iFunding Weekly Educational Newsletter

Part 1: Introduction to Due Diligence in Commercial Real Estate

Due Diligence – What is it?

Purchasing a property without conducting proper due diligence is like buying a used car without looking under the hood……what looks like the greatest deal can turn into your worst nightmare. Good due diligence consists of a thorough review of the physical, legal and financial risks of a potential investment property before committing to the deal.

The due diligence process serves to confirm all the material facts related to a property that could cause a buyer to hesitate from consummating the deal at the price and on the terms proposed by a seller. At a minimum, due diligence for a commercial real estate acquisition should consist of: (1) an environmental assessment; (2) title and municipal records review; (3) a survey; (4) an engineering and building inspection; (5) a zoning review; and (6) review and confirmation of financial data, each of which will be separately addressed in this Seven Part Series.

Due Diligence Contingencies in Contracts

A buyer can either conduct due diligence before entering into a contract with the seller or after the contract has been fully executed. If a buyer wants to conduct due diligence after a contract is fully executed, the buyer should have a due diligence contingency in the contract. A due diligence contingency is a length of time specified in the contract for the buyer to carry out and perform due diligence. If the buyer is not satisfied with its due diligence the contract contingency gives the buyer the right to back out of a deal without penalty (i.e. the buyer will get its contract deposit back). Contingencies are important for buyers who cannot predict with certainty the physical, legal and financial conditions of the property prior to entering into a contract. If a buyer enters into a contract that does not have a due diligence contingency and then uncovers a material issue the buyer will either have to proceed to the closing and accept the risk or terminate the contract and loose the deposit. Due diligence contingencies can vary greatly depending on the facts of each transaction, however there are two main categories: a general due diligence contingency and a specific due diligence contingency.

General Due Diligence Contingency or “Free Look”

For the buyer a general due diligence contingency in a contract is preferable to a specific due diligence contingency. For a general contingency the language in the contract is drafted to allow the buyer the ability to conduct all forms of due diligence (within reason) that the buyer needs in order to feel comfortable to proceed to the closing. This type of general contingency is known as a “free look” because it allows the buyer to terminate the contract for any reason or no reason and still receive a full refund of any earnest money deposit.

Specific Due Diligence Contingency

Specific due diligence contingencies are tied to narrow investigative procedures like environmental assessments, zoning studies, financing or building conditions. A specific due diligence contingency is most beneficial to the seller because it only allows the buyer to terminate the contract under limited conditions. For example, a specific due diligence contingency could contain an environmental provision that only allows the buyer to cancel the contract in the event that a Phase I Environmental Site Assessment recommends a Phase II Environmental Site Assessment (which involves testing) (Environmental Due Diligence will be covered in more detail in Part 2 of this Series); or a specific due diligence contingency could contain an engineering provision that only allows the buyer to cancel in the event that the building inspection reveals structural issues with the roof, walls or foundation (Engineering and Building Inspection Due Diligence will be covered in more detail in Part 5 of this Series). From the buyer’s prospective a specific due diligence contingency is a much riskier contingency than a “free look” because if due diligence reveals a material problem beyond the scope of the limited conditions, the buyer either loses its deposit or is forced to close and then is stuck with the problem.

Seller’s Tips

  • Use specific due diligence contingencies in the contract
  • For each type of due diligence, clearly identify the reasons under which a buyer can terminate the contract and draft language as narrowly as possible
  • Require the buyer to provide appropriate insurance for all of its consultants naming seller as additional insured
  • Make sure that the buyer indemnifies the seller for any damages or liabilities that arise out of testing and that seller will repair all damage at its expense
  • If buyer wants a right to extend the diligence period, require a non-refundable payment

Buyer’s Tips

  • Get a “free look” general contingency which allows termination of the contract for any reason or no reason
  • For all forms of due diligence contingencies make sure that the contract requires the seller to assist the buyer in conducting the due diligence by providing documents in the seller’s possession such as existing property files, reports and permits
  • If the buyer is allowed to apply for permits or make any applications before closing the contract should grant the purchaser the authority to act on behalf of the seller when dealing with third parties such as municipalities
  • Try to get a right to extend the due diligence period, without a non-refundable penalty
  • For each type of specific due diligence, clearly identify the reasons under which a buyer can terminate the contract and draft language as broadly as possible

