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.

Five steps to take before making your first real estate investment

Are you fairly new to real estate investing? You may have already heard that real estate crowdfunding is a simple way to explore investing from your own comfortable space and a handy computer. You can browse through different types of investment and properties – homes, apartments, retail stores, and office buildings, among others.

Many investors want to become more familiar with the real estate investing’s dynamics – evaluating the potential returns, possible risks, and choosing projects – before making that first investment of $5,000 or more. It’s true: online investing can become more comfortable if you’ve also viewed real estate properties first-hand, had a confidante to ask questions to, or gotten your hands on the right questions to pose.

Here are suggestions from iFunding to help you get started. This week we look at how to gain practical and local experience before you invest. In the next blog post, we will name the top introductory books to fill you in on investing strategies, understanding an investment’s potential, and asking discerning questions.

How to get started:

  1. Join a local real estate investors association (REIA): Most cities or counties host REIAs, which are casual meetups of down-to-earth real estate builders and owners, investors, contractors, lawyers, bankers, etc. discussing the best investing strategies and sharing opportunities. There’s usually a speaking time and plenty of time for networking. Ask if someone you enjoy speaking with at a REIA would take you along to see an investment property. REIA events are often monthly in the evenings, and membership is either free or for a modest annual fee. To find one, try googling on “REIA” and your town name, or visiting meetup.com.
  2. Join BiggerPockets.com: Bigger Pockets is the largest, most active online community of real estate investors freely sharing advice and responding to each other’s questions. We do mean “freely sharing” because there is no cost for an entry membership that delivers great value. Over 100,000 fellow investors and scores of discussion topics active on any given day can’t be wrong!
  3. Attend a real estate foreclosure auction or tax lien sale in your town: Actually investing in foreclosed properties or trying to buy the rights to overdue city property taxes is a high stakes strategy for the experienced investor. However, attending one of these live events as a bystander can be an fun and exciting way to consider a range of properties and exercise your intuition (and your calculator) to estimate the appreciation value of a house. It’s best if you read about properties in your town that will be “on the blocks” at the next event, then drive by the property in advance.
  4. Supplement your local visits to properties with online knowledge: Google Maps’ Street View will give you a look at the house before you visit. Zillow provides square footage, buy/sell/rent prices, supply and demand and photos for many residential properties. NeighborhoodScout reports about the economic trends and demographic profiles in the area around a property.
  5. Browse several crowdfunding sites: Crowdfund platforms like iFunding give you exposure to a variety of deals at once, including due diligence background research and deal terms. To gain experience with the same number of properties, and the same depth of data, through in person contacts would probably take months if not longer. Remember that an account for an accredited investor is free, and you don’t have to invest until you’re ready.

We’d like to leave you with this thought from Deirdre Virvo, co-founder of the Southern Connecticut REIA. Deirdre was asked in an earlier iFunding interview what it takes to get started in real estate investing.

“My first advice on learning about real estate is to read, read, read. However, in the end, accept that real estate is a hands-on business. Thus, you need to take steps both to get involved and to keep learning. A lot of people are real estate junkies, taking copious notes at endless classes. Then, when I run into them years later, they still haven’t invested in their first property. I say: get out and meet others, and be comfortable putting in a modest amount into your first venture to get your feet wet.”

Insights from iFunding/Citrin Cooperman Panel: the Current State and Future of Real Estate Crowdfunding

Thanks to the sizable audience that attended last week’s NYC panel discussion on real estate crowdfunding, despite the 7° weather.  As this market achieves a multi-year track record, then the findings, the possibilities and the panels are becoming more interesting. Here, we share the top insights from the panel, co-hosted by iFunding and our partner, Citrin Cooperman, a nationally recognized auditing, tax and advisory services firm.

Speakers:

  • Harmen Bakker, moderator, and Partner in Citrin Cooperman’s [www.citrincooperman.com] Real Estate practice;
  • Mark Mascia, President of Mascia Development [www.masciadev.com] – real estate developer and investor experienced with several crowdfunding platforms
  • Mark Roderick [www.crowdfundattny.com], attorney and expert on crowdfunding securities regulations, of Flaster/Greenberg.
  • William Skelley, CEO of iFunding [www.ifunding.co], real estate crowdfunding platform.

Bakker/Moderator: Let’s start with the advantages and any cautions with using crowdfunding, from the real estate developer’s perspective…

Fundraising efficiency

Roderick/Attorney: Crowdfunding is nothing more and nothing less than the Internet coming to the capital formation industry. The Internet directly connects developers and investors. It sweeps away all the middlemen. It’s disruptive, reduces cost, and increases efficiencies.

