IVAN: Welcome to Financial Freedom on Autopilot. I’m Ivan, and this is my good buddy Ted Steinkamp with Advanta IRA.
So well, thanks for coming and listening or watching, and we just have a whole bunch of information for you today on IRAs. This is the first time, like last week when I met him, that I found out how it actually works. I never had anybody that could really explain it the way he does.
It’s all a bunch of gobbledegook and a lot of ways to work this. And so he explained it in very simple terms through case studies, so I can’t wait to just share that stuff with you through his expertise, not even just in IRAs but outside in the financial industry entirely.
So speaking of that, let’s go into his experience in his career. 35 years in the financial services industry across commercial, institutional, and international banking for 7 years, he had credit commitments of up to $150 million. He did financial advisement and institutional sales 12 years, managed two books totaling 130 million across 75 clients. Second book was 5.5 billion across 28 clients, so they had a little bit of money in their bank and a retirement plan consulting and management for six years. He built another book of business, wealth management, for two years, great culture, great company but needed more of a challenge too so he moved on from that. He got into commercial real estate finance, so that’s kind of intersecting with my world for 8 years. He’s specialized in complex transactions, rebuilt the firm after partners unexpected passing, and of course he’s at Advanta IRA now, working with clients seeking to raise capital like hedge funds operator like me.
So a lot of stuff, I’m sure that’s just the surface of the amazingness that Ted Steinkamp is. So, do you want to explain a little bit more on your personal side too?
TED: Yeah, you know, a little bit, I also just want to back up just a touch, Ivan, into, you know, the business resume because this is where the personal side of it kind of spills over. When you’re in this business for 35 years, you see a lot of stuff, you experience a lot of stuff, but you’re always looking for new opportunities. And one of the new opportunities that came up when I had to rebuild the firm after my business partner’s death a couple of years ago was I took that real estate firm, or that entity, and created it, or transformed it, I should say, into my own personal investment vehicle. And that today is a lot of what enables me to do certain things, particularly here at Advanta IRA, but also still keeps my foot in the past business life, but also allows me to step forward into the future.
Now, when I am not working, which is rare, I’m one of those people who just cannot sit down and watch TV. I’m bored. I just don’t think I’ve turned on a TV in my house in two years. You will find me just talking to people, you know, family, friends, yeah, you can tell by the natural platinum highlights I have, I’m a little bit older than Ivan, but I play guitar. I’ve got 46 years on these fingers. Each and every year it amazes me because that number goes up. I used to play hockey many years ago. So when I do watch TV, it is at a sports bar watching NHL hockey with beverage in hand. I may be in the gym, and hey, there’s times I just need to enjoy quiet time. And that’s kind of me on the personal and the professional side. And thanks for the good intro on the professional side, Ivan.
IVAN: Yeah, you know, the main thing, the main structure of this podcast is the MAP. So it’s mindset, action, and planning. And you just touched on a big thing right there. So mindset, you take time to work on your hobbies. You disconnect from the world so you can recharge. What’s your version of quiet time? Do you like to go up to a mountain somewhere and chill out or…?
TED: No. No. I haven’t gone to that extent yet. I do have a few friends that’ll literally do that, that live in Colorado, and they’ll just meditate and look at the landscape. That’s not me. I’ve got to have a creative outlet and a physical outlet. That’s really what motivates me. Going to the gym, just blowing off the steam, you know, all the frustrations of the day. Take it out on a stack of weights. That helps, particularly when it comes down to sleep. One of the lifestyle habits I have developed over the years, I used to only sleep four hours a night, sometimes out of necessity. Today I sleep 5 hours a night, which is unusual. I know a lot of people say, “I can’t get by without any less than eight or nine.” My body’s programmed after four or five hours of sleep, I just sit up, and I’m ready to go. Just whenever I get it.
But on the creative side, that’s why I play guitar. I will go into the kitchen and try to create something. I do like to cook all sorts of different cuisines and different types of food. I’m not somebody who draws or does sculpture or painting. I’ve never developed those skills. Maybe I will one day in the future, but I’ve got to have those creative and physical outlets.