In the Concrete Jungle

In New York City buyers of real estate have been hoarding their cash reserves since the financial crisis in 2008. As a result, there is huge amount of cash chasing after very few deals which has placed a lot of the control in the hands of sellers. In New York City sellers therefore heavily favor entering into non-contingent contracts (often referred to as “all-cash” contracts) and have forced buyers to conduct as much due diligence as possible prior to entering into a contract. One reasonable solution is for the seller and buyer to enter into a non-binding letter of intent, which has an exclusive period during which the seller will only sell to that buyer. This allows the buyer a certain amount of time (usually very short) to conduct limited due diligence before entering into a binding contract. However, letters of intent should be used with extreme caution as courts may enforce them as binding contracts, especially with respect to any promise by the parties to “act in good faith”.

Good Resources

A helpful list of documents that a buyer should consider requesting from the seller prior to committing to any commercial real estate deal is here.

Disclaimer

The information in this blog post (“post”) and website is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. By using this website and post you understand that there is no attorney client relationship between you and Tomlin Law, PLLC. No information contained in this post should be construed as legal advice from Tomlin Law, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction. Although the information on this blog is intended to be current and accurate, it is not guaranteed or promised to be current, accurate, or complete. This blog contains links to other web sites. Tomlin Law, PLLC makes no guarantees or promises regarding these web sites and does not necessarily endorse or approve of their content.

Tune in February 22 to Watch iFunding CEO on The Stoler Report

iFunding is pleased to announce William Skelley, Founder and CEO, will be appearing on The Stoler Report this month. The episode debut will air Tuesday, February 22nd, 2016 on NYC CUNY TV. To view a sneak peek of the episode, view it now on YouTube.

The Stoler Report-New York’s Business Report, is New York’s only television broadcast featuring real estate and business leaders. Michael R. Stoler hosts the show. The weekly program features compelling group discussions highlighting current events and issues in the world of real estate.

Featured alongside Mr. Skelley,  in the panel discussion of “The Evolution of Crowdfunding for Commercial Real Estate,” includes renowned real estate and investment professionals: Paul Braungart, Founder and President, Regional Capital Group; John Shannon, Senior Managing Director, HFZ Capital Group; Larry Davis, President, Shorewood Real Estate Group; and Nicholas Mastroianni II, President and CEO, US Immigration Fund.

The show will air over the next three months on the more than twenty university, educational, community, and public access television stations. For those not able to watch live, the episode will also be available on The Stoler Report website and The Stoler Report App, which can be downloaded for free on iTunes and Google Play, after the debut showing on Tuesday, February 22nd .  Also view the episode now, on YouTube!

Ten Markets for Investors to Watch in 2016

While many investors aspire to own a piece of the skylines dotting America’s gateway cities, 2016 is the year of the secondary and tertiary markets, which are offering a better proposition value than most of the traditional “Big Six” markets. The Urban Land Institute (ULI) recently released its “Emerging Trends in Real Estate” report, which highlights some of the best markets to watch this year.

Issues found with larger markets, the report says, is that they have become so highly valued on a global perspective that pricing has risen to unattainable levels for a typical domestic investor. When ULI reconciled its survey results, it became clear that markets were moving in the rankings as a result of market participants’ need to take a more offensive approach to the market or to set up a desirable defensive position.

The cities in the top 10 are a combination of traditional higher-growth markets that offer favorable business conditions; markets that were slowed by the global financial crisis, but are now in a position where demographics may drive future growth; or new markets that appear to be positioned to move up a class in the investment strata.