Skelley/iFunding:  The best deals I know of need to close fast to capitalize on an opportunity. Our latest investment offering was listed on our website the night before this panel, and was fully funded before I went to sleep. On the other hand, larger, more sophisticated deals can take one to several weeks.  We’re looking at 3-7 days to fund on average.  Also build in one to several weeks for due diligence and investment arrangement setup.

Mascia/Developer: I agree, speed of fundraising can be a key benefit, depending on the platform and deal. It’s not possible for me as a developer to raise $1 million anywhere near as quickly as the good online listings, and certainly not with so many investors.  Just having meetings and lunches with potential investors could take weeks. To me what it comes down to is delivery [of the financing on a timely basis]. I’ll gladly pay more for a service I can count on to deliver.

Investor Relationships

Mascia: There are (at least) two interaction models for developers with the investors. In the first, the investors are passed by the crowdfunding platform directly to the developer. In the second, the investors are pooled into an LLC managed by the platform. Right now I’m on the fence as to the preferred model, as I watch the size of crowdfunded investments grow and number of investors increase.  It’s more efficient for the crowdfunding platform to handle investor questions. However, if the platform starts to provide a larger portion of my total financing, I need to be careful to maintain my own relationships.

Roderick/Attorney: The most common investment structure is a single purpose vehicle (SPV) set up by the crowdfunding platform to pool all the investors’ funds into the deal through a single entity.  However, this limits the total number of crowdfund investors to 100, according to securities law.  You’ll start seeing other structural relationships as the field grows.

Investor Due Diligence

Mascia:  Many family offices tend to emphasize social due diligence, that is, reaching out to colleagues to gauge the integrity of a developer.  The good crowdfunding platforms tend to be more rigorous in their due diligence checklist. And, they share the findings with all the investors.

Bakker: It is important that investors and sponsors carefully review and understand the structure of the deal, the platform model, reporting provided, and the regulations to minimize their risk and increase the reward.

Individual property investments versus funds of properties

Roderick:  In a sense, when an investor decides to work with a real estate crowdfunder, they are partly relying on the platform’s pre-screening of a deal. I believe investors will want more of this; pooled assets are the future.

Skelley:  We’ll offer investments in semi-blind funds, where the investor receives knowledge about existing investments and some information about potential future property investments. We generally don’t offer blind-funds, where only aggregate returns are reported, as that’s the domain of a REIT or a Blackstone.

Bakker:  One day, will there be aggressive and conservative portfolios an investor can choose from?

Skelley: In the not too distant future, expect to see from us the option to invest in different tranches in a deal, such as either the mezzanine debt or the preferred equity.  And, we’ll share analytics about risk and return. It’s early in the real estate crowdfunding era to have a large enough sample for good metrics, but we’re working on it.

Investor Reporting

Mascia: Some platforms send investment updates weekly; others do it monthly or quarterly. This also depends on the duration and speed of progress on an investment. The less frequent ones tend to be more detailed.

Skelley: For any deal where it makes sense, we provide weekly or bi-weekly updates, including a statement of progress, photos and even video. One developer shares time-lapse images showing stages at the site.  We encourage developers to reinforce the confidence of the investors in them, through the updates. This makes a big difference.

The Future:

Bakker: Looking ahead a few years, what will be game changers for real estate crowdfunding?

Skelley: Two years ago, no institutional investors would take a meeting on crowdfunding. Now, we’re in frequent dialogue with family offices, private equity firms and real estate power-houses.  You’re going to see more institutional money get involved in this approach, just as they have in consumer lending plays like LendingClub.com.

Mascia: I’d like to see a secondary market, where investors can resell their participation in crowdfunded deals to other investors.  I think investors at this point may prefer one to three year investments, but for my commercial deals, the best returns may come by timing a market sale five or even ten years out. I don’t want to have to refinance all of my crowdfunded equity every two or three years, so a secondary market would make the market more liquid.

Roderick:  To date, the crowdfunding platforms have been reluctant to become broker-dealers, given the filing and compliance requirements.  However, the role allows for the most straightforward way to be compensated proportionally to value added: as a percentage of the amount raised for a deal.  I’m seeing the emergence of a few broker-dealers with an online presence that make it easier and less costly for a crowdfunding platform to ‘plug into’ that broker-dealer with the same benefits.

Roderick: There’s a chemistry in any market sector, a critical mass where all the necessary ingredients start gelling. That’s coming. When securities regulations finally allow non-accredited investors to participate in most online deals, that will open up the market to millions of individuals and create even more innovation. I think the crowdfund platforms will want to balance the influence of individual investors and that of institutions wanting to syndicate their deals.