IVAN: Speaking of outlets, like that’s kind of time commitments, kind of blocking off your day to do certain things. What sort of time commitment should it look like to invest with an IRA, like educating yourself, like doing all the procedures? I’m sure largely you guys could help a lot with that and, you know, delegating, but like what does that look like from a time commitment?
TED: And we can if, you know, just looking back over time. If I was someone just entering the world thinking about utilizing a self-directed IRA to invest, I would say the first place to spend the time is learn the basic rules of the IRA or of using self-directed IRAs. You don’t have to become a subject matter expert. Don’t waste your time with that. That’s where the custodian comes into play. One of the things that Advanta IRA is very proud about is the service model.
We have clients that will reach out to us and just share with us their investment idea, just making sure they understand the rules appropriately. And that’s one of the biggest values we can bring as a custodian. But it’s also a time value for you. I said don’t become a subject matter expert. That takes a lot of time. You probably only need to spend maybe five to ten hours understanding the basic rules, how they apply, look at a few case studies, and that’ll make you good to go. Everything else, bounce it off the custodian. Just ask them the questions, make sure everything’s in good graces with the IRS or will be.
IVAN: And later on in our time together, we’re actually going to pull up slides from your deck. And go after specific dos and don’ts, so you’ll also be equipped that way. What is some actionable ways that they could train up and learn about the process?
TED: Yeah, here’s the thing just with investing in general, the more creative you are, the better. I can tell you right now within an IRA, regardless if they’re at a brokerage firm or over here at Advanta IRA and they’re self-directed, there’s two things you cannot invest in according to the IRS rules. That is life insurance contracts and collectibles. So no baseball cards, artwork, fine wine, exotic sports cars, none of that. IRS will say BS for disallowing that, and trust me, people have tried it over the years. But anything else outside of that, the universe is wide open.
I was just having a conversation with my manager before I got on the Zoom call with you. We’re going to be doing a webinar series, or at least we’re planning one, where we’re probably going to be presenting some case studies but also some of the creative things we see here with the clients at Advanta IRA. Obviously, the most high-profile investments are going to be real estate. That’s probably 60% of what we see over here, and the world of real estate is very broad. Whether we’re talking about attainable housing, which is what you specialize in, Ivan. Some people just want rental houses, they want to invest in syndications, the paper assets, very, very broad subject. You, of course, have cryptocurrency, precious metals, private placement stock, that’s really the big four.
Now, some of the stuff I have seen, talk about very creative, and this is why I say spend time just looking for the ideas, different catalysts. I had a conversation with one gentleman that he is a commercial roofer. He’s always renting these 30 and 40 cubic yard dumpsters like you see at construction sites. Because when he tears the roofing, the old roofing material off, it’s got to go in the dumpster. He reached out because he had an idea. He struck a deal with a friend of his that’s in the dumpster business but needed more dumpsters. He was going to buy them as an investment and lease the dumpsters. No, he was going to have them painted an ugly color. You know, who would think of that, but I mean, just the dumpsters as an investment.
We have a couple of clients here. You know, this is kind of a real estate-related idea. A lot of it is his investment is renting washer and dryer units to apartment complexes. We’ve seen people invest in cemetery plots. That’s a different type of real estate investing. But getting out of the real estate investing, what about on the paper assets, taking participations in discounted notes? Mortgage loans, tax liens, we’ve seen clients invest in livestock, farmland, you name it. As long as it’s not collectibles and it’s not life insurance contracts and it’s something the IRA is making the investment, not the individual, it’s okay.
IVAN: So Ted, I have a pot belly pig. I don’t think I told you yet. And he gives me a return on investment because he puts a smile on my face every time I see him. [laughs] Okay, could I securitize my pot belly pig, Phil?
TED: That might be a little bit challenging. We’d have to see how you do it. I need a little away concrete details from you, Ivan, before I…
IVAN: Let’s work on that instrument, brother. Let’s make it happen. [laughs]
TED: That we might be able to do it or not. But trust me, there are so many different ways to securitize and do things these days.