ULI’s 2016 markets to watch, and the reasons they made the list:

  1. Dallas/Fort Worth – Impressive employment growth driving the local economy, supported by a business-friendly environment, attractive cost of doing business, and a cost of living that has allowed the market to enjoy many corporate relocations.
  2. Austin – Continued strong economic and real estate performance and a city that benefits from diverse job creation ranging from service jobs to higher-end STEM and TAMI positions. It remains an attractive place to live for all generations, but there is some concern the market is growing faster than local infrastructure.
  3. Charlotte – Good job and population growth, coupled with development of urban centers, has made this market attractive to residents. There is some concern that the concentration of the financial services industry may not offer the same level of growth as some of the more tech-oriented markets.
  4. Seattle – A diverse industry base that is benefiting from the growth of TAMI industries. While growth has been strong enough, the only potential risk is if it can sustain this current pace.
  5. Atlanta – Experiencing strong growth in key economic sectors without concerns of oversupply. It also offers a lower cost of doing business, which is attracting corporate relocations.
  6. Denver – Economic strength and a location and culture that attracts a qualified workforce and a growing technology sector. Further growth will be driven by a number of public and private infrastructure investments.
  7. Nashville – A once up-and-comer that has now arrived, adding to the number of 18-hour cities with a growing and vibrant urban core, yet offers attractive suburban locations. Similar to Austin, there is some concern that infrastructure won’t be able to keep up with growth.
  8. San Francisco – Even though this Top Sixer is seemingly at its peak in occupancy, rent levels, and valuations, respondents noted that if it ever drops, the chances are it will bounce back even higher—so they’re keeping this one on their top 10.
  9. Portland, Ore. – A market that may rise from secondary to primary status in 2016, due to its being at the forefront of what makes an 18-hour city. However, there is some room for improvement in public and private investment and the local development community.
  10. Los Angeles – Another Top Sixer to make the list, its pricing and fundamentals are strong, but relatively mild compared to those in San Francisco. There’s potential for future growth in select neighborhoods, and both multifamily and retail are undersupplied.

Real Estate Crowdfunding is Only Rising with iFunding’s Best Month in August 2015

iFunding, a leading real estate crowdfunding platform, had its best month in its 3 year history, offering investors over $14 M in real estate investment properties.

August is typically one of the quietest months of the year, with investors distracted by summer activities. However, due to the quality of iFunding’s real estate opportunities, the company quickly funded six of its eight projects listed within a week of introducing the project to its 7,000 accredited investors.

“iFunding takes pride in providing quality deals for our investors, “ William Skelley, Founder and CEO, states, “We have been focusing on developing sound relationships with our sponsors, and this month, it’s clear this effort has paid off.”

“We thoroughly enjoy working with the iFunding team and using its platform for our funding source.” Myles Bruckal, Founder of The Bruckal Group says, “Raising capital with iFunding exceeded our expectations, and therefore listing with them again was an easy decision. We are honored to be apart of its most successful month, and we’re in discussions regarding our next project for the iFunding platform. ”

iFunding expects continued growth by offering larger and higher quality opportunities and acquiring additional accredited investors.

About iFunding 
iFunding is a leading real estate crowdfunding platform, facilitating debt and preferred equity fundraising for properties ranging from multi-family residences to apartment towers, hotels and resorts, ,retail locations, malls, offices, mixed-use buildings, and more. iFunding provides opportunities for its 7,000 accredited investors to invest in institutional-quality real estate deals, with a minimum investment of $5,000. The company oversees deals throughout their lifespan, providing extensive information and transparency to give investors insight and oversight into their investments. It also generates financing for multi-project funds, and partners with family offices to co-fund opportunities with its individual investors. iFunding offers flexible financing terms to real estate developer and operators. Visit http://www.ifunding.co for more information, or connect with us on LinkedIn athttp://www.linkedin.com/company/innovational-funding, on Facebook at http://www.facebook.com/iFunding , or via @inno_funding on Twitter. The phone number for investor and operator inquiries is 844-367-4386.

iFunding Contact:
Paula DeLaurentis
Marketing
844-367-4386 ext.3
press(at)innovationalfunding(dot)com

A New Indicator of the Health of Real Estate Investing

US government data indicates that commercial real estate lending is healthier than it has been for many years.