 

The real deal about using self-directed IRAs (SDIRAs) to defer taxes on real estate investments – Interview with attorney Mat Sorenson

So… you’re an investor with some real estate experience (maybe through a crowdfunding site like www.ifunding.co), and are looking for ways to shield your profits from immediate taxes through an IRA. You may be familiar with self-directed IRAs (SDIRAs) as an approach to using IRAs to invest in real estate, because traditional, institutional IRAs don’t allow direct real estate holdings. Our question for today is:

Exactly how do SDIRAs work and what types of real estate investments are they best for?

iFunding spoke with attorney Mat Sorenson , to give you more insights into SDIRAs. Mat is author of “The Self-Directed IRA Handbook”, the most widely-read book on the subject of SDIRAs, with a 5-star rating on Amazon. We ask him first about the growing use of SDIRAs, then turn to their application within real estate and crowdfunding.

Mat, when did you start building a legal practice around SDIRAs?

Starting 2006, my law firm encountered many clients involved with real estate and 1031 exchanges (‘swaps’ that defer taxation on real estate investments profits when a new investment is identified). We researched other means of sheltering gains from taxes, and found self-directed IRAs to be very viable. That’s true not just for real estate, but for holding precious metals or investing in startups as well. The practice at our firm, KKOS Lawyers, has grown, and I’ve spent the majority of my time advising clients on SDIRAs since 2008. My SDIRA Handbook was published in 2013.

How do SDIRAs work?

Self-directed IRAs give the individual more flexibility as to where they invest retirement funds. Traditional IRAs permit investments in stocks, bonds, mutual funds and CDs, for example. Only SDIRAs allow funds to be invested in specific real estate projects, direct loans to other parties, equity investments in startups, etc., while still providing tax deferral benefits, just with a broader range of investment opportunities.

Funds from existing IRAs or 401Ks (when you leave a job) can be rolled over into an SDIRA, or you can contribute new funds to an SDIRA, subject to maximum annual IRA contributions that the IRS allows someone in your particular situation. Your SDIRA needs to be administered by a service provider known as a custodian. For a fee, they hold the account, confirm the applicability of investments and wire funds on your behalf, and report form 5498 annually to the IRS regarding distributions, contributions, and your account value.

Is the use of SDIRAs to self-direct IRA investments growing?

Absolutely. They were created via government regulations in 1974, but didn’t receive attention for many years because individuals relied more on fixed pensions from their employer. Also, financial advisors are less inclined to recommend SDIRAs, because it empowers the individual to make independent investment decisions and place money outside of the traditional money management companies.

The environment today, where individuals are responsible for their nest egg, and feel qualified to make independent investment decisions, has changed things dramatically. There was a 2013 article in the Wall Street Journal that documents how the custodian companies for SDIRAs have grown from handling hundreds of millions of dollars around 2005, to tens of billions now.

With which kinds of real estate investments do SDIRAs work best?

iFunding recognizes that there is much more a potential IRA holder will want to know about SDIRAs’ benefits and set-up logistics. We recommend Mat’s book as a source, as well as a variety of articles on the Web. Here, we ask Mat about key real estate investing considerations that many other sources neglect to highlight.

You could invest in nearly any type of real estate investment property through an SDIRA, however only some of them will qualify for all the tax benefits of the self-directed IRA. Basically, real estate rental & income properties paid for in cash, as well as loans to real estate operators that strictly repay via interest, qualify for all the tax benefits. To restate, with loans or promissory notes on real estate projects, you would receive the interest payments fully tax-deferred in the SDIRA or tax-free if you have a self-directed Roth IRA.

When will taxes need to be paid with an SDIRA involving real estate?

There are several situations where taxes will apply to income made in a SDIRA. If the real estate project involves in new construction, or in property improvements (“flips”) for short-term turnaround and sale on a regular basis, then it is considered to have generated profits from a business, which are subject to UBIT, or Unrelated Business Income Tax. The SDIRA will need to pay taxes on these profits. You can see the taxation rates on the IRS’s form 990-W. They range from 15% tax on profits in a year under $2,500, to 39.6% marginal tax on profits over $12,150.

Second, if the investor has contributed equity to a rental project, and the real estate operator on that project has also taken out a loan from a bank, then the equity returns – that is, the profits – that the investor receives are subject to taxes in proportion to the amount of debt on the overall deal. This is called UDFI, or Unrelated Debt Finance Income Tax. The UDFI Tax rate on the sale of the property is the capital gains tax rate. UDFI rates on other income (e.g. net rental income) range from 15% to 39.6% on the margin; you can look them up via the IRS’s “Trust Tax Rate” for the current year.

There are other prohibited transactions to learn. You, or a direct family member, can’t be personally involved in the real estate project’s operations, for example. A qualified lawyer or CPA can ensure you set up and use your SDIRA property.

How well do SDIRAs work with crowdfunded real estate investments?

