After having been forced to take a little time away from recording new episodes, I am back to pick up where I left off.
On this episode I take a moment to reflect on how real estate has provided me with the TIME freedom to spend with my father who has been saddled to a hospital bed for over seven (7) months up until his unfortunate passing early this month.
I also address three listener questions on the best way to get started in real estate investing. Another question about a lender’s ability to accelerate a loan using the “Due on Sale” clause — and how to avoid it. And finally an interesting question about an IRA exit strategy when turning 70 1/2 and you are required to make the minimum required disbursements (MRD).
If you missed our last episode, be sure to listen to Rich Dad Advisor, Tom Wheelwright on Tax-Free Wealth.
Enjoy the show!
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My Father’s Passing, Best Way to Get Started, Due on Sale, IRA Exit Strategy
My father passed away on February 2nd. He’s been suffering for quite a long time. He had lung cancer and the last six, seven months have been rather difficult on him. The last two months have been exceptionally hard. I just tried to spend as much time as I could with him. My father was a great man. He was very compassionate and respectful and unselfish. He always put family first. I’ve had people tell me that my father gave me a beautiful gift, and that’s his temperament. You learn a lot from your parents and you get your values from your parents, whether it would be trust, honesty and just having integrity. These are the things I learn from my parents. My father was an amazing person who really touched a lot of people unknowingly. These values that I got from my parents and my father, I implement those in my own life and I pass those on through my business and just being open and honest and transparent and trustful with people.
The reason I’m sharing this with you, aside from the fact that I just haven’t been available or in frame of line to put any episodes out for the last three or four weeks is because in looking back, I went to visit my father who lives out of town. A three-hour flight from where I live here in Southern California. Every month I would go and visit him for seven, eight days at a time and spend the majority of my time with him in the hospital. I would do that every month. I’ve been doing that for the last seven months consistently. When I look back, the reason I was able to do that, the reason I was able to spend all that time visiting my father is because of real estate.
The business and the investment of real estate has given me the freedom to travel and visit with him and spend the time. It’s all about that freedom. It’s not just about the cash but it’s about the time. Fortunately, I had the time to go and visit with him. I’m glad I did because I was there right to the very end.
The message I have for you is that a lot of us love what we do, but there are a lot of people out there that have a job that they don’t necessarily care for all that much. Even if they do love it, you’re married to the occupation or your career, it’s a 9 to 5 type of thing, and that’s all fine. I love what I do and a lot of people love what they do. What happens if you have accidents or a sick family member and you need to go and spend time with them? Are you going to be able to do that? Do you have the time freedom to do that? That’s my goal for you, really to help bring you, our audience, to a point where you have financial freedom and time freedom. It’s a wonderful feeling to be able to do that. That’s the purpose of this podcast. The reason we have our real estate business is to help real estate investors or new investors to build up their portfolio and their income to the point where they have financial freedom and time freedom. That’s all I say about that. I just wanted to apologize to everybody for being disconnected for a while. Now, you know the reason why.
Today, what I thought I’d do, just to get back on the bandwagon here, is to go over two or three questions that I have received from our audience who have submitted questions via our website at PassiveRealEstateInvesting.com.
The first one is from Ray. His question is: what’s the best way to get started in real estate? The best way to get started and really the starting point for virtually everything is education. You need to educate yourself. That doesn’t mean getting a degree or a PhD. It means building up enough financial education that you know what you’re looking at, what you need to do, what you need to do your research on, the right questions to ask, understanding what people say when you’re talking to them whether it’s mortgage broker or a real estate agent or anybody else for that matter.