With Q2 ’15 data analysis now available, the Federal Reserve notes that commercial real estate loan delinquency rates have been in steady decline, implying a healthier economy and real estate market.  The percent of CRE loans from banks with delinquent payments dropped to 1.2%, the lowest rate since 2006. In between these years, the delinquency rate climbed as high as 8.77%, during the major recession. There’s a great chart here, with a screen capture below.

iFunding sees this as another sign that commercial real estate investing may be in a ‘goldilocks’ environment now, where market demand and property prices are growing slowly but steadily and investment performance overall should bias positively.  Although there are no guarantees about the future, many industry pundits agree the U.S. domestic economy is relatively robust (see the video here), the existence of an investment bubble is very unlikely, and the possibility of a recession is low for the next several years.
What does the Fed’s loan data mean for your real estate investing? You may want to consider that:
  • Investment opportunities with a 1- to 3-year target for return of capital are attractive yet prudent, as they are predicted to avoid major macro-economic surprises.  Longer duration investments also can be favorable, but understand that your capital may be locked in for an unexpected amount of time until the market is right for a property sale.
  • Both first-lien debt and well-underwritten mezzanine (“second tier”) debt, with its higher average return rate of several percentage points, can be reasonable investments for an income-generating portfolio at this time. First-position debt is secured by a first-in-line lien against the property, meaning that even if there are payment delays or defaults, a company like iFunding is in position to take control the property and protect investors’ principal.
  • The average loan default rate will vary by the type of commercial property held, the structure of the loans, as well as local and demographic economic trends, and each property carries its own risks. Therefore, spread your investments across multiple holdings to diversify away much of the default risk.

 

iFunding raises $1.27 Million for property in metro Denver, Colorado

New York, NY, August 14, 2015– iFunding, an online real estate market place that’s revolutionizing real estate investing, raised $1.27M within days of listing a new project in the metro Denver area on its platform. The capital was raised for the building and development of 12 townhomes that have been named Virginia Village.  The property is located in an urban Denver neighborhood just south of Cherry Creek.

Virginia Village is located at 4400 E. Bails Place and 4401 E Jewel Avenue, Denver, Colorado. Collectively the property is 30,000 square feet. This property will have 12 urban townhomes. Marcus & Millichap 2015 Q1 reports the Denver metro area is poised to be one of the strongest apartment markets in the country.

“iFunding continues to provide the strongest investments and highest quality sponsors for our investors. This project is a testament to our goals and values,” William Skelley, Founder, Chairman, and CEO of iFunding states,  “The quality of deals and sponsors on our platform has significantly grown this year along side the growth of our team. We are excited about what the future holds for our investors as well as our company.”

 

About iFunding
iFunding is a leading real estate crowdfunding platform, facilitating debt and preferred equity fundraising for properties range from multi-family residences and condominium estates, to apartment towers, hotels and resorts, single-family homes, retail locations, malls, offices, mixed-use buildings, and more. iFunding provides opportunities for accredited investors to invest in institutional-quality real estate deals, with a minimum investment of just $5,000. The company oversees deals throughout their lifespan, providing extensive information and transparency to give investors insight and oversight into their investments. It also generates financing for multi-project funds, and partners with family offices to co-fund opportunities with its individual investors. We offer flexible financing terms to real estate developers. Visit http://www.ifunding.co for more information, or connect with us on LinkedIn at http://www.linkedin.com/company/innovational-funding, on Facebook at http://www.facebook.com/iFunding , or via @inno_funding on Twitter. The phone number for investor and operator inquiries is 844-367-4386.

 

iFunding Contact:
Paula DeLaurentis
Marketing
844-367-4386 ext.3
press@innovationalfunding.com

William Skelley on panel, 2nd year in a row, at Annual Crowdfunding Forum for Real Estate 2015

For the 2nd year in a row, William Skelley, CEO and Founder of iFunding, will be speaking on a panel at the Annual Crowdfunding Forum for Real Estate hosted by IMN. This year’s event will take place September 16th and 17th at the Fairmont in Santa Monica, California.