They work very well together, given the considerations mentioned above. Many crowdfund investments are structured as pass-through LLCs, so the tax deferral and other treatments are very similar to deals where an individual directly invests in a property. In some respects, investing through crowdfunding is more efficient for a SDIRA than direct real estate deal participation. That’s because the investor, and therefore the custodian, doesn’t incur costs of lots of income and expense handling; the crowfunding platform takes cares of that. For example, if you owned the property yourself, you would need to record monthly rent income or individual maintenance expenses through the SDIRA; with crowdfunding you’re only recording net income as it is distributed to you, at moderate intervals or end of project. You can read my blog post introducing the principles of SDIRAs with crowdfunding.

Does the custodian chosen by the investor matter for crowdfunding investments?

Yes, it can. Custodians charge servicing fees using a different calculation approaches. If you are making a higher number of smaller investments via crowdfunding – meaning relatively modest profits per investment – then try to avoid a custodian that charges fees based on the number of investments transacted. That will eat into your profits, potentially more than the tax deferral benefits of the SDIRAs will offset. In contrast, other custodians will charge based on total funds within the account.

Also, research that the custodian has a solid reputation for timely responses. The good ones can approve and disburse funds within a day. Crowdfund platforms typically look for funds to be wired within several days to a week after an investment commitment is finalized. [iFunding notes that, on sites like biggerpockets.com, the real estate community has highlighted certain custodians that take much longer to approve wires; buyer-beware].

A few custodians have made a specialty out of working with crowdfund investors, and are more familiar, and fee-compatible, with crowdfund sites. I am familiar with IRA Services Trust Company in Northern California, and Pensco Trust Company based in Denver.

Can we run through deal examples to see how SDIRAs work with respect to tax deferral?

Let’s explore:

(a) a debt/loan deal in a new building construction, and

(b) equity in a home fix-and-flip

(c) equity into an apartment building’s improvement then rental.

In the first case, assume the investor is participating in a loan to a new condo construction project. The crowdfund structures financing this as a promissory note. In this situation – a loan or promissory note that strictly pays interest as the return on investment to the individual– then 100% of the profits are tax-deferred (or tax-free for a Roth IRA). If this was a traditional (non-Roth) self-directed IRA, then you wouldn’t pay any taxes on the gains until you take out the money for retirement.

In the second case of a home fix-and-flip, let’s say the crowdfund site raised $300,000 in an all cash project investment. One investor puts in $15,000, or 5% of the total. In 10 months, the real estate operator finishes the project and sells the home for $360,000. That’s a $60K total profit. Fix-and-flip businesses are subject to UBIT (tax). This investor receives 5% of the profit or $3,000. If this is their only SDIRA investment subject to UBIT that year, than the IRS tables say the taxes will be $500. In Q1 of the year after the investment ends, the crowdfund platform issues a K-1 tax filing and copies the SDIRA custodian, and the custodian pays taxes from the SDIRA, on your behalf, usually during the traditional April filing period.

In situation ‘c’ with an apartment building, there are some improvements being made, but the primary purpose is to buy-and-hold the property and generate rental income. There is no UBIT that applies to these profits. However, let’s take a case where the total project receives $600,000 from a crowdfund company’s investors as equity, then takes an additional bank loan for $400,000. In year one, the project generates $30,000 in net operating income. In this situation, there is a loan on the property as well as the investors’ equity, so UDFI tax will apply. The proportion of debt into the project financing is 40% (= $400,000 / ($400K + $600K)). Therefore, 40% of the profits of $30,000 are subject to UDFI, or $12,000 (= 40% * $30K). The amount of tax for one investor will be based on the IRS tables and that investors’ proportion of the equity investment.

What are the main caveats using an SDIRA?

The custodian companies vary in degree of experience and funds under management, as well as in customer responsiveness and turnaround times to approve investments and wire funds. So, choose carefully. Look for FDIC protection. Custodians use a variety of fee structures, some of which are much better suited for crowdfunding and real estate. Fees can be based on IRA value, or number of assets owned, or driven by activity including wires or tax reports generated. The weightings of setup fees, ongoing fees and termination fees vary significantly and typically range from a few hundred dollars to a thousand or more, assuming you aren’t actively managing each bit of income and each payment from a property yourself. Be sure to investigate which structure is most cost-efficient for your investing.

The custodians need to approve the transfer of funds for investments, but are only verifying that the types of investments you are making fall within the guidelines for SDIRAs. They are not evaluating the soundness of the investment itself. That’s the responsibility of the individual. In my book, you can read an extensive checklist of due diligence steps that should apply to any SDIRA investment.

Finally, seek out sound legal and accounting advice when creating, using, and reporting on your SDIRA. When properly set-up, the accounts can be very tax efficient and rewarding, and avoid IRS-related or other issues from occurring later on.

Thanks very much for your insights, Mat.

Thank you. I welcome questions on the subject, and can be reached at (602)761-9798 or mat@kkoslawyers.com. You can also find my book, The Self Directed IRA Handbook, on my website and on Amazon.com.