IVAN: Okay. So let’s see. The next question is how much capital should they be planning to have for acquiring or investing in a fund or syndication.
TED: If you’re looking at doing some sort of fund or syndication investing, I would say probably about 80 plus percent of all syndications are going to require a minimum investment of $25,000 to $100,000. And I’m talking about multifamily, multi-use, light industrial. Those are the big ones we see out there today being syndicated, but there are other options out there.
I have seen some crowdfunding or crowdsourcing platforms for mortgage loans where it’s as little as $10 to invest in a mortgage loan participation. Now, $10 in a self-directed IRA wouldn’t work just because there are fees associated with the IRA. I would say if you’re going to start a self-directed IRA with the intention of investing, you’re probably going to want to bring it into around the $10,000 to $20,000 amount to start just so you can make sure you have enough of a return coming in so your expenses don’t eat it up on the IRA, eat up your return, because you want to be able to grow and prosper over time.
And I wouldn’t make that the bare minimum. Always keep adding to it because as you have more over time, as you have more ideas and they generate more return, that IRA just grows, grows, and grows.
IVAN: Speaking of fees, you guys have some sort of a flat fee structure, right, on helping people out?
TED: Yeah, pretty much. There’s a couple of ways we can do it. As far as the fees, if you’re just going to be going into one investment, as long as we know which type of investment, the recordkeeping fee is not going to be anything more than $345 for the year, so it’s not really much. There is going to be a one-time account opening fee here at Advanta IRA, and if you need any wires or anything sent, that’ll be additional. But we’re all about full transparency here, so we do have the fee schedule posted.
We have a couple of different ways the fees can get charged. You can do an account value asset-based fee or just a per-investment fee, whatever is in your best interest. Even if you want to change the fee schedule, that doesn’t upset us. We just want you to do what’s best for you. We’re a fee-for-service provider.
I can tell you one of the unique things with the IRA business is what’s referred to as checkbook IRAs. We have clients that utilize the checkbook IRA. Essentially, all that is, is the IRA owning a single-member LLC, and that single member is the IRA. Then the individual who holds the IRA becomes the manager of that IRA so they can go out and open up a bank account. That’s what gives them the checkbook privileges. They still have to abide by the rules, but here’s the cool thing: for Advanta IRA to recordkeep that, we only recordkeep the LLC. So it’s only one fee. They could have 10, 25, 50 different investments in there. We’re not going to charge them for each investment. We’re going to charge just for the IRA for the LLC because that’s where everything’s being held in. So someone could be involved in 10 different private loans, they could own seven rental properties in there, and they could have an investment with your attainable housing fund and just be charged for holding everything inside of that LLC instead of having all 18 different investments with separate charges attached.
IVAN: Yeah. And that’s the predicament that you helped to help me understand. Basically, I had this misconception that there was a whole lot of complications and you couldn’t even visit the property if you had invested in owning a property, but you explained it to me that if you have a non-recourse loan, you could actually even get more involved in the property. Could you elaborate on that?
TED: Yeah. If you’re going to buy a property, and we can go over that with the case studies in a short while, if you’re going to buy a property where you need to have a loan so you can make the purchase, that’s going to have to be a non-recourse loan.
What non-recourse means is in the event of default, all the lender can take is that property. If it’s a recourse loan, which is what a lot of us enter into outside of an IRA, there are some real estate investors that still do non-recourse, but it’s a higher standard that must be met. Most under a recourse loan, if that property is foreclosed upon, when the lender sells the property, if there is any unpaid loan balance remaining, the lender sues the borrower and tries to reclaim that amount. And the reason why it must be non-recourse inside of an IRA is because you’re limited to the dollar amounts that can be contributed to an IRA. So if it was a recourse loan and you got sued because of foreclosure, and there was, say, $100,000 of unpaid balance still due to the lender, well, if you can only contribute $7,000 to the IRA, you can’t satisfy the judgment. So that’s why it has to be non-recourse.
IVAN: So those non-recourse loans probably have lower LTVs too, right?