William Skelley

Skelley is founder and CEO of iFunding, the online, commercial real estate investment marketplace for accredited investors and institutions. He is responsible for business development activities at the company, which has financed over 35 real estate projects with total real estate value of over $400 million. William specializes in working with family offices. Prior to iFunding, he founded a boutique investment bank that underwrote $2 billion in real estate transactions, ranging from hotels/resorts acquiring hundreds of millions of dollars in financing, to mixed-use properties and single family homes. Earlier, William was a principal at Rose Park Advisors, a hedge fund founded by Harvard Business School professor Dr. Clayton Christensen, specializing in “disruptive innovation.” He has also worked at General Electric, Olympus and as an advisor to several start-ups.  He attended Harvard Business School and Hobart College.

Skelley will be speaking on the panel discussing, ‘Evaluating the Expansion of & Economic Factors Behind the Growth of Crowdfunding’ along side other executives in the real estate crowdfunding industry.

iFunding will be meeting with developers and investors by request from September 16th through 17th. If interested, email press@innovationalfunding.co.

 

iFunding hires Paula DeLaurentis as Chief Revenue Officer

New York, NY – August 11, 2015 – Paula DeLaurentis, a senior marketing, financial services, and real estate professional, has joined iFunding as the Chief Revenue Officer.  DeLaurentis will be expanding the company’s business development and marketing efforts by implementing a greater strategic focus and a personalized outreach to the real estate investment community.

 DeLaurentis possesses over 20 years experience in marketing, financial services and real estate.  Most recently, she was Principal at The Channing Group, an advisory and marketing organization that specialized in commercial real estate transactions for investor groups, banks and high net-worth families.  Previously, Paula DeLaurentis served as CMO for Entitle Direct, a title insurance company; Managing Director at TDAmeritrade, responsible for Strategic Alliances and Investor Marketing; and VP of Product Marketing for Thomson Financial, serving the Institutional Equity and Wealth Management segments.

 With DeLaurentis’ lead, iFunding has begun to expand its efforts to bring diverse deals to the real estate crowdfunding market. “Thousands of investors, as well as family offices and institutions are joining iFunding to participate in the strong returns possible with real estate crowdfunding.  I’m excited to be joining a leader in this market.  We recognize that our clients have different needs for information about real estate and different preferences for deals.  Our platform will reflect that diversity by providing a range of high quality commercial investment opportunities, real estate industry and educational content, and customized interactions with investors, real estate developers and potential partners.” DeLaurentis commented.

 With new strategies already in effect-  During the first week of August alone, iFunding has listed  over $5 Million in investment opportunities, “Our company has grown exponentially in the past year, increasing the size, volume and commercial sophistication of the deals we offer. We’ve also raised equity for our future growth and doubled the team. With Paula’s experience in real estate and with other financial products for high net worth individuals and institutional investors, as well as in strategic alliances, we’ll be able to engage all parties that are interested in real estate investing economy online.” William Skelley, CEO of iFunding, added.

 

About iFunding
iFunding is a leading real estate crowdfunding platform, facilitating debt and preferred equity fundraising for properties range from multi-family residences and condominium estates, to apartment towers, hotels and resorts, single-family homes, retail locations, malls, offices, mixed-use buildings, and more. iFunding provides opportunities for accredited investors to invest in institutional-quality real estate deals, with a minimum investment of just $5,000. The company oversees deals throughout their lifespan, providing extensive information and transparency to give investors insight and oversight into their investments. It also generates financing for multi-project funds, and partners with family offices to co-fund opportunities with its individual investors. We offer flexible financing terms to real estate developers. Visit http://www.ifunding.co for more information, or connect with us on LinkedIn,  Facebook, or Twitter. The phone number for investor and operator inquiries is 844-367-4386.

 

iFunding Contact:
Paula DeLaurentis
Marketing
844-367-4386 ext.3
press@innovationalfunding.com

 

Five of the Best Books for Part-Time Real Estate Investors

There are countless books about real estate for an active property investor who is negotiating for acquisitions, overseeing refurbishments or managing an apartment building.  However, there’s much less education available for investors participating financially but not becoming closely involved with the properties.

Investors in this “limited partner” role need education about:

  • how to evaluate the risks and rewards of different property types;
  • which real estate markets are strong;
  • how to select an real estate business partner;
  • and what milestones to look for while monitoring project progress.