Raising Company Equity through Crowdfunding – an Interview with Chance Barnett, CEO of Crowdfunder

Crowdfunding is being used for a wide variety of fundraising purposes these days, not the least of which are (a) equity for growing companies and (b) financing for real estate projects.

Crowdfunder is the number one ranked equity crowdfunding site on Google, with over 77,000 registered users and $56 million committed across investments to-date. iFunding, a real estate crowdfunding platform itself, chose to use Crowdfunder when we decided to raise funds for our corporate operations. In the first week of its campaign, iFunding raised $1,200,000 via its listing, with more expected in the coming weeks.

Because effective crowdfunding will be of interest to many of our business partners and investors, we asked the CEO of Crowdfunder, Mr. Chance Barnett, about his platform and secrets to success with equity crowdfunding.

How did you come up with the concept for Crowdfunder?

The idea emerged three years ago, after I became involved with a policy group in Washington DC that contributed to the creation of the JOBS (Jumpstart Our Business Startups) Act. That federal Act liberalized the rules enabling more individuals invest in privately-issued securities, such as startups issuing equity or real estate companies financing deals. It was exciting working with leaders in the Senate, House and SEC. After the law passed in 2012, I turned to the tremendous opportunities on the business side and decided to create Crowdfunder. I had been an angel investor and entrepreneur several times earlier.

There are many active crowdfunding sites, with a number of them raising equity for new ventures. What makes Crowdfunder unique?

There are only three or four equity crowdfunding sites driving meaningful financing volume. We are one of the largest. Most of our growth has been organic, based on the quality of our service and investments. We were ‘live’ even before the passing of the JOBS Act, acting as a startup networking and investor matching service that identified and promoted entrepreneurs in their communities. This has given us a lot of time to understand the dynamics between passionate entrepreneurs and investors, and build that into our culture and operations.

What best practices should companies be aware of, when planning to crowdfund equity?

We advise companies that:

  • Crowdfunding‘s financial returns are proportional to the effort you put into it. Plan your ongoing campaign steps – marketing and response processes – well before launch.
  • The first days of the campaign drive momentum. Leverage your best relationships and marketing ideas to reach the most likely audience to invest, starting day one. Your founders should personally lead the outreach, and the entire team should highlight the campaign to their personal contacts.
  • Investors are interested in the returns, but equally so they want to connect with your company’s mission. You should think carefully about crafting your story in a compelling way. Then, target your outreach to people who are likely to connect emotionally, including the community of existing users of your product or service, or those with similar demographics.
  • Similarly, many investors want to feel engaged with your company or learn alongside your team, by participating as an investor. They realize the financial returns will take years. Therefore, give thought to how you will include your investors in the ‘journey’ and keep them involved even after the fundraising round is complete.

iFunding is very happy with our fundraising results so far on your platform – one million dollars raised in 3 days. Do you see that level of activity frequently?

We have seen a number of companies raise hundreds of thousands of dollars in a few hours, and a million plus in a few days. iFunding is definitely one of the strong outcomes, for being active just a week so far.

How would you respond to investors who want to be confident they have the right information to decide on a startup investment?

Our platform compiles, in an easy-to-follow format, all the relevant materials from a company that is raising equity. Also, through our social networking “Connect” function, you can request to connect directly to the fundraisers, the investors in a deal, or anyone else in our investor base with a similar interest, and create a dialog via text, phone… whatever works for both of you. The “signaling” function of a social networking also helps reduce risk; you can see who already invested in a company and get a sense of their professional background and knowledge about that field.

What do investors say they like best about your platform?

We serve up a unique variety of deal flow. That is, we highlight more than just the latest consumer technology fad, like a mobile app or social media platform. Often the companies on our website have a combined for-profit, and social-good mission. We also have a growing deal flow at the intersection of technology and entertainment.

Crowdfunder is known for crowdfunding investment in Pono, which is the brainchild of rock legend, Neil Young. His goal is to record and distribute significantly higher fidelity music, “as if one were listening in the studio.” What do you think of Pono?

Pono (https://www.crowdfunder.com/pono-music) is great! I’ve been playing guitar since age thirteen, and learned quite a few Neil Young tunes. It’s a thrill to listen to the super hi-fidelity music and feel like Crowdfunder has contributed to the financing of Neil’s business venture.

Here is your opportunity to be an equity owner in iFunding!

The iFunding team is excited to announce that we are raising a round of financing for our own company. What better way to do this than to use the same crowdfunding principles that we live by day-to-day? You can read all the investment details at www.crowdfunder.com/ifunding. We encourage investors to consider participating directly in our company’s success by owning equity in iFunding.

