Never rule out seller financing

I got an e-mail this week from a reader who wants to invest in income-producing real estate. Without going into all the details, he seems well-versed in construction and could handle repairs himself … a very important aspect of becoming a landlord. However, he lacks the cash for a sufficient downpayment and is considering taking out an equity loan on his home to come up with the funds. As an alternative, I suggested he consider seller financing. But he is concerned that that is too risky. Here is a recap of my reply: Sean, you’re right … seller financing can be risky. To me, a big risk is that sellers generally will only provide short-term financing. For example 30-year amortization with a 5-year balloon. That could leave you scrambling in five years to find financing. And you might have to pay a higher interest rate than what banks charge. Plus you don't have much negotiating power on the price when you're asking the seller to carry the mortgage. But I'd rather take the risk of possibly loosing a rental property back to the seller than risk loosing my homestead. The key is to do your homework and carefully look at every potential expense that could impact the cash flow. You just might come across a seller who owns the house outright and has to move. Could be because of job relocation, personal reasons ... you never know. If the price is right and you strongly believe that you can generate enough positive cash flow to accumulate a decent down payment over the course of a few years, you could be in a position to get a conventional loan by the time the balloon is due. Anyway, never rule anything out, including seller financing, especially when you don’t have enough cash for a downpayment or otherwise can’t qualify for a traditional mortgage. Best wishes, George

Can I deduct a new roof?

A reader sent in this question: I have purchased a piece of property with a building on it. The building's roof was in bad shape and I replaced it. My plan is to make this a rental property. Can this expense be deducted from my taxes? Thanks, Jerry My answer: Two issues here. The first is that you replaced the roof before you made the property a rental. You didn’t give be the dates. But suppose for example, you replaced the roof in 2010 and hope to turn it into a rental in 2011 … you’re out of luck. The second issue is a common one, even if you replaced the roof the same year it first became a rental: Rental property owners might think that any expense they incur is tax-deductible. I hate to burst anyone’s bubble, but that’s not quite true. The IRS separates work you have done on your rental as repairs or improvements ... A repair keeps your property in good operating condition. It does not add to your property’s value or prolong its life. Examples include: Fixing gutters, floors and leaks. Repairs are tax deductible the year you incur them. An improvement on the other hand, adds value to the property. Examples are a deck addition, a water softener and carpeting. Improvements must be depreciated over their life expectancy. It might not make a lot of sense, but the IRS considers a new roof an improvement since it increases the value and lengthens the life of the property. Therefore, you have to depreciate it over its life expectancy, for instance 20 years. However, if you had simply patched it, you could deduct the expense in the year you paid it. One of the many expensive lessons I’ve learned as a landlord is to make repairs as problems pop up instead of waiting until they multiply. It’s a lot cheaper than paying for extensive renovations, plus you get an immediate tax deduction. IRS Publication 527 is packed full of helpful tips on tax deductions for residential rental property. I suggest you give it a good read and bookmark for future reference. Good luck! George

Need startup capital?

It’s not a secret Boomers are looking at retirement differently than their parents did. And many hope to go into business for themselves after leaving the corporate world. However, financing a new venture could be a problem. Today, I’d like to give you a brief overview of a strategy that just might help you get that dream business off the ground. Rollover as a Business Start-Up (ROBS) lets you get cash from your 401(k) plan. Here’s how it works: You create a C corporation and set up a retirement plan, but don’t initially issue stock. Then you roll over your existing 401(k) into the new retirement plan. Afterward, your new corporation issues stock and transfers it to the new retirement plan in exchange for cash. If the ROBS is set up correctly, no interest is owed, there are no IRS penalties for early withdrawal and you don’t have to repay the money. In addition, ROBS money may be used to help you qualify for a loan from a bank or the Small Business Administration. The IRS does not consider ROBS plans abusive tax avoidance transactions. But they are questionable because they may solely benefit one individual — the individual who rolls over his or her existing retirement funds to the ROBS plan in a tax-free transaction. That tells me the IRS is keeping a close eye on anyone who goes this route. And you could expect them to ask questions about your ROBS plan’s recordkeeping and information reporting requirements, including:

• The plan’s current status
• Plan contribution history
• Information on the rollover or direct transfer of the assets into the ROBS plan Participant information
• Stock valuation and stock purchases General information about the business itself

According to the IRS, here are some other areas a ROBS plan could run into trouble:

• After the ROBS plan sponsor purchases the new company’s employer stock with the rollover funds, the sponsor amends the plan to prevent other participants from purchasing stock.
• If the sponsor amends the plan to prevent other employees from participating, this may violate the Code qualification requirements.
• Promoter fees
• Valuation of assets
• Failure to issue a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., when the assets are rolled over into the ROBS plan.

There are other risks, too ... A 2009 study by the IRS found that, although there were a few success stories, most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy (business and personal), liens (business and personal), and corporate dissolutions by individual Secretaries of State. The IRS went on to say that some of the individuals who started ROBS plans lost not only the retirement assets they accumulated over many years, but also their dream of owning a business. As a result, much of the retirement savings invested in their unsuccessful ROBS plan was depleted or ‘lost,’ in many cases even before they had begun to offer their product or service to the public.

