jersey, Pennsylvania, Tennessee, Nebraska, Maryland, Kentucky, Iowa, Indiana, Connecticut, Delaware, DC, Hawaii, Illinois, Maine, Mass., Minn., NY, North Carolina, Ohio, or Oregon.

Opinions on workforce in America, and the responsibility of Wall Street

don’t usually get into any political discussions on this blog, but the news this week both on the domestic front and international front really has me concerned. The events of this year will shape the decades to come.

The economic crisis, brought on by the real estate bubble, and Wall Street’s excessive greed in exacerbating the bubble by dealing billions of dollars bad loans,  has left millions of families in crisis. Families are over extended and living in properties that they can’t afford or those properties have been abandoned or foreclosed. On top of that, our unemployment rates are still well above 14 percent when you consider the under employed in that formula. The national crisis led to an election of Republican majorities in many states, and many new Republican and Democratic Governors. I think those Governors are justifiably trying to cut programs and spending. This is a time when they can muster the authority to make great changes and to scale down government. They just need to cut in the right places, and they need to think of the ramifications of what they are doing.

In Wisconsin, the Governor is trying to get rid of the unions collective bargaining rights. It seems that his efforts are political in that he left out the three unions that supported him in his election. How he could ever get away with that, I can’t say. It is a bad political move and weakens his position. I am not a fan of  many modern Unions for all the obvious reasons, but I do think they serve a purpose. They make us less competitive, and they typically are asking for too much these days. And when I say too much, I am thinking of pensions, benefits, etc. Why should government employees get lifetime pensions, and lifetime medical benefits when private employers can’t afford to offer those things anymore? Unions have historically provided legitimate protection to workers against the ills of business. There has to be a balance and right now it seems that the unions are exposed, because people like me think that some of the benefits provided to union member is excessive. I think that there needs to be compromise here. The Governor of Wisconsin cannot expect to just remove 80 years of history in one swoop. And crushing the unions, because we are in an economic crisis seems extreme. Both side need to get reasonable.

Workers in this country and abroad need to be employed and make a fair wage in order to ensure that the economy remains healthy for the rich, middle class, and working class. The events in the Middle East are a result of decades of huge disparity. We are beyond the problems faced in Lybia, Egypt, Tunisia, and much of the Middle East and Africa. The stratification of the haves and have nots are unsustainable in those countries without strict military rule. The revolutions being fought in the Middle East today should take us back to our historical struggles to provide opportunity for many in our country.  I think the key to our crisis and the world crisis is that people need jobs in order to feed their families. We need to cut costs in government and we need to get the unions to understand that they better get reasonable or they will die on the vine, but more importantly, we need the state and federal governments to create jobs. We are fortunate enough to have the infrastructure and resources that Lybia, Egypt, and Tunisia could never dream about.  I don’t see an easy road for any of those economies. What I see for us is the need to  get people back to work. I applaud the Obama administration’s spending on expansion of business in this country. Despite the costs, government loans to business to help them expand is a worthy gamble.

What I would like to know is how the new politicians on the block, including Obama, have not done more to deal with Wall Street issues like executive compensation? How come we hear nothing about the Wall Street traders who bought and sold the bundled mortgages going to prison for fraud? I would feel a lot better if I saw more of those types of activities going on. Once again, Wall Street and the Banks hold all the influence so they go most unscathed. There must be balance.

Accounting Standards and its impact on Commercial Real Estate

Could the new Accounting Standards move companies from leasing real property to ownership of real property?

There are some recent proposals to change the Financial Accounting Standards Board (FASB) accounting rules that should have a significant impact on the commercial real estate industry. The rules may make it more likely that companies will choose to own property rather than rent it, and may also change lease negotiations for those who do rent.

Currently, a lease can be either a capital lease, which is reflected on the tenant’s balance sheet, or an operating lease, which shows up on financial statements in the form of rent as a monthly expense. The proposed rule would treat almost all leases as capital leases. FASB argues that this rule would encourage transparency and give a more accurate picture of a company’s financial condition.

Although the new rules may improve disclosure and transparency, they have the potential to have a significant effect on the commercial real estate and equipment leasing industries. Many large companies have thousands of operating leases and one reason some of them choose to rent rather than acquire property is the way the property is treated for accounting purposes. The new rules would require a company to include virtually all of its leases on its balance sheet, as if it had purchased the property and was making loan payments rather than paying rent.

This small change could have a huge impact on large companies such as CVS, Wallgreens, and other national retailers

Happy New Year! Now what about taxes??