TED: Slightly lower LTVs, slightly higher interest rates. The lenders are just taking a little more risk, so they’re going to price it accordingly.
IVAN: Yeah, of course. That makes sense. I think that’s a natural place for us to pause, and we could go ahead and get rolling on pulling up your slides. I think we wanted to start with pages, 13 to 18. So, jumping into slide 13 here, why do people choose to self-direct?
TED: Yeah, it really comes down to three reasons. We just have them in three separate buckets on the slide, and of course, I’ll get these out or you can email the slides out to the viewers and participants.
For a lot of people or a lot of investors, being able to utilize your IRA funds away from the traditional channels opens up a whole new source of capital. A lot of people are just of the mindset that what they have in an IRA at the brokerage firm, that’s all they’re ever going to be able to do, and that’s not really the case. Self-directed IRAs open up that whole world. As I said, no life insurance contracts, no collectibles, anything else you’re pretty much going to be okay.
The one other thing to add to that is it cannot be outwardly illegal. I can tell you one of the investments that is a challenge to do is cannabis. If you’re investing in a business, I’ll make up a name here, Cannabis Kingdom, cannabis is illegal under federal law, and a lot of custodians will not hold it. However, if you’re investing in a business where cannabis is not outwardly disclosed but is a part of it, who knows, we don’t know. It could just be a totally legit business. Say you’re investing in Fat Tony’s Pizza LLC. Fat Tony also has a dispensary. Fat Tony is selling a lot of pizza, but it doesn’t say Fat Tony Cannabis, so no custodian’s going to have an issue with that. Fat Tony’s Pizza is probably totally fine for all anybody knows; you invested in a pizza business. But really, it opens up a whole new source of capital. Instead of having to go to your bank account and stroke a check to make an investment in whatever it is that you wish to fund, you could actually transfer some money over to a custodian from your brokerage firm IRA over to the self-directed IRA custodian and make that investment. The only difference is, if it’s one of the big-name brokerage firms, they can’t hold that, but Advanta IRA can, so it’s a whole new source of capital.
The other thing is, and we’re experiencing this today, stock market fatigue. It’s been going up and down. If you’re reasonably good at math and you start taking a look at your account statements and the sort of returns you’ve been earning overall, you might be negative for the year. There’s probably going to be a few of you out there that maybe have a slight positive return, but for the most part, the ups and downs of the stock market just wear out people. They much rather have something that they can see, touch, and feel figuratively, like a real estate syndication, that on regular intervals, those dividend distributions come into the account. They tend to like that more. If they’re going to receive, let’s just say, 6% just to choose a number, it is just more palatable to them knowing they have a physical asset, something they understand a little bit better than the latest technology stock that is not going to be volatile in price, because most syndications, that price, if it’s a $25,000 investment, that’s pretty much what it stays at the entire time until disposition of the asset, when the anticipation is there’ll be a profit on top of that. That’s much more agreeable with a lot of people instead of the ups and downs of the stock market.
IVAN: Yeah. And plus, you gotta be researching like crazy, like reading 200 pages a day.
TED: And yeah, and I believe Warren Buffett, yeah, he’s just retired, but he’s always said he would read as much as 800 pages in a day. I could not read that many pages. I mean, he’s a super reader. I would have several naps in between on that 800 pages. Reading just relaxes me too much.
IVAN: Me too.
TED: But the other thing too is the tax benefits, Ivan. If you invest personally, every time you would receive that dividend distribution, well, that’s got to get reported on your form 1040, and the IRS is going to expect income tax. But when the investment is held inside of the self-directed IRA, the dividends, the rents, the profits, you know, if it’s a traditional IRA, that’s tax deferred until you make the distribution some point in the future. And if it’s a Roth IRA that’s passed that five-year seasoning rule, it’s tax-free. And there’s very, very few investments out there, other than municipal bonds and qualified opportunity zones, that are going to be tax-free.