It’s always good to educate yourself. You look at a guy like Warren Buffet. He reads about 800 pages a day. He actually carves out time and schedule every single day to learn about something new, something that will help him get ahead financially or get ahead in life. He has said, “It’s good to learn from your mistakes, but it’s better to learn from other people’s mistakes. People have written books and reports and put out podcasts or write articles, whether in magazines or in blogs. They’ve made their mistakes. They’ve gone through the trials and tribulations. They have the experience to have gotten them to where they are from where they got started. Educate yourself. Build up that financial education. When we go to school, we get academic education. If you get into a trade or you learn some sort of specialized profession you have, professional education. But the thing that we don’t get in school, at least not in the majority of schools here in America is financial education. It’s not something that’s really taught in school. Educate yourself on what you want to learn and keep educating yourself because you’ll get much further ahead faster and you’ll be far more successful.
That’s really the starting point when it comes to starting in real estate. But you never stop learning. You don’t need to get into a mode of analysis paralysis where you constantly feel that you haven’t learned enough to be able to take the next step. Learn enough so you can take another step and more towards whatever that next step may be. That next step might be wholesaling. Maybe that’s a place to start, where you don’t need a lot of money. You’re really just finding deals out there that other real estate investors will buy from you, so you’re just controlling real estate, putting something under contract at the right price, so another investors can come along and they can purchase that from you. It’s really just an assignment of contract, where they’re paying you a fee to take that real estate investment deal off your hands. That’s where a lot of investors start. They just start wholesaling usually within their own neighborhood or somewhere within their own city.
From there, the next place to go or another starting point is really just purchasing rent-ready properties or turnkey properties like what we sell. At that point, it’s a virtually hassle-free investment. The bottom line there is if you have the cash and credit to acquire rent-ready or turnkey properties, you’re good to go. As long as you’ve got a 20% down payment in most cases and a credit to qualify, you’re set. It’s just a matter of picking your market, picking your neighborhood, picking your property and adding that next property to your portfolio. Last but not least, if you’re not in a position to do that, you could partner with someone where they bring the cash and you have the credit or vice versa. Or you can just start acquiring distressed properties using hard money, fixing them and flipping them. You will need some capital to do that. If you’ve got friends and family that’s willing to partner with you or fund you, you could do that as long as you have the time without your own cash, your own capital.
Those are my 30,000 foot level comments on how to get started with real estate. You could ask a bunch of people this question. You’ll get slightly different answers. The starting point is always knowing what you’re going to do, educating yourself and then start with the lowest hanging fruit for you, whether that’s wholesaling or buying turnkey property or partnering or flipping with someone.
The next question comes from Sean. Sean was asking about the due-on-sale clause. He writes, “I own a couple of properties. My wife and I have purchased them in our names and then transferred the deed to our LLC. I have heard of mortgage companies wanting full payment because of the deed transfer. We do not have the resources to pay off a mortgage on demand. I am leery to be buying other properties because of this.” We get this question from time to time. There’s a lot of misunderstanding out there about the due-on-sale clause. First of all, what is the due-on-sale clause? It’s simply this. Most, if not all, mortgage documents have what’s called or referred to as the due-on-sale clause. That says that the lender has the right to accelerate the loan, in other words, to demand full payment of the loan immediately due and payable, if you sell the property or transfer the property for any reason.
The fact is if you’re going to sell the property, the title company is going to obviously pay off your leans, your first and second maybe third lean, whatever is on the property first before you get any disbursement. If you transfer the property from your name to your LLC, the lender has the right and may accelerate that loan. Now, in practice, in the real world, this rarely happens. I’m not saying it never has happened. In the last twelve, twelve and a half years that I’ve been in real estate, I’ve never heard of it happening to anybody that I know. I’ve never seen it happened and I know that a lot of investors will buy and transfer their properties into their LLC or into their trust or whatever vehicle they’re holding their property.
The truth of the matter is that the lender does have the right but the probably of that happening is virtually zero. You have a legal right to transfer your property into a trust. A trust is by law allowed and cannot be called on by the lender. The lender has no right to accelerate the loan if you put your property into a land trust. Back in 1982, an act was passed called Garn–St. Germain Act. What this allows people to do is transfer title into a trust and it prevents the lender from enforcing the due-on-sale clause. As long as it’s in a revocable trust, effectively, it prevents the lender from accelerating the loans. For people who want to avoid this due-on-sale clause or at least the potential risk of having the note accelerated, you can transfer title into a revocable trust. You of course are the beneficiary or your LLC is the beneficiary, however you want to set that up. But you have the legal right to transfer title into your own revocable trust and that cannot be touched by the lender. It cannot be accelerated. You have the legal right to do that.
