Why the “Buy & Hold” Strategy Remains #1

Buy-and-hold

By Eric Lorimore

The Buy and Hold strategy, as it applies to real estate, is and always has been responsible for creating more millionaires than any other strategy in existence. The main reason is because it allows you to develop equity through appreciation over time. There are many short term strategies such as lease options, wholesaling, and flipping that can create some cash in your pocket, but in no way will it improve your net worth over time.

I have found in my 20+ years of investing that the process of purchasing real estate is the most important part of the ownership cycle. Selling is easy in the right market, and the only time in the real estate transaction you become responsible for commissions and capital gains tax. It can kill the whole deal if done improperly and at the wrong time.

Your goal in real estate investing should be to develop as much equity as you can in the property while still having enough passive income to get you there. As long as you own the property, you will have the additional benefit of tax sheltering that you cannot obtain from any short-term strategies. THIS is the fundamental reason why the Buy and Hold strategy is #1.

Most people fall within the 20%-36% income tax bracket, and for all you Californians out there, California has one of the highest state income tax rates. What’s even scarier is that most people work the first 4 months of each year just to pay their taxes! The fact is, you will never get ahead financially until you learn to shelter your income from taxes. The wealthy population in this country know how to shelter their income from taxes, which is why so many of them practice the Buy and Hold strategy and own rental properties.

As time passes and you pay off your loan, you get the benefit of additional cash flow which comes in handy in retirement. You may choose along the way to do what is called a 1031 Exchange into a larger, more valuable property that produces heavier cash flow. The beauty of a 1031 Exchange is it defers the capital gains tax (which increased 1/1/13) into the future and allows you to transfer more of your equity to the new purchase. This is another benefit to building wealth in real estate that only the Buy and Hold strategy offers.

Historically, properties have doubled in value every 7 to 10 years going back 50 years in time. Imagine your equity position if you hold a property for 20 or 30 years!

Once you sell, you not only loose out on future appreciation, but you have to pay commission and capital gains tax. I look back to some of the first properties I owned and wish I had never sold them. While I sold them for a profit at the time, their value today is 2 or 3 times as much. It really made no sense to sell and let the next owner make all that appreciation. I managed not to sell one property I purchased many years ago and finally paid it off. The cash flow on that one property today is over $1200.00 per month after expenses. That’s more than the average social security check, plus rents have gone up thanks to inflation. I never thought I would actually like inflation until I started owning real estate!

At a recent Marshall Reddick Real Estate Network Millionaire’s Club dinner, I was seated at a table next to a gentleman who had been investing in real estate with them since 1999. He never sold any of the homes he bought. Many of these properties have doubled in value over time and he is now considering using 1031 Exchanges to move into larger properties. The cash flow and tax shelter he has received over time have been a great asset to him, and now for estate planning purposes he is consolidating his holdings into larger properties to one day will to his heirs. His plan was to leave a legacy to his children and grand children. The Buy & Hold strategy allowed him to realize his dreams.

True wealth in real estate is realized through appreciation. Cash flow, although a necessity, is the glue that holds the deal together to allow you to wait until the value grows. Let your tenants cover your monthly payments and make you rich!

Solo 401k – Transferring Options

Individual Solo 401k Checkbook Control

Saving money with the traditional 401k is an option that many people get involved with through work or other options. Many end up utilizing the options that are provided for them, but when you own your own business and you’re working away from a structured company, you may have to do things on your own. There is an option is known as a Solo 401k and requires a bit more attention from individuals than other options. You’ll find that with this plan of action you’ll need to keep a full set of records that are accurate. This sometimes seems like a daunting task, which is why many people go with another route, but if you’re serious about having retirement investments that are strong, you’ll have to look into transferring your money into this type of plan.

Many people try to go with the custodian IRA option and while that is definitely worth looking into, it will not allow the same kind of flexibility that a Solo 401k would. It’s with that in mind that many are looking at finding a professional overall provider to put money into an account for the future. You may not know how to get this done, and that’s OK.  Looking for providers like Fidelity Investments, TD Ameritrade or Charles Schwab to assist you with the transferring of retirement funds may not be to your advantage.  And the reason is that those providers do not offer options that are self-directed.  That is where help of Sense Financial comes in handy, because they provide truly self-directed retirement plans that come with checkbook control.

Self managing accounts like this can seem painstaking and even arduous at first glance, but you’ll find that if you simply stick to it and you look at the resources that are given to you, retirement saving is not that hard. Not only that, if you’re looking at getting into real estate, this opportunity opens up with greatness. A custodian IRA for instance will not allow you to do this, which is why many move their money over to this type of option.

Advantages of Solo 401k Plan

One of the best things that you’ll denote about self-directed retirement plans such as Solo 401k or Checkbook IRA offered by Sense Financial is that you will have more control over what you do with your retirement savings, whether you want to further invest or you want to pull money out of the system for use with certain transactions. Sure, there are IRS rules and regulations that make this different than your conventional retirement account, but it’s meant for those that are looking at retirement contributions for the future and are not under the umbrella of a larger company. When you work for someone, you often times end up dealing with a great number of issues, but that’s not the case when you are working on your own.