IVAN: Yeah, it effectively is. Is this a correct statement? It can reduce your tax income bracket too by…
TED: It could in theory. Yeah, because if you have, say, say you have gross income of $150,000, you know, that would put you up fairly high in the brackets. Not at the very top of the bracket, but, you know, a tangible number for most households. Say if $50,000 of that was coming from, $50,000 of that income was paid into your IRA, well, you don’t have to pay taxes on that. So you’re only paying taxes on the $100,000 over. So it reduces the total dollars paid, and it might squeeze you down into a lower bracket. Though this is definitely something to have a conversation with your accountant, because if you can reconfigure your income sources and how you get paid, you might be able to pay a lot less in taxes.
IVAN: Yeah. What’s the maximum amount somebody could pay in every year?
TED: Into an IRA. Well, it’s going to be basically $7,000 for the annual contribution. If you’re like me, you’re age 50 and older, I believe it’s $8,000. Please just look up on the IRS.gov website. I used to be a CFP, I don’t keep up with the numbers, but that’ll put you on the dart board. Now, with an IRA, though, there’s also unlimited transfers, and you can move the monies between accounts. So if you have money in an IRA elsewhere, you could transfer some or all of those dollars into a self-directed IRA. So your account balance can go from zero for a new account to whatever, and you can still make your annual contribution.
And then also, the other big source of monies is former employers’ retirement plans. When you leave a job, you can roll that money out of that retirement plan. Typically, we see it come from a 401k, but also pensions, profit-sharing plans, cash balance plans, they’re all eligible for rollover. You don’t have to roll the whole sum; you can roll a portion of it over. So you can actually fund an account to a pretty high level very quick.
IVAN: Okay, well, moving on to slide 15. These are the real estate assets that can be invested upon. We briefly touched on some of them already, but let’s go over an example of a single-family home. For, let’s say, the most aggressive type of real estate, single-family home, fixing for the property.
TED: Yeah, let’s talk about it. There’s a couple of ways in which single-family homes can be done. And let’s just talk about a single-person scenario. Yeah, okay. And if I may, Ivan, just use you and your name only on this.
IVAN: I refuse.. [jokingly]
TED: Okay. So John is going to go out and purchase a single-family home as an investment property. Now, what we typically see for single-family investment properties, it’s not going to be a half-million-dollar house unless you happen to live in a market where the cheapest houses are priced at that point. You’re going to see these right about, I know one gentleman up in Cleveland, Ohio, is buying the houses for about 50 grand a pop. So that’s something that would clearly be in an IRA if someone chose to do so. So let’s say he goes out, buys a $50,000 rental house. Two choices here. He can pay cash if he has the cash in his IRA, or he can pay part cash and take out a non-recourse loan so he has the full amount.
And by the way, any rehab costs, it’s okay. Just depends how you want to pay for it. Do you want to borrow the money, or do you want to just pay the cash out of your IRA? But once that property is in there, is in the IRA, the rent that gets paid is paid to the IRA. There’s always going to be expenses with rental properties. There’s going to be plumbers, electricians, exterminators, roofers, heating and air people. That’s got to be paid out of the IRA. You cannot be paying that out of pocket, so you want to make sure you have enough cash in there to pay those bills. But all the money that comes in from the rents, net of the expenses, that does not flow through your Form 1040. That stays in the IRA. It does not have to be reported as taxable income.
Now, one thing, though, that we do see quite a bit, particularly in the pricier real estate markets, and you and I live in one, Atlanta, Georgia. Housing is not cheap here. It’s not as expensive as other parts of the country, but what we’re seeing more and more of as real estate prices continue to rise is what’s referred to as partnering, where two investors go in on a property. And that is totally permissible with the IRS. You just have to keep the proportions of ownership separate and keep the distributions in those proportions and the expenses. Follow me?
IVAN: Yeah.
TED: Okay. So if you and I were going to invest in a property, you’re going to use your self-directed IRA. You’re going to have, I’ll say, 40% of the property, and I’m going to come in for 60%. But my 60%, I’m stroking the check out of my bank account. So when that rent check comes for $1,000 every month, $400 of that rent goes to your IRA. $600 of the rent goes to my bank account. All right? You, because it’s in your IRA, you’re not paying taxes. I have to pay taxes on my $600 every month.
IVAN: Oh okay.
TED: Because I’m doing it now, if I use my IRA, two IRA investors can go in and participate on the same property, or three or four. IRS doesn’t care. We just have to keep those percentages divided. Now, when the expenses come, say we send out the heating and air guy to do seasonal service on the air conditioning unit. And just to keep the math simple, say that service cost $100. It used to, it doesn’t anymore.
Ivan, you would be responsible for paying $40 of that service, and I would be responsible for paying $60 of that service. I would have to stroke that check out of my bank account. You would have to present the bill for your $40 to your IRA custodian so they can cut the check out of your IRA.
IVAN: Okay And is there a fee for, I guess, transaction stuff like that?
TED: On our side, the way we have the recordkeeping fees priced, cutting the checks for that is part of our service.
IVAN: Oh, okay. Yeah.
TED: Now, if we were requested to send a cashier’s check for a closing on a property, then we’d have to charge what our bank charges us for a cashier’s check. But normal processing, we can. They can also be sent ACH if the company is set up to receive payments.
IVAN: Okay, so that brings up a technical issue for me. It might be a predicament for other people. Most of the contractors I work with, they want to be paid with like Zelle or Cash App or, you know, Venmo, but that wouldn’t be feasible in this scenario, right?
TED: It could be.
IVAN: Would it?
TED: If you did the LLC in IRA with a checkbook control, in theory, you have to set up that LLC and it has a checking account at the bank. If that bank can set that checking account up on Zelle, which most banks utilize that service, you could pay them Zelle that way.
IVAN: Oh and in that case would the custodian log into the bank account and send it?
TED: No, no. You would have control, so you can authorize the payment because you’re the manager of the LLC.
IVAN: Okay, okay. Gotcha.
TED: And then, Zelle, I mean, Venmo, I haven’t done it, but my understanding, correct me if I’m wrong, with Venmo you’re basically entering your bank account details, and it’s going to be the transfer from one person to the other. So, in theory, you could still do that. You have to keep your records, though. Because if the IRS were ever to audit and ask a few questions, you know, “Hey, Ivan, can you show us the bill related to this $40 payment you made?” just present the IRS auditor with the bill and say, “Hey, this 40 bucks was my 40% of the $100 air conditioning service.”
And they’ll say, “And how’d you send this?” and say, “Venmo or Zelle through my bank account that the IRA utilizes.”
IVAN: So, that’s another mind-blowing thing for me because I thought for the longest that some sort of unbiased third party or completely irrelevant third party had to be outside of that, had to handle everything, even managing the property.
TED: So, they do. You cannot. There’s a thing within the IRS rules that you cannot be receiving a direct benefit. Now, when we’re talking about managing a property, yeah, you’re going to have to have a third party. You cannot do that yourself. IRS frowns on that. The benefit you’re receiving is not a—everything needs to be arm’s length away from you, one step removed, which means you’re going to have to have a third party manage the property, repair, do the maintenance, that sort of stuff. You can’t do that yourself because you’re receiving a benefit by increased returns by doing that. IRS will not permit that.
IVAN: So, in this case, for this $100 bill, the property manager would give us a call and say, “You owe 40%, your partner owns 60%. Send it to this person.”
TED: Correct. I’m glad you brought up property manager too, because property managers can be very effective in not only just handling the phone calls and the day-to-day headaches of a property, but when they collect the rents and they pay the bills for the month, they can split out what everyone is owed net and send that to the IRA. So if you had $1,000 a month come in, you had to pay bills of, you know, say, $300 for that month, let the property manager pay that 300 for the month. There’s 700 left over. Split it out 60/40, like it is in our hypothetical example. So you get your 40% cut of that, $280, that goes to your IRA. That’s net of all the expenses. And then I would receive my portion, my 60%, the 420, and I got to pay taxes on it. Property management companies are very solid and worthwhile in that regard.
IVAN: Yeah Just got to do some good vetting to make sure they’re you know quality guys..
TED: Absolutely. Yeah. They’re, in a lot of ways, they’re an employee to you and your IRA. So you want to make sure you get a good employee.
IVAN: For any beginners too, I would advise always have like a 30-40% reserve remaining. Like, instead of depleting the reserve of the bank account as fast as possible and everybody getting, you know, the remaining amount, keep a good amount of money in there for like if a plumber needs to be called by the property manager overnight or something like that.
TED: Yep. Yeah. Always make sure you have enough money in the IRA. And of course, a best practice, you know, you can always co-opt this from the commercial real estate industry. They always take a portion of the rent roll every month and put it into a reserve account, and that’s going to pay for the major expenses that come up. You know, you got to re-roof a building. Heating and air systems need to be replaced. They only last so long.
How many times have you been in an office building and the lobby is all ripped up because they’re remodeling it? A lot of times, a portion of that, at least from the repair perspective, if it’s for a portion of the lobby, they have a reserve account to pay for that. Now, if it’s a significant renovation to the building, they’re probably going to go out and refinance the building, take cash out if they’re in a position, and that’s going to help fund a big portion of that budget.
IVAN: Yeah. So as you know, and as I know being a syndicator too, we have to think about worst-case scenarios, especially with your background, you know about that. So tell me about the worst-case scenario, like what if, like I met an investor that ended up buying two Section 8 properties, and they ended up being pretty amazing cash cows, but they didn’t do proper inspections, and it turned out it had foundation issues. So tell me about a worst-case scenario of what if the IRA gets depleted from bleeding out cash, asset goes wrong, etc.
TED: Yeah. You’re in a little bit of a predicament there. Obviously, with an investment like that, there’s going to be a capital call that goes out, so everyone’s going to have to pony up additional cash. If all the investment dollars from the initiation of the investment came from an IRA and there’s not enough cash in there to deplete it, that’s when you’re going to need tax advice. There are some guidelines where the IRS will allow monies to be infused into a property. You can’t do it through the IRA. It’s going to have to be through your bank account, and that’s going to re-change or reconfigure all the distribution percentages. So that is where a very good CPA, who is very knowledgeable of the tax law as it relates to IRAs, is going to be needed, because you’re going to be going into a gray area and they’re going to have to guide you through that so you don’t get into trouble with the IRS. I have seen it done. It just takes some very careful planning.
IVAN: So now we’re talking about capital accounts.. Revising ownership structures..
TED: Correct.
IVAN: Okay, so it’s possible. It’s not impossible. It’s just going to take some configuring.
TED: Absolutely. Now what I have seen where people go into properties, even if it’s just, you know, our hypothetical example, you and I, there will be the use of each investor using their IRA and their bank account. Because even though you should not be changing those investment percentages out of each bucket, because you have the bank account money involved, you’re going to reduce the strain on an IRA. So if you have other monies outside in another IRA, you can just transfer those in to cover, and then you can take the rest of the strain off by using your checking account as long as you’re maintaining the original percentages.
So you can shuffle things around. And I think you made a really good point too, Ivan. You know, we, you have to think about the worst case scenario. And that is with any investment, whether it’s taxable, tax deferred in an IRA, outside of an IRA. It’s what we call in my past life risk control. You always have to engage in risk control because the biggest screw-ups I have seen is when the risk control standards were very lax. You just have to think of the worst case scenario. And of course, sometimes the solution is this investment’s not working out. Let’s sell it. Let’s get rid of it. We got to move on. Sometimes that’s the outcome.
IVAN: Even if it hurts it has to be done sometimes.
TED: Yep. Sometimes you do have to take a loss. That is part of the game. Not all investments go up in value.
IVAN: Yeah. Let me see. So next slide is paper assets. Did you want to—
TED: Yeah unless you want to cover trailer parks or excuse me mobile home parks.
IVAN: That’s a unique cash cow asset but um since we’re starting to run out of time
we could go-
TED: Yeah. Let’s just go to paper assets. This is the one nearest and dearest to my heart. This is the area I personally invest in. I will tell you right up front you need to be good with math or at least using a financial calculator. You can get an app for your phone. I grew up using the HP 12C so I can do the cash flow calculations and the yield calculations. But this is where you really get into stuff where you can fractionalize the investments. And what I mean by fractionalize is instead of buying 100% of it, maybe you only want to buy 10 or 20% of it. Paper assets are easily divided. Physical assets are also easily divided, but it takes a lot more in the way of documents. Mortgage loans, as I mentioned, I’ve seen some places or some platforms you can invest as little as $10 to participate in a mortgage loan. Tax liens have always been very popular, particularly in Georgia. Our foreclosure laws are very favorable for tax lien investing.
IVAN: Yeah. We’re a non-judicial state.
TED: Yeah we’re non-judicial. I heard one case last year in New York State, a loan had been in default for 13 years, and finally the landlord or the lender was able to evict the tenant. They just kept filing one appeal after the other.
IVAN: You got to be kidding me..
TED: Up in courts, 13 years, didn’t pay a dime in rent.
IVAN: Oh my gosh.
TED: Hey, that’s New York. Tax deeds can be very similar to liens, it just depends how the state is structured. Notes, if you’re very good at the math, you can buy a note, sell participations, increase your yield. I’ve seen people earn as much as, or investors earn as much as 30-40% doing that with notes. Very creative, but you got to be good with the math. Options against real estate properties, you hold that right to buy that property at some point in the future for an agreed-upon price. What if the value of the property goes up and you’ve owned that option for two years and it’s getting close to exercise or let it expire, you can sell that to somebody.
IVAN: Yeah. I had a direct transaction regarding that too. Somebody, we couldn’t sell a piece of land, but this person that was interested ended up offering $1,000 a month to hold it for three years. And in Atlanta, you know, that’s pretty valuable.
TED: Yeah. And again, you know, this is stuff you need to be a subject matter expert on or pretty close to it. And you’re also going to need a good attorney and a CPA that understands it because they are invaluable. You go into a transaction, lose all your money, you won’t do that again.
IVAN: Yeah. The interesting thing about this particular type is that because you’re talking about fractionalizing, it’s a lot of diversification.
TED: Yeah. If you choose to diversify, because there is an argument going on in the investment community, using that term as a broad term, diversification is a good way to preserve wealth because you’re spreading out your risk. But there are some people in the growth phase of wealth accumulation that prefer to concentrate. And they don’t really want to diversify because they’re willing to take the risk for higher returns, and then they get to a set point or a point of growth where they say, “All right, I’ve got enough tied up in this. Let’s diversify and break it out. I don’t want to take a roll back.”
IVAN: Oh yeah, there’s that. Also, kind of referring to like the, let’s say, mortgages, like notes. If you’re invested in five different notes at $10,000 a piece, that could be a method versus five different multi-families, I don’t know, $100,000 a piece. That sort of asset diversification of the notes.
TED: Well, here’s one thing to take a page out of my playbook. Whenever there’s a lien against the property because there’s a mortgage or a loan against it, that is the only asset. That property is a liability. Everyone works for the lender until that is repaid, and if the lender doesn’t get repaid, what do they do? They foreclose. There’s a reason why every lender wants the borrower to have money in the deal. It provides the cushion. So the lender actually acquires that property, whether they want to or not, at a discount. As long as the values have not materially changed, they can sell it. Maybe they put it in their own portfolio. So sometimes being a private lender is not a bad thing, particularly in your IRA. We have clients here that do that, and if they have to foreclose and take a property, they may want to put it in their own property portfolio because they just acquired it at a discount.
Accounts receivable are another one. I have seen clients invest in medical receivables. Who’s going to pay the receivable? Usually, it’s an insurance company; it’s just taking a little while to collect, but that health care provider needs to be paid. Margins are getting thin in that business, and someone will sell the receivables at a discount to an investor. Someone might be willing to take a 5% haircut to get the money today or next week, and you’re going to get repaid in 30 days. If you can wash, rinse, repeat, and do that every month, in a perfect world you’d earn a 60% return doing that. But the world doesn’t work perfect. That’s an annualized return, by the way. But the world isn’t perfect, so you might have an