Our Expansion Plans

After a year of raising tens of millions of dollars for nearly thirty real estate projects, and introducing the industry’s first mobile investment app, iFunding is ready for its next growth stage:

  • Real estate operations, including market analytics, deal sourcing, due diligence, entity setup, legal filings and compliance, financial reporting will be scaled up to manage more deal flow.
  • Greater ease-of-use features and richer deal information will be deployed on our web and mobile platforms.
  • Marketing, especially online real estate education programs, and digital/social outreach will spread the word about crowdfunding to more investors and property developers. Meanwhile, an account management team will work with the most prominent investors and family offices.

Learn More

Those who are accredited investors are invited to read our investment materials and participate in our corporate fundraising via www.crowdfunder.com/ifunding. Individuals will be asked to verify their “accredited investor” status via online income verification or a letter from your lawyer or CPA. And, if you haven’t already, take a moment to acquire a free account here at www.ifunding.co to be able to browse our real estate investment opportunities.

Financing Strategy

Because much of iFunding’s business model is based on receiving a profit when our real estate investors do the same – we feel this approach aligns our incentives with our investors – capital is needed to expand operations in this stage of our growth. We are now raising $1 to $2 million ($1 million is our target, $2 million is the cap), which will bridge the capital already contributed by select customers, business partners and colleagues of the firm, and an A Round planned for 2015. We feel this is the most effective sequence of funding in order to facilitate growth while managing the strategic direction of the company. As the future A Round will leverage venture capital and real estate industry financing, effectively, individual investors can benefit from crowdfunding to participate now at preferential terms, with a low minimum investment ($10,000).

Market Growth

Our founders, William Skelley and Sohin Shah, were recently reflecting on how quickly the real estate crowdfunding market has grown, since their idea for the company emerged in 2012. “There were a lot of people who thought that real estate crowdfunding couldn’t become a reality, as recently as 2012 when we were starting up. It’s been amazing how knowledgeable investors and leading-edge developers have supported crowdfunding and iFunding so confidently.”

The market effectively went ‘live’ a year ago, when companies including iFunding started listing their first investment opportunities. Our average internal rate of return in the first projects that have been completed is more than 20%. More recently, the analytics firm Crowdnetic determined real estate to be the largest industry participating in “private securities, publicly raised” (i.e., crowdfunding). Given that total worldwide real assets are worth more than $25 trillion; over $150 billion in real estate is transacted each year; and at least $25 billion of that is from individuals, we see plenty of room for future growth.

With Appreciation

We’d like to thank several partners that have assisted with this fundraising round.

  • We chose to list the investment at Crowdfunder, because Crowdfunder’s site makes it easy to read about and compare business equity investments, communicate information with potential investors, and because of their reach. It is the number one ranked equity crowdfunding site on Google, with over 77,000 registered users and $56 million committed across investments-to-date.
  • Further, we have partnered with Accredify to manage verification one’s “accredited investor” status. Investors generally need to demonstrate a certain level of income or liquid assets in order to participate in private securities. The Accredify site allows an investor to either use an easy and private verification of income against tax records, or to upload a verification letter from one’s CPA or attorney. That single verification can be used with a wide range of investment sites, including but not limited to iFunding’s.
  • Finally, our thanks goes to Tommy Hawkins of Hawk IV Productions for producing our introductory video on the investment site.

The iFunding team will continue to work every day on expanding access to quality real estate investments, and providing greater value to you. We welcome questions via 844-367-4386 or investors@ifunding.co.

Looking at Long-Term Housing Demand & Financing: Trends and Strategies

While many residential real estate investors closely scrutinize every deal they consider, not as many keep an eye on big picture trends. This long-term view is important, but not only for the professional real estate developer that finds greater demand from specializing in a growing niche. It’s also valuable for the limited-partner investor that wants to reduce risk by focusing their due diligence on a few types of projects.

At iFunding, we consider these trends when exploring projects to offer our investors. You can see that type of assessment where investments include condos built in mid-sized cities with growing tech/finance industries, and where starters and rentals are built for younger professionals, who view housing more as a service to lease than a lifetime mortgage to hold. You’ll also find the big picture view in mobile park home investments, suited for the service economy’s lower paycheck holders, and in lifestyle communities for the more affluent retirees.

This article touches on these long-term trends, including the residential shift to “echo boomers,” regional migration, and new sources of financing for homes.

From Retiring Baby Boomers to Changing Echo Boomers

An aging population will mean adapting existing homes for disability, where the owners wish to age in place. Others will want to move to convenient, low-maintenance communities which offer townhouses and condominium apartments, which should increase dramatically for this group as well as for the young who are just starting out.

The increasing demand for rental housing should continue through 2020 as Echo Boomers, those born after 1990, form new households. The trend towards job-hopping rather than the long careers of the Baby Boom generation favors the flexibility of renting, and Echo Boomers will likely be better educated, particularly women, which will mean a higher average financial position for this generation in the long-term.