Solo 401k – Quick Notes on Saving Money

Self Directed Individual Solo 401k Checkbook Control

When it comes to saving money in the real world, much like the corporate world, there are a few options that you have. For those that are working on their own, without the covering of a full time job, there are ways to save for the future that can really pack a punch for later on in life. One such option is the ever so popular, Solo 401k. This is very much like you would expect from a larger company, but it is isolated to being relegated for those that are self employed and are looking for a way to move activities and assets to a self sustained account.

There are some Solo 401k Rules that many people will want to know about. While this sounds like a good option for anyone that is self employed, it is not really something that is going to be looked upon favorably. The main difference is that you have to put in a great deal of work into it. You also need to understand the rules of engagement and how you can connect investments into a self-managing style. If you’re not someone that keeps pristine records, you will fall behind fast with this type of account, as it requires serious attention and great records to ensure that payments and notes are all in order, as well as any investments that flow into it are accurate.

Self-Directed Solo 401(k)

For those that are serious about looking into a Solo 401k it’s imperative to look at the many different options that are out there. You won’t be able to simply treat it as a savings account, as you will need to adhere to the same kind of principles that are placed on workers within the traditional method of gaining employment benefits. Self managed funds grow with an individuals contribution, often times not matched by any other income, which can also put a damper on things.

Solo 401k providers can help with the outline of rules, regulations and how the government treats these accounts. It’s important to understand that you will not be able to simply move forward with this, you’ll need to adhere to a certain level of rules and regulations. Without looking into all the fine details, you will not be able to sustain the account for very long and could end up losing out on a major benefit. Take time to learn more about this with the providers that are available, you may find that this is a great plan of action for the future.

And as always, to learn more please visit: http://www.sensefinancial.com

Solo 401k is a Retirement Plan of Choice for the Self-Employed

Self-Employed

Self-employment is growing in popularity fast lately.  According to the statistics, the largest group includes man aged 45 to 64 years old. Self-directed Solo 401k Plans are designed specifically and are available to the self-employed.  These plans carry important benefits and rewards.

What is a Solo 401k?

The Solo 401k plan is a simplified version of a conventional 401k plan, outlined by the IRS in 1981.  As a traditional 401k plan, the Solo 401k rules are the identical.  The Individual k or Solo 401k is intended for the self-employed and small business owner, and as such, give additional options for its account holders.

Following are several benefits of the plan:

- High contribution limits: Because contributions can be made to the plan as both employee and employer, the Solo 401k permits retirement savings to grow at an accelerated rate.

In 2013, the IRS raised Solo 401k contribution limits to $51,000 for those under the age of 50 and $56,500 for those age 50 and above.

Spouses involved in the business can also contribute to the plan, in effect doubling-up the potential contribution total to $113,000 per year if both are age 50 and above.

- Checkbook control: The Solo 401k plan provides its owner total control, or “checkbook control,” over its funds.  Funds from the account can be invested with the simplicity and speed of writing a check.

- Unlimited investment opportunities: The plan allows a world of investment opportunities, permitting investments in about every class, from real estate to precious metals.  The self-directed nature of the plan allows the portfolio to be diversified under the direction of the plan holder.

- Low cost and ease of management: With the Solo 401k, the holder is also the trustee of the plan.  As trustee, he or she can make investment decisions without needing custodian approval.  This avoids the costs and delays often related with a custodian.

- Loan feature: The plan allows a loan to be taken from the account for any purpose, including personal use.  The loan can be up to $50,000 or 50% of the account, whichever is less.

With advantages such as high contribution limits, checkbook control, and loan feature, the Solo 401k is a powerful financial tool, available to the self-employed and small business owners.  Retirees who are self-employed or thinking of joining the growing ranks of self-employed may qualify for the plan and its benefits.

Accessing All Advantages of the Individual 401k

Solo 401k Advantages

The Individual 401k has great potential as a financial tool.  Its many features, such as high contribution limits, virtually unlimited investment capabilities, checkbook control, and loan feature make it an attractive choice for those who qualify.

Not all providers offer the full range of features with their Individual 401k plan, however.  Providers vary in their plan’s features, management, and fees.

In choosing a provider, it is important to find out what type of plan is being offered.  Individual 401k providers fall into three categories:

• Self-directed custodians and trust companies

This provider offers an Individual 401k plan that allows alternative investments, such as real estate, private businesses and precious metals.  While this plan offers a wider range of investment capabilities, the power to make the investments belongs to the custodian and trust company.  The owner’s retirement funds are at the mercy of the company and its decisions.  Any potential investment opportunities must be submitted for approval by the company, and is thus subject to various forms of paperwork and delays.

This type of provider typically charges a range of fees, from set-up to holding.  These can range from several hundred to over a thousand dollars.