Again, I have not seen in twelve plus years any instance where a lender has called a note due. If you have your mortgage current and you pay your mortgage every month, there are no red flags that go up on the lender’s end, then you really shouldn’t have an issue. I think it’s just that simple. I think a lot of investors maybe get concerned about this. They hear about it and they start to wonder, “I’m doing something wrong or if I’m going to trigger something with the lender.” I really don’t think you have too much to worry about. I’m not an attorney and I’m not suggesting that you do something that you shouldn’t do. The bottom line is that the probability of a due-on-sale clause being called is very small. If you are current on your mortgage and the lenders are getting paid every month, you should be fine. Consult an attorney who understands revocable trusts, land trusts and you can set up the infrastructure, which is essentially a trust to protect yourself from them.
Bill writes in. He says, “I am 69 years old and will be facing federal minimum required disbursements from my IRA and 401(k) in the next eighteen months. What are some of the exit strategies to consider from IRA funded real estate to be in compliance with the federal government’s minimum required disbursements? This is a good question. I am not an IRA expert but I do understand the IRA and 401(k) vehicle and how it applies to real estate. What I will say is this. The federal government has what is effectively called the RMD, the required minimum distributions, and you must take distributions from your retirement account once you reach the age of 70 and a half years old.
There are a few minor exceptions to that. But generally speaking, you need to start making withdrawals. Now, if you have real estate in your retirement account along with cash, then there’s not an issue, at least not initially. You can make the minimum required distribution from your retirement account and leave the real estate intact. However, the day will come, probably sooner than later, where you will need to liquidate those hard assets within your IRA, so you need to convert those into cash, so you can take the cash out and make those distributions if you’re working with a particular custodian or administrator of your retirement account. They may suggest or even require you to liquidate any hard assets that you have in there, whether it would be precious metals or real estate or whatnot.
The process is simple. It’s just a reverse of what you did to acquire the real estate within your retirement account. Now, all you’re doing is you’re selling that real estate that’s within your retirement account. What happens is that real estate will be sold and the net proceeds from that sale will be transferred back into your account and that just becomes cash and that cash is now accessible to you and you make your minimum withdrawal or you could withdraw more. Retirement plan participants and IRA owners, including SEP IRAs and simple IRAs, they’re all responsible for taking your minimum distribution on time, every year from your account. Otherwise, you face penalties. I don’t know what those penalties are, but they’re supposedly pretty stiff. You want to follow the rules and if you’ve got a retirement account and you’re 70 and a half or older, just make those distributions.
Those are the three questions that I’m going to cover for today. I wanted to keep it brief. If you have any questions, don’t hesitate to contact our office, talk to one of our investment counselors. We could talk to you about markets or strategy if you want. We offer a free strategy session if you’re thinking about investing real estate or you’re just not sure where to start. Give one of our investment counselors a call. That’s what we’re here for. We’re happy to help.
Many of you know already that we have a free report you can download, The Ultimate Guide to Passive Real Estate Investing. Go ahead and download that. It’s a good primer. There’s also some more advanced stuff in there too. Take advantage of the free strategy session. Remember to subscribe if you’re listening to this podcast for the first time or you’ve been listening to it for a while and you haven’t subscribed, just hit that subscribe button and you’ll just get automatic updates every week. Thank you for your patience. I love having you as a loyal listener. We love doing the show. You have a great week. Talk to you soon.
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Download your FREE copy of:
The Ultimate Guide to Passive Real Estate Investing.
Get your FREE coffee mug by leaving us a Rating and Review on iTunes. Here’s how.
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Please give us a RATING & REVIEW (Thank you!)