After 2020, it is expected that this cohort will move toward home ownership, absorbing some of the single-family houses released by retiring Baby Boomers. Smaller houses will better fit the needs of the smaller households with fewer children that Echo Boomers seem to prefer, although the increase in minority home ownership, with higher average family sizes in some cultures, will offset this trend somewhat.

Home ownership remains the preferred housing choice until then, even among the Echo Boomers, with walking access to civic services a priority for many. As the economy recovers and credit balances return to manageable levels, we should see younger owners lead the remodeling market as they adapt older units to contemporary standards for sustainability and lifestyle. Investors will see this frequently in “infill” projects, where existing tracts are upgraded or rebuilt from the ground up, while benefiting from the historic ambience and/or small-neighborhood feeling of a particular area.

Locations for Growth

Although the “March to the Sunbelt” should be supporting a strong housing market, it is here that the bulk of the foreclosures occurred. As the recovery continues, the Sunbelt should see the highest demand for remodeling and renovation, as units are brought out of foreclosure and upgraded for resale.

Large cities offer many opportunities for renovated housing, including the conversion of vacated industrial buildings to desirable apartments. Smaller cities and towns with viable commercial areas, especially near transit stations, are also promising locations for housing renovation and replacement. However, the local job market is of paramount importance in making any investment decision, as the great burst of new construction and energy extraction activity in North Dakota–otherwise inexplicable–makes clear.

The Future for Mid- to High-End Single Family Homes

A segment of larger, free-standing suburban homes may decrease in value, as Baby Boomers release them for something smaller and easier to maintain. The Echo Boomers won’t be ready for such big houses for a while, and they have so far shown a hesitation about the isolation of suburban living, preferring the civic bustle of even small towns. Highest-value luxury homes, however, are in a class by themselves, and there is little reason to expect a decline in demand for them. There have been signs that tastes in recreation are changing, however, and that golf course developments, for example, may have trouble holding their value. Individual Investors and Family Offices becoming a new Financing Base As the US government explores way to change and reduce the roles of Fannie Mae (FNMA) and Freddie Mac (FHLMC), the private credit sector will play a larger role in providing credit to the nation’s housing market. Since 2008, much of the foreclosed/bank-owned housing stock has been purchased by hedge funds. Because the opportunities for the largest investment returns rebounding from the 2008-2010 housing implosion are diminishing, these hedge funds are now purchasing fewer of the remaining houses on the market. Demand is shifting back to individual home purchases, who are sticking with their planned housing budgets and looking for value more than ever.

This trend implies that the refurbishment efforts (which some call “fix-and-flips”) of individual real estate operators and modest-sized companies remain key for housing investments in the mid-term. However, not any type of house will do. It’s best to focus on housing trends like the ones above, pointing toward specific regions and cities, rentals & condos for young professionals, community living spaces for an older generation. Beyond flipping homes, other operators will find that running long-term rentals building – 1-4 family units, and apartment complexes – is the best way to develop a core competency while generating long-term income.

Meanwhile, the financing for such ventures needs to come from somewhere, if not the government –backed mortgage securitization agencies. Crowdfunding will be one of those fast-growing funding sources, in iFunding’s opinion. Our research into research about crowdfunding activities show that crowdfunding across all industries is growing 85% year-over-year, and is likely to reach $10bn in investments by 2017. Meanwhile, real estate has become the largest market for “private securities, publicly raised” (i.e., crowdfunded), with $60m raised so far in 2014, according to research firm Crowdnetic (http://www.crowdnetic.com/reports/sep-2014-report). Of $150bn in worldwide real estate transactions of all kinds (not just crowdfunded) in a recent year, $25bn were funded by accredited individual investors. Now, with regulations expanding access to non-accredited investors, we expect to see even further growth in crowdfunding. As a result, we recommend that investors familiarize themselves with crowdfunding by ‘dipping their toes in’ with modest early investments.

Sources:

U.S. Housing Trends: Generational Changes and the Outlook to 2050. John Pitkin and Dowell Myers, 2008

The US Housing Stock: Ready for Renewal. Joint Center for Housing Studies of Harvard University, 2013

Housing an Aging Population: Are We Ready? Center for Housing Policy: Barbara Lipman, Jeffrey Lubell, Emily Salomon, 2012

Women in Real Estate – Interview with Jennifer Taylor of Atalanta about Career Development and West Coast/Hawaii Investments

Does gender make a difference in how real investors and developers succeed in the real estate industry? Do women get involved in real estate from different starting points than men, or find different ways to thrive?

These were questions that came up as iFunding was exploring the demographic of real estate investors and developers that attend our events, propose properties for development and participate in crowdfund investments. We’ve been interviewing female real estate developers and investors to hear their thoughts. This is the second of our interviews.