New Year  Reminder to Anyone in the middle of a 1031 Exchange.

In a 1031 exchange, the taxpayer must acquire all replacement property by the earlier of the date that is 180 days from the date the relinquished property closes, or the date the tax return for the year in which the relinquished property closed is due, including extensions. This means that for exchanges where the relinquished property closes late in the year (from approximately October 15th until the end of the year), a calendar year taxpayer must get an extension of the tax filing deadline in order to benefit from the full 180 day exchange period. For example, if the relinquished property closed on December 1, 2010, and the taxpayer does not get an extension on the filing of his return, the taxpayer will only have until April 18, 2011 to acquire all replacement properties. (The 2011 tax filing date has been extended to April 18 because of a Washington, D.C. holiday.) If the taxpayer gets an extension, however, he will have until May 30, 2011 to acquire all replacement properties.

Once a tax return is filed, it cannot be amended to include the exchange or to obtain an extension of time to complete the exchange. If the exchange is incomplete, the sale will need to be reported as a taxable event.

New tax deal... What does it mean to you?

President Barack Obama Monday evening announced a tentative tax deal with Republican leaders that would usher in a wave of tax changes, business write-offs and benefits for the unemployed that would last from one to two years.

While a final deal has yet to be agreed to, here is a cheat sheet to help wade through the debate.

 

Taxes

• The core of the proposal is a two-year, across-the-board extension of tax cuts enacted under former President George W. Bush. Mr. Obama said in his remarks Monday evening that he didn't favor extending tax cuts for top earners, but compromised to keep tax breaks for the middle class.

• A 2% rollback of individuals' payroll taxes that are used to fund Social Security. The White House said the cost of this one-year measure is $120 billion and that it wouldn't affect Social Security's solvency.

• The pact also includes a child tax credit, earned income tax credit and a credit to help students afford college. These are aimed at the middle class and favored by the White House.

• The estate tax would be reinstated for two years at 35% only for estates over $5 million. This provision is favored by Republicans. Obama called the provision more generous than is "wise or warranted."

Unemployment

• The pact would preserve extended jobless benefits, also known as unemployment insurance, for 13 months. It is something Obama said he fought hard for. The White House estimates a 13-month extension would cost $56 billion. Republicans had balked at extending jobless benefits, saying they wanted it to be paid for either through costs cuts or new tax revenue. The White House has said paying for the unemployment-insurance extension, rather than borrowing the money for it, would limit its impact.

Business Benefits

• The pact would allow all businesses to expense 100% of their investments in 2011. The write-off would be retroactive to September 2010, when Mr. Obama originally made the proposals to help shore up support from the private sector. The U.S. Treasury Department has said this expensing provision could generate more than $50 billion in additional investment in the U.S. in 2011.

• The agreement includes a 2-year extension of the research-and-development tax credit and other tax incentives to support business expansion.

Costs/Unknowns

• Senior Obama administration officials said in conference call with reporters Monday that they didn't know the overall cost of the package. The White House has said the provisions in the deal wouldn't worsen the medium and long-term deficit. In the short term, the plan is likely to increase the deficit.

• The unemployment insurance and payroll tax holiday, when combined, would cost an estimated $176 billion.

• A two-year extension of the Bush-era tax cuts would cost $314.9 billion, according to a Dec. 3 study from the nonpartisan Congressional Research Service, which does studies for lawmakers.

• It is unclear if a final deal will include other tax incentives and credits, such as an ethanol tax credit.

Not Included

• Senior administration officials said the deal didn't settle all Republican-White House disputes. The two sides still need to resolve disagreements over an arms-reduction treaty with Russia, called START, and the military's "don't ask, don't tell" policy

The Bush Tax Cuts

The "Bush tax cuts" refers to legislation enacted in 2001 and 2003. The cuts lowered tax rates on income, dividends, and capital gains; eliminated the estate tax; lowered burdens on married couples, parents, and the working poor; and increased tax credits for education and retirement savings.

What happens if the Bush tax cuts Expire?

It kind of depends on whether they expire for everybody or just the top 2% of Americans. Many would argue that they need to expire for the top 2% in order to avoid more deficits in the future, i.e.. , without the income from the increased taxes on the richest Americans, the government will have huge spending shortages. Others argue the tax cuts have worked by creating a trickle down stimulus and they should continue. That argument makes little sense to me when you look at our current economic picture.