As you can see, a ROBS plan offers a pretty slick way to finance a new business with assets you normally couldn’t easily touch. But it’s filled with potential landmines. So make sure you hire an attorney and/or a CPA who is well experienced in ROBS to guide you along the way. Best wishes, George P.S. I’m now on Twitter. Follow me at http://twitter.com/efinancialwrite for frequent updates, personal insights and observations on how to have a healthy retirement.

If you don’t have a Twitter account, sign up today at http://www.twitter.com/signup and then click on the ‘Follow’ button from http://twitter.com/efinancialwrite to receive updates on either your cell phone or Twitter page.

Real Estate and Health Care — a Winning Combination!

In my November 30 posting, I talked about how much I like real estate. Now I’d like you to think about how the demand for medical care continues to rise. Especially for nursing homes and assisted care living facilities as 76 million baby boomers require more and better care. One way to profit from this trend is with a real estate investment trust (REIT) that specializes in healthcare real estate. And one REIT that I’ve been looking at recently is Ventas, Inc. (NYSE: VTR). Ventas is one of the nation's leading healthcare REITs with holdings of approximately $11 billion. It owns 241 senior housing facilities, 40 hospitals, 187 skilled nursing facilities and 130 medical office buildings and other healthcare facilities containing approximately 50,000 licensed beds and senior living units located in 44 states and two Canadian provinces. Ventas has been a consistent performer among the Healthcare REITs in the MSCI U.S. REIT Index (RMS) over the past 5 years. For the five-year period ending September 30, 2010, Ventas had an annual total shareholder return of 15.5 percent. The current dividend yield is 4.1%. VTR isn’t the only REIT in the health care sector. HCP, Inc. (HCP), Health Care REIT (HCN), and Senior Housing Properties Trust (SHN) are other big names in the business. So if you believe, like I do, that the health care industry will thrive in the years to come, REITs could prove to be a terrific way to get a reliable income and attractive long-term returns. Best wishes and Happy New Year! George

It’s that time of the year again ...

I’m not talking about what you should do with your IRA and retirement plans. I covered those earlier this month. And if you haven’t taken those steps yet, you only have five days left. I’m talking about our annual ski trip. We’re making plans right now for a return trip to Banff National Park in Canada. This is some of the best skiing you’ll ever find in the Rockies, without the crowds and at a very affordable price. I’ll give you more details as we get closer to the date. So dust off your skis ... dig out your parka … and starting getting those legs in shape! In meantime if you think you might be interested in joining us, contact me for more info. George

Merry Christmas!

Wishing you and yours a safe, a healthy … and a very Merry Christmas! George and Linda

Bart thinks the VA will pay for his long-term care

In A Boomer’s Guide to Long-term Care, I’ve included a chapter with e-mails I received after an article on long-term care insurance ran in an online publication.

Here’s one of them …

Bart C., 78, from Philadelphia, PA writes:

I’m a veteran. The VA will pay for my care.

My reply: I’m all for helping vets, Bart. And as far as I’m concerned we don’t do enough. But let’s be practical … the facilities are government-run, and there’s a waiting list to get in.

Plus, the VA doesn’t give out long-term care benefits unless you:

• Have a 70 percent service-connected (SC) disability, or

• Are rated with a 60 percent SC disability and are unemployable, or

• Are rated with a 60 percent SC disability and are permanently and totally disabled.

So this tells me that if you’re a vet without a severe service-connected disability, you won’t get VA LTC benefits.

However, you might be able to get Aid and Attendance (A&A) benefits or Housebound benefits.

A&A is a benefit paid in addition to monthly pension. So you first must be eligible for the pension.

A veteran may be eligible for A&A when:

• The veteran requires the aid of another person in order to perform personal functions required in everyday living, such as bathing, feeding, dressing, attending to the wants of nature, adjusting prosthetic devices, or protecting himself/herself from the hazards of his/her daily environment, or …

• The veteran is bedridden, in that his/her disability or disabilities requires that he/she remain in bed apart from any prescribed course of convalescence or treatment, or …

• The veteran is a patient in a nursing home due to mental or physical incapacity, or …

• The veteran is blind, or so nearly blind as to have corrected visual acuity of 5/200 or less, in both eyes, or concentric contraction of the visual field to 5 degrees or less.
ike A&A, Housebound benefits may not be paid without eligibility to pension.

A veteran may be eligible for Housebound benefits when:

• The veteran has a single permanent disability evaluated as 100-percent disabling and, due to such disability, he/she is permanently and substantially confined to his/her immediate premises, or …

• The veteran has a single permanent disability evaluated as 100-percent disabling and, another disability, or disabilities, evaluated as 60 percent or more disabling

You can find more information, including how to apply, on the Veterans Affairs Web site at: http://www.vba.va.gov/bln/21/pension/vetpen.htm#1.

And for more tips on how to protect your wealth from the skyrocketing costs of long-term care, pick up a copy of A Boomer’s Guide to Long-term Care.

Best wishes,

George