Jennifer Taylor is Managing Principal and founder of Atalanta Realty Investments, which targets investments in office, retail and industrial assets in the Western U.S. including Hawaii. Jennifer has been named one of “Ten Disruptors” this year by National Real Estate Investor magazine. Atalanta is a socially-responsible business that invests in culturally diverse, under-valued, urban neighborhoods.

Q: Your background is interesting, Jennifer. How did you get involved in real estate?

I started my career as a receptionist for an executive suites building, owned by Aetna. I knew nothing about real estate at the time, but could sense the potential power of operating the type of building I worked in.

I transitioned into property management, and worked in the field for nearly a decade. While there, I wanted to grow into the investment side of the business. I’ve always been a self-starter and have spent a lot of time learning about real estate from others, including the institutional asset managers that visited my management company’s to check on their properties.

Q: How did you grow your investment and operating business?

In 2002, I started an investment group called Arroyo Realty Partners with two partners. We invested in office building in Honolulu and expanded to other properties in Hawaii. We were fortunate with our exit from that business, as we sold the assets to an institutional investor in August 2007, right before the downturn.

I then rode out the downturn, before putting a new business plan together for a similar platform, now called Atalanta Realty Investments. We focus on operating and enhancing the value of commercial properties in markets with significant Asian populations, particularly parts of California and all of Hawaii. We aim to acquire retail, industrial and office assets. The first thing we did was to buy back the portfolio of Hawaiian assets we had sold to Morgan Stanley in 2007. Now, we just closed on our first acquisition: two offices buildings in Honolulu.

Q: Why did you focus on Hawaii?

I’m of Filipino descent. My parents came from the Philippines and met in New Jersey, where I was born, then we moved to Pasadena, California. I feel my family background has made it easier for me to operate in the Hawaiian real estate market. Hawaii is strongly influenced by its trade relationship to, and inhabitants from, the Pacific Rim. Interactions are subtly different from the mainland. For example, your word is held to a high standard, with less emphasis on the written contract to make progress in a relationship. Discussions are more subtle and toned down.

By the way, Hawaii has a ton of opportunity right now. The office market is still recovering from the earlier downturn, however retail and industrial vacancy is just 4%, and tourism and hospitality remain strong.

Q: Turning to the impact of gender in the real estate business, where do women and men concentrate in the real estate business? Does that make a difference in their success?

Most asset managers are men, though women can clearly stand out results-wise in investing as well. There are both male and female agents in high numbers and some of these will migrate to the investment side.

In property management, the majority of people I’ve met are women. I think having property management experience is valuable with cash-flowing commercial properties, because you gain a strong sense of what aspects of the property can be improved, and where financial efficiencies can be gained. Atalanta has four principals, three of which are women: Robin Dean, Lourdes Canlas and myself. It’s not coincidence that we’ve all had property operations experience. Our fourth partner is a gentleman named Aden Kun with a background from the investment side of the industry.

Q: Do you sense that there is a “glass ceiling” of patterns and perceptions that hinder a women’s career more than men’s?

I feel that I’ve experienced the glass ceiling at times. But I’ve focused instead on breaking through to new roles and relationships with senior management and peers, without being offensive to others. In a sense, every step upward in my career was an opportunity to grow and be seen as more senior. Growing up with two sisters helped me later to navigate individuals’ sensitivities in the office.

Q: Is it important to understand the numbers in real estate?

Absolutely, for both women and men. There actually are many things you need to understand to be successful in real estate, including the financials and contracts. I’ve trained myself to be able to evaluate income statements for cash-flowing properties, for example, but it’s not something I’d prefer to browse in my spare time.

Q: Are there other ways you think women and men may differ professionally, generally speaking?

I think women act more intuitively. Both men and women can be strong in the art of the deal; that is, picking the right market, negotiating terms, and choosing your timing. But women seem to read people better and are willing to communicate more frankly. For example, I found it pretty easy in a recent acquisition to get an early sense from the seller, another women, about whether we were in the right ballpark to get the deal done. With men I’ve negotiated with on deals, there was more beating around the bush about intentions.

I also have found that women in business are extremely supportive of one another. Throughout my career, I have seen women share information, refer each other to opportunities and mentor one another to get ahead. I think that this trend is only increasing and that this support will continue to have a positive and significant impact on the careers of emerging female leaders.

Q: What’s next for you and your business?

My partners and I are excited about Atalanta’s prospects, based on team chemistry and our understanding of Hawaii, California and other west coast markets with Asian populations. The focus suits us well. We will evaluate deals in the $5 – $30 million range. We’re also excited to be under contract to develop The Gathering Place, a 55,000 sq. foot open-air retail center on Oahu. Each acquisition and a growing operating history is building on our track record. That demonstrates to potential equity partners that we know our markets well.