Listen to the Podcast Here: Welcome back to The Real Estate Nerds Podcast! As investors, we’re bound to see our fair share of both good and bad deals. So today we’re putting a spin on our usual format. Instead of talking just Best Deals or Bad Beats, we get to hear a little of both. Today, Amanda Han of Keystone CPA shares two of her deals–one of her best, and one of her worst. Amanda and Scott examine both from a tax and investment perspective, providing new and helpful tips and stories about rental real estate and creative financing along the way. Amanda also shares some strategies that she has observed over the years with regards to tax-free investing, IRA use, and more. Whether you are self-employed or working a traditional job, Amanda and Scott have insights to share with you. Tune in to hear the full conversation. Description Useful Resources References Amanda Han: A Self-Directed Roth IRA Best Deal Amanda sits down with Scott to share a bit about her background and investing experience. Rather than focusing on her own investments, she shares a Best Deal that she oversaw professionally. Learn how one smart investor got the most out of investing with his self-directed Roth IRA. [1:30] Amanda is a CPA, tax advisor, and real estate investor. Her company specializes in working with real estate investors, who make up the majority of her clientele. While she states she hasn’t had extreme positive or negative personal deals, she is sharing deals she oversaw for clients today (anonymously, of course!) No identifying information is ever given about clients of the professionals on the Real Estate Nerds podcast. [3:00] Amanda dives into the first deal, which involved a client making a rental real estate investment using self-directed retirement funds. The client, whom we will call “John,” met Amanda near at a real estate club near her home in California. John was using a Roth IRA to grow his retirement assets tax-free. He was interested in investing his funds in a property in a rough area of Los Angeles. The plan was to re-zone the property into a multi-family unit. [4:00] The $200,000 property ended up yielding John around $1 million. Because he used a Roth IRA to hold the property, all of these gains were completely tax free. This savvy investor combined good investing strategy with smart tax planning to win big. [5:00] Scott asks if this type of investing win is typical of Amanda’s clients. Both Scott and Amanda assist self-directed investors regularly, but Amanda argues that most people aren’t yet taking full advantage of self-directed retirement accounts. She tells a story of another client who also has $200,000 in a Roth IRA, but it’s currently just sitting there when he could be making investments to maximize that account. While Amanda sees a lot of interest in self-directed investing, many account holders get the account but don’t immediately pursue deals or strategize to make the most of this tool. [6:30] Scott points out that he has seen a certain class of smart investors leveraging their investing skills to take advantage of the full range of options within the self-directed IRA. Amanda sees successes of this nature as well with notes, where the investor profits immensely by foreclosing the property. Amanda believes she knows what makes these “Mitt Romney” types get their amazing returns: “The key is in combining the tax-free money with your highest return or best deals.” [8:00] Amanda points out that proactivity with professionals is also key. Asking your CPA before you make the investment is generally best, particularly when it comes to Roth IRA investments with high potential returns. [9:00] Scott and Amanda discuss the power of the Solo 401(k) for those with self-employment or non-W2 income. It’s preferable to the self-directed IRA (SDIRA) in many cases “It’s the same vehicle as the IRA, but a lot more flexible and powerful. For everyone who is eligible for a Solo 401(k), I recommend they talk to their advisor about it, because it’s a great way to get savings year after year.”Amanda points out that those with W2 income aren’t necessarily excluded. But to be eligible, an investor must have some income outside of a W2 job. This can include many people in the real estate realm. A Deceptive Worst Deal Scott and Amanda transition to the other extreme of the retirement investment spectrum by getting into the details of one of the worst deals Amanda has seen in her advising career. [11:30] “Lisa” was a client who was new to the real estate industry. She had taken a course that inspired her to ask Amanda about creative financing. She was drawn to a deal for this reason that involved rental real estate. Amanda and Lisa both believed the deal was seller-financed with no money down–at first. The seller was supposed to carry the note. Getting to own real estate without handling bank lending appealed to Lisa. [13:30] To understand the financing structure and tax treatments, Amanda asked for the purchase contract. This is typically a legal document, but Amanda knew that it was a key document to review from her CPA experience. The document revealed that the deal was in fact not a seller-financed deal, but a rental contract with a lease option with the potential to purchase. The contract even described Lisa as a tenant. These major discrepancies between what the contract said and what the investor believed were warning signs for Amanda. [14:45] Unfortunately, by the time Lisa came to Amanda, she had already signed the contract and paid the money required. Although Lisa attempted to address her concerns with the seller, the contract was signed and the deal was done. The problem here is that Lisa didn’t understand the contract and also did not get the tax benefits or appreciation value of the property, because she was merely a tenant rather than an owner. “This deal was misleading on what she was really investing in, and on the tax side she lost on some major tax benefits.” Amanda has advice for avoiding bad, misleading deals like this: “Especially when you’re getting into creative real estate or anything that’s out of the norm, definitely have your CPA and your attorney review the agreement.” [16:24] Scott agrees that as an attorney, he would have caught this detail too. The two agree that a major problem they encounter with clients is failure to read and understand their contracts. [17:28] Scott shares one of his favorite tips about contracts for new investors: “Find somebody in the industry that’s a professional, whether that’s a CPA or an