• Banks and brokerage firms

Banks and brokerage firms also offer an Individual 401k plan.  Their plan focuses on traditional investments such as stocks, mutual funds, and bonds.  Investments are usually limited to the products offered by their company.  This provider does not offer the loan feature or Roth sub-account with their plan.  Typically there are hidden fees with this provider, based on the net asset value of the fund.

• Self-directed Individual k or Solo 401k administrator

This provider serves as a facilitator who sets up a self-directed Solo 401k on behalf of the plan owner.  The provider sets up the plan and then names the plan owner as the trustee and administrator of the plan.  The owner has full control over the investments of the plan and can make investments with the speed and simplicity of writing a check.  As trustee of the plan, the participant can take full advantage of the virtually unlimited investment capability of the plan.  The plan allows both traditional and non-traditional investments in almost any class, from real estate to precious metals.

Sense Financial Services offers the truly self-directed Solo 401k plan with its full range of features such as:  loan feature of up to $50,000, high contribution limits, unlimited investment capability, and Roth sub-account.  Plan participants can exercise checkbook control over their retirement funds, without the need for custodian consent.

When choosing a plan provider, it’s important to research the features available, the fees charged, and the management of the plan.  Understanding one’s investment goals and objectives can help in the process of finding the best Individual 401k provider.

IRA and 401(k) Rules Changes

IRA and 401(k)

Are there any changes to the 401(k) plan and IRA rules this year (and going forward)?

Yes.  The most significant change that no one seems to be paying attention to is the brand new “in-plan” Roth conversion rules.  In the past, clients with 401(k) accounts with their current employer had very limited options for moving pre-tax 401(k) funds into post-tax Roth 401(k) accounts.  For example, in the past, a 50 year old corporate employee who had $200,000 in her 401(k) account could not convert some or all of the account into the plan’s Roth component.  However, many clients would like to convert at least some of their account into post-tax funds (and, of course, pay the tax associated with the Roth conversion) in order to create a pool of pre-tax and post-tax retirement funds.  That type of planning is now possible, with the end result of more income tax flexibility in retirement years.

Advantages for Self-Employed

Those who are self-employed have even more flexibility.  They are eligible for Individual 401(k) Plan, which is a type of Qualified Retirement Plan designed specifically for the self-employed individuals or small business owners with out any full time workers in the business or company.  Some of the advantages of the Individual 401(k) Plan are significantly higher contribution limits (up to $56,500 in the year 2013), ability to make after tax (Roth) contributions to the plan as well as converting pre-tax retirement dollars into after-tax (Roth sub-account), loan option which allows plan participant to have quick, easy and inexpensive access up to $50,000 (or 50% of the plan balance, whichever is less).  Also, one of the main advantages of the plans offered by Sense Financial is the “Checkbook Control”, which puts the plan participant into the driver’s seat, eliminates custodian fees and delays associated with the custodian, allowing making investment transactions as simple as writing a check.

Investing in Notes Using the Solo 401k

Self directed Solo 401k

Investing in Notes with Solo 401k Plan

The self-directed Solo 401k Plan offered by Sense Financial has virtually unlimited potential for investing options that are available for clients.  It is often referred to as “unlimited investing” because of the potential investment capability.  The owner of the plan can direct the funds of the plan into almost any investment class, including real estate, precious metals, hard money loans, mortgage notes, private businesses, tax liens and tax deeds, trust deeds, investment opportunities abroad as well as conventional traditional investments.

Purchasing Notes with Solo 401k Funds

Promissory notes are a relatively straightforward and potentially profitable investment option.  Funds from the self-directed retirement plan can be invested into notes.  Solo 401k rules allow notes to be purchased from third parties using funds from the plan.  These promissory notes are determined by the owner and trustee of the plan.  All payments of the note go back to the plan, tax-free.

Promissory notes are treated as investments and differ from the Solo 401k loan feature.  With a note, account funds are invested into the promissory note to a third party.  This differs from the loan, which lends account funds to the trustee of the account.

The owner and trustee of the Solo 401k is responsible for setting the terms of the note as well as drafting the documents needed.  These terms include:

• Principal or loan amount
• Rate of interest- simple or compound
• Maturity date
• Payment due dates
• Type of loan- secured or unsecured
• Guidelines dealing with loan default

The plan owner must draft the promissory note document which includes the terms of the note.  This document legally obligates the borrower to repay the loan.   The Solo 401k is listed as the lender and beneficiary of the note, with the owner/ trustee signing the documents.  The owner/ trustee of the plan is responsible for the safekeeping of the investment.

Securing the Note

An additional document securing the the promissory note is also needed if the loan is secured. Secured loans are regarded as the safest type of loan as the note is secured by collateral such as real estate or equipment.  The owner of the plan or a hired loan servicing agent can draw up this asset securing note.  Once these document(s) are recorded, either the plan owner or the loan servicing agent is in charge of collecting and depositing payments into the Solo 401k account.

Because the income from promissory notes is considered return on investment, all profits, income and gains made from these notes must go back into the Solo 401k account to keep the account from being taxed.