In this blog, we recommend five books that are especially relevant to limited partners, whether they are about to invest with a partner in a local project, or online through an investing marketplace/crowdfunding site. The books are listed in order of easiest to most advanced reading.

Real Estate Investing For Dummies

People admit to liking the “Dummies” series about as much as they admit to liking the musical group ABBA, but let’s face it, the books get the job done. “REI4D,” as you’ll allow me to call this book, covers whether real estate investing is right for your situation; how to evaluate properties; what kind of supportive professionals you’ll want to work with; and much more.

Trump Strategies for Real Estate: Billionaire Lessons for the Small Investor

For those who like to learn about an industry by reading about the ‘players’ in that industry, it’s hard to beat Donald Trump for big picture insights. This overview is written by his lawyer of 25 years. It’s actually the best Trump book to encapsulate principles for achieving a premium on a property and negotiating an arrangement to your advantage. The author also recounts some of their biggest property ‘scores’ from which they profited. A memorable and easy read.

Investing in REITs: Real Estate Investment Trusts

Real Estate Investments Trusts generally are publicly traded securities that can be purchased through your broker, just like stocks. Each REIT holds large numbers of properties of a particular kind, which together generate profits for investors. Their unique characteristic is that at least 90% of their taxable income must be distributed to investors each year, making them high income-yielding assets. While they don’t provide the same hands-on approach of investing in a specific property, they can be useful to diversify one’s real estate portfolio. Ralph Block’s book covers the economic dynamics of each key RE sector – apartments, office, industrial, storage, mortgage and more. Understanding the sectors also can help you select investments through crowdfunding.

Mastering Real Estate Investing: Examples, Metrics and Case Studies

This book excels at combining case studies about different types of properties and how they perform, with key financial ratios needed to understand to find identify the strongest opportunities, and predict and monitor the properties’ investment returns. The same author penned another great financial book, “What Every Real Estate Investor Needs to Know About Cash Flow”.

The Due Diligence Process Handbook for Commercial Real Estate Investments

Due diligence about the state of a property and the local real estate market is the foundation for successful investing. This book starts with basics then gets into a thorough listing of checkpoints.  While a passive investor in real estate won’t need to perform all these steps themselves, they should feel comfortable asking the right questions and understanding for the answers about a property before investing.

Selecting a Self-Directed IRA Custodian to Increase After-Tax Returns with Real Estate Investing

Self-directed IRAs (SDIRAs) can be very effective with online investing to defer taxes on your earnings. This is a second interview by iFunding in our SDIRA series, focusing on selection of an IRA custodian. SDIRAs require that an IRA account holder use a custodian company to administer investments and generate tax reporting. We spoke with Michael McNair – Trust Officer at IRA Services Trust Company about how well this can work with real estate investing online.

Remind us how self-directed IRAs improve the after-tax returns on any investment, including real estate.

In some respects, self-directed IRAs are like any IRA. They defer or eliminate taxes on investment income. SDIRAs can be traditional, taxed-deferred IRAs – including SEP and Simple IRAs – or a Roth IRA. With a traditional IRA, a certain dollar amount each year can be contributed without paying taxes on that income, but eventually, after the participant reaches the age of 70 ½ , they are required to take a distribution each year. The participant will pay taxes on the amount distributed to them. With Roth IRAs, you pay taxes upfront on the contributions, but never pay on the income or growth on the investment, even when withdrawing the money.

The restriction with IRAs that are not self-directed is that you are limited to stocks, bonds and mutual funds. You cannot, for example, invest directly in real estate properties, limited liability companies, promissory notes, crowdfunding opportunities or precious metals. That’s where self-directed IRAs come in. They are especially suited for real estate debt investments, that is, loans to property operators or developers.

Consider that some real estate investment types can average returns that are in the double digits (e.g., over 10%) per year. You can perform quick calculations about your potential savings if you defer taxes on income and growth, or eliminate taxes on asset growth entirely with Roth IRAs.

How did IRA Services Trust Co., and you personally, get involved with SDIRAs?

IRA Services Trust Company originally administered limited partnerships for Wells Fargo. In 2008, we were granted a Trust Charter, which enabled us to act as a custodian of self-directed IRA accounts. Since 2008 we have grown the business from less than 15,000 to over 40,000 accounts. I’ve been with the company since 1995.