attorney, just somebody who’s done a deal before. Then try to get a cheap consultation with them…Have somebody that’s a professional look at the deal. They’ll give you way more than $200 worth of advice for a 30-minute phone call.” Amanda herself uses this trick when she has clients needing specific expertise. Red Flags to Watch Out For to Avoid Bad Deals [18:30] Amanda cautions against letting the seller’s attorney review a contract. You want your own attorney, or at least an independent attorney, to review it on your behalf. Scott points out that this is an ethical dilemma for attorneys, and investors should be wary of situations where they’re having to question who an attorney is actually representing. [19:29] Scott has yet another piece of “legal Jiu-Jitsu” for handling lawyers should you find yourself in an uncertain situation with one: “If you’re ever in the room with an attorney and there’s some kind of guise, ask them if they’re your attorney or if they’re representing the other side. [21:00] Our two experts discuss the danger of a templated or copy pasted contract. It happens often, particularly in creative financing deals. Failure to vet a contract is a recipe for a bad deal. But again, there’s an easy way to avoid this bind according to Scott: “Get some advice from somebody who’s smarter than you.” [23:00] Amanda points out that extreme urgency on a deal can be a major red flag: “If a deal has to be done in the next ten minutes, it might be too good to be true.” Investors need time to do thorough due diligence. [24:30] Amanda discusses her clients who invest with notes as lenders, and asks Scott what to do about unsecured loan offers. As a CPA, there isn’t a major difference from a tax perspective, but she wonders what an attorney would recommend for those types of investment. Scott suggests there should be some kind of guarantee: it could be trust alone, but of course, collateral is better.Scott offers a handy trust test: “If you wouldn’t trust that person with the login info to your bank accounts, don’t make the loan to them unsecured.” [26:06] Options and creative securities can help lenders avoid these situations. The Takeaway: Know What You’re Getting Into By Planning Ahead Scott and Amanda wrap up the show with some red flags to avoid, and tips for making sure you’re getting the deal you really want. [27:55] Scott gives an example of a client who bought a beneficial interest in the estate, and some of the unexpected problems he ran into. These issues could have been avoided had the client been proactive and sought professional help ahead of the purchase. [28:40] Amanda can relate to Scott’s experience of cleaning up messes created by investors failing to think ahead by asking for professional help: “The biggest issue I see is not planning before implementing.” Many of the problems both Scott and Amanda see are completely avoidable. [29:00] The two investor-professionals comment about another frequent issue: entities that are formed but not actually used. This goes back to the contract issue discussed earlier. LegalZoom-made entities have created unusual client expectations in Scott’s line of work, where some clients seem more concerned with design than whether a contract is accurate and will hold up in court: “That is not the way real legal work happens…If you’re getting stickers and glitter on your legal work, that’s probably not appealing to the serious investor.” Connect with Amanda Han Connect with Amanda through her company’s website, www.KeystoneCPA.com You can also join her on BiggerPockets.com, one of the largest networks of real estate investors and professionals in the world. Finally, check out The Book on Tax Strategies for the Savvy Real Estate Investor for even more great information on maximizing your tax savings on your real estate investments. Listener Resources Thank you for joining us on today’s episode of the Real Estate Nerds Podcast. For even more free educational resources on real estate investing and the law, check out the Royal Legal Solutions blog. You can also reach our host Scott Smith directly, connect with him on LinkedIn, subscribe to the Royal Legal Solutions YouTube channel, or join our investor community on Facebook. Don’t forget to subscribe to stay up to date and have the most current episodes of the Real Estate Nerds Podcast directly in your listening library. Every subscription helps us create new, custom content for you. What did you think of today’s episode? What would you like to hear more about in the future? Leave your thoughts and questions in the comments section below, or leave us a review in the iTunes store. We love hearing your feedback, so fire away. Join us again next week for another Bad Beats episode, where we will all learn how to avoid some common investing mistakes from Michael Sherman. Thanks for listening and joining us on our journey to become better investors! Hosted by Scott Smith, Lead Attorney and Founder of Royal Legal Solutions. Schedule your personal consultation now. If you have questions about our content or suggestions for future episodes or guests, reach our podcast team at [email protected]. About Amanda Han Amanda has over 18 years of experience as a CPA with special emphasis in real estate, self-directed investing, and individual tax planning. Amanda has extensive “Big Four” public accounting experience in the Lead Tax Group servicing clients in the real estate industry. She provided tax consulting and tax compliance for companies engaged in land development, residential development, medical facilities, and conglomerate shopping malls. Subsequent to her work at Deloitte, Amanda served in the Corporate Tax Department for an international Fortune 500 Company in the high tech industry and was responsible for quarterly provisions and various aspects of SEC reporting. Amanda has numerous years of experience in working with international companies in terms of federal and multi-state tax planning as well as audit representation and resolution. Amanda is a frequent contributor and educator to some of the nation’s top investment companies and is a leading expert on retirement investing. Amanda’s cutting-edge tax strategies have been featured in prominent publications including TIME Magazine Online, BiggerPockets.com, Realtor Magazine, and AllBusiness.com, a Dunn & Bradstreet Company. She is certified by the CA State Board of Accountancy and is a member of the prestigious American Institute of Certified Public Accountants (AICPA) practicing in all 50 U.S. States.