I believe that if the cuts are to continue for the wealthiest Americans, the loss in revenue can only be justified with an equal cuts in programming. That would take a joint effort on the part of Congress, and would require huge cuts in one of our largest budgetary items...DEFENSE. So if the Republican's want the wealthiest Americans to continue to get the cuts, they need to agree on cuts to defense spending. Education, Social Services, (excluding social security, which nobody can touch), and various other governmental programs don't compare to the money spent on Defense.

Both Republicans and Democrats favor an extension of the tax cuts for the middle class. Where they differ is whether to extend the cuts for Americans in the top 2% of taxpayers.

Among other things, if the Bush tax cuts were allowed to expire, the following would take place:

1. Tax brackets would change, from 10%, 15%, 25%, 28%, 33%, and 35% to 15%, 28%, 31%, 36%, and 39.6%.

2. Long-term capital gain tax rates would rise from 15% to a maximum of 20%.

3. The child tax credit would be lowered.

4. The alternative minimum tax would cease to be indexed for inflation.

5. The marriage penalty would be reinstated

Thus, there is a lot at stake here. Whatever is decided, it must be tied in to lowering governmental spending. Otherwise, we will create an even greater deficit for the next generation.

IRS Sunset Provision

The real estate market and general economy have been the subject of a great deal of negative news lately. While a tax increase is never good news it may cause a little run in the markets this fall. There may be an increase in the year end transactions this year due to the year end sunset provisions in the law that lowered capital gains to 15% back in 2000. In 2011, the federal capital gain rate will increase to 20% automatically if Congress takes no action to extend the 15% rate decrease. It seems unlikely that Congress will do so. In addition, in 2013, there will be a new tax of 3.8% on unearned income, which will include income from the sale of real estate that will be imposed on those individuals with a gross income of more than $200,000, or married couples with an aggregate gross income of $250,000.00. Therefore, by 2003, most middle and high income earners will pay a 23.8% federal capital gains rate for sale of investment property. Combined with many state taxes, the rate will clearly be above 25% for many taxpayers in most places.



With tax increases looming, it is more important than ever to seek advice from your tax advisor long before you sell investment property. Our company engages in many of these discussions with accountants and attorneys that are trying to help their clients make thoughtful decisions. In fact, in a recent case, we were able to help a client find a way to avoid a large capital gains tax, and even help them with some retirement planning issues in the process. .



Mr. and Mrs. Marks approached one of our attorney clients in 2002 about selling a long term vacation property that had primarily been used as a second home. The property would sell for about 2.6 million, and since the basis in the property was under $200,000.00, the combined state and federal taxes would have been over $500,000. The couple was not thrilled about paying the tax, because after paying off some other debts with proceeds of the sale; they would not have had enough money left to retire on, along with their other assets. That attorney contacted us to ask some questions, which led to a meeting with the parties. In that meeting, we helped construct a plan that involved, converting the property to a full time rental for at least 3-5 years. The parties enlisted a realtor who was easily able to rent the property at a rate that nearly covered their yearly real estate taxes and carrying costs. Also, as suggested, they also refinanced the property in order to consolidate some unrelated debt. This would also benefit them 8 years later when they did the 1031 exchange.



Due to the changes in the real estate economy, the couple decided to hold off on selling the property in 2007, because the market had changed for the worse. This year, they listed the property, and got a strong offer of 2.5 million. Our company was able to introduce them to a commercial realtor who specializes in triple net lease commercial properties, and through that realtor’s efforts, they found a very strong, stable triple net lease property. They were able to do a 1031 exchange into the building by using the majority of the exchange proceeds, and now they have an investment property that is throwing off $105,000.00 of rental income and will not only help fund their retirement, but will also be left to their children when they pass on.

Misc IRA questions.

I got a call today from a client that is about to have his IRA buy a piece of land and lease the mineral rights. This is a hot area in some parts of the country. His first question was whether a lender would lend him funds for the purchase. I gave him the name of an IRA lender but informed him that it seemed unlikely since the lease payments on the mineral rights were not substantial unless the gas company actually chose to drill at some point and therefore the land was not income producing. Since and IRA loan is non-recourse, the lender would either have to see substantial assets in the IRA, or there would have to be an income producing property involved.

My clients next question was about when was the earliest that he could take distribution on a ROTH IRA. The answer is two fold. 1. The age of 59 ½ or before that if he is ”eligible.” Eligible (tax and penalty free) distributions of earnings must fulfill two requirements. First, the seasoning period of five years must have elapsed, and secondly a justification must exist such as retirement or disability. The simplest justification is reaching 59.5 years of age, at which point qualified withdrawals may be made in any amount on any schedule. Becoming disabled or being a "first time" home buyer can provide justification for limited qualified withdrawals. Finally, although he could take distributions from a Roth IRA under the substantially equal periodic payments (SEPP) rule without paying a 10% penalty, any interest earned in the IRA will be subject to tax at a substantial penalty.

Guidant?

I was speaking with a new prospect the other day, and he asked me if we were the same as Guidant Financial. That is a tough question, because I have never had a clear picture of what the company actually does? They are obviously one of the best internet marketing companies in the Self Directed IRA area. They are great self promoters, as well. But when I have spoken to people about Guidant’s services, what I am told is that they charged huge fees to set up LLC’s for their self directed IRAs, and then turned them over to a custodian to handle the administration of their IRA accounts. Guidant seems to be a successful marketing company for other custodians, and they get a big fee to set up the intital documents. If you read their site and their blog, they call themselves a “facilitator”. In their Blog they talk about how they lend money for small business. The truth is that I tell my prospects that if they are going to go to a competitor, they should compare fees and services. Guidant is an internet marketing company, and a very good one. But I don’t think they act as an IRA custodian or administrator.

Delaware Statutory Trust

I just read this article about DST’s. They are a new 1031 replacement property vehicle not too different from a TIC, except for one thing. The up front costs of acquisition are much lower. I pulled a few paragraphs from the article below. It was published in the New England Real Estate Investor.

“Financing problems have plagued commercial real estate since 2008. But problems for existing real estate owners have brought the best buying opportunities of our lifetimes. Institutional real estate owners have been forced to liquidate some of their real estate portfolio at bargain-basement prices in order to raise money to refinance expiring debt. More debt is coming due over the next two years that has to be paid off - creating more buying opportunities for cash-rich purchasers. A number of institutional real estate offerings are now available. They have long-term NNN leases and are large enough to attract institutional investors. Economies of scale enable a $20 million property to be a better value than a $2 million property. How can someone with only $1 million afford to invest in such high-quality real estate? The solution is called a Delaware Statutory Trust (DST).

Institutional-grade real estate offers the best prospects to investors, as it provides income as well as excellent capital gain potential. Investors can join forces to purchase Institutional-quality real estate today at bargain prices through a DST, which have been eligible for 1031 exchanges since 2004. In a 1031 exchange, the investor sells investment real estate but pays no immediate taxes on the sale. The basis and gain are 'exchanged' into a new property. DSTs are private placements and only eligible to accredited investors (those with a net-worth over $1 million not counting their principal residence according to a provision of the new 2010 financial reform bill).

Several property types are available as DSTs - although retail and multi-tenant (apartments) seem to be the best value today. Apartment buildings in growing areas which are located near major highways and shopping areas are among the safest investments today. These types of institutional multi-family properties pay investors about a 6% cash flow. Financing is readily available for multi-family offerings on the institutional level. Financing for other property types, however, is more difficult today. Thus retail DSTs pay from 7-8%, but most are cash deals and may not be appropriate for your 1031 exchange if your replaced property contained a lot of debt.

DSTs are a big improvement for investors than Tenant-In-Common vehicles, which have a huge load upfront as the sponsoring company can't make a profit on the back end due to 1031 regulations. DSTs, however, allow investors to "invest with the sponsor" - aligning the interests of the DST sponsor and their investors. DST sponsors indeed make money with the investors on the ultimate sale in 3-7 years (depending on the offering and market conditions). Since the real estate is being acquired at today's low rates - not only do they offer solid income, but investors enjoy excellent growth potential as well.”

Dockominium

A prospective client called yesterday and wanted to know if they could invest IRA
funds in a “dockominium”. Not being exactly sure what that was, I proceeded to let the prospect educate me about Seaview Marina, in Ocean City, NJ. At Seaview, the marina slips are sold in the same fashion as a condominium operates in the state. There is an association, and dues, and there is a deed to the slip. Slips run from $90,000 to as much as $200,000.00 depending on the size and depth of the slip. Many of these dockominiums are rented for the season at very nice rental amounts. My response was that it was indeed a viable investment for the client as long as he did not store his own boat there and collected rent to the user of the slip. It actually makes a great IRA investment since the Dock Association maintains all the slips and the IRA would just simply pay a monthly maintenance fee. The only issue, of course, is making sure that there is sufficient cash flow from the rental to pay the Association fee.

Incidentally, the client believed the return on these slips was about 7%, and that they have appreciated nicely in good real estate markets. He thinks he is getting it at a very low price.