Note that some providers in the SDIRA market only are “administrators.” Administrators can perform administrative duties and reporting but need to work with a custodian that is allowed to hold title to investments.

How do fees work with SDIRAs? They must be designed to accommodate the smaller transactions typical of an investment in a crowdfunded property, correct?

You should look for a SDIRA custodian that offers a fee structure compatible with online real estate investing, or crowdfunding. In a traditional, direct property investment, the investor is likely to make one big investment upfront then have a variety of outbound payments or inbound income each month. With crowdfunding, many investors will only put up $5,000 to $20,000 upfront per asset, and receive monthly interest or a lump-sum payment at the end. Our fees at IRA Services Trust are crowdfunding friendly – $35 to set up an account online; $125 one-time to purchase an asset/property; then $100 per year to maintain the account and $80 per real property asset per year. There is a small charge for a wire, while ACH transfers don’t generate a fee [note that iFunding will accept investment contributions, and pay returns, via ACH].

So, the benefits of the SDIRA outweigh the costs?

Very often that’s the case, though it depends upon your situation. SDIRAs tend to shield taxes best on income-generating properties paid for in cash (without debt). The use of SDIRAs has grown exponentially over the past decade.

iFunding suggests considering this simple case: $15,000 invested in each of two real estate crowdfunded properties at the same time. They each have a target return of 12% after one year, or $3,600 total (2 x $15K x 0.12). The one-time fees to open and fund the investments would be $285 and the ongoing maintenance fees would be $260/yr. In this situation, the annual maintenance fees come to .5% of the assets and 7% of the income.

Next, you would make a calculation with respect to your marginal tax rate on the profit of $3,600. This represents the tax savings benefit of using an SDIRA. Many US investors’ marginal tax rate is 25% to 39%. If you calculate the taxes you would not have to pay with a Roth SDIRA, and net out the fees, you arrive at the economic benefit in this example. At the 39% marginal tax rate, the SDIRA would let you keep over roughly $1,000 more of your $3,600 gross profit versus investing with a taxable account (you would keep slightly less than $1,000 in year 1 with the IRA account, and somewhat more thereafter). This is equivalent to a 50% increase in your net profit per year by using the SDIRA.

What else are customers looking for in a SDIRA custodian?

The question about fees usually comes up first. A very close second however, is the helpfulness and promptness of the client service staff. You want to be confident that your custodian can process transactions quickly so that, for example, your real estate deal can close promptly with your available funds. You also want experienced staff that are readily accessible and care about the account holders’ questions and challenges.

At IRA Services Trust, we have 55 employees, many of whom have been with us for 10 to 15 years. We also offer a special Concierge Service, for investment advisors and investment providers who want a single point of contact and often want transactions to be expedited.

How long does it take to set up an SDIRA?

The primary determining factor is where the funds are coming from. One can make a new IRA contribution, roll over funds from a qualified plan (401k, profit sharing plan, etc), or transfer funds from an existing IRA. Making a contribution to fund an IRA is very quick, but it is limited to $5,500 (under 50) or $6,500 (over 50) per year. If you are moving funds from an existing IRA to an SDIRA, the timing depends on how quickly the custodian will process the request. It is our experience that it will take from one to two weeks. In either case, it’s fair to say, a typical set-up time may be a week, but leave a buffer if you have an important investment to fund with a firm deadline.

If you are investing in what’s known as a Reg.D/506(b) investment (ask your real estate investing platform about specific property offerings), then there can be a “cooling off” period after you sign up and before you can invest. The period is intended to protect the investor by reinforcing the need to learn about the offerings and build a relationship with the issuer. This can be perfect timing to establish your SDIRA.

One more note is, that with 401K plans, some employers do not allow plan participants to transfer funds while they remain active employees.

What related services does IRA Services Trust offer?

Our systems are set up so that we can work with a crowdfunding platform to capture and securely share basic SDIRA account set up information from the platform’s website. Alternatively, a visitor to the crowdfunding site can be easily directed to a custom landing page on our site to start the account set-up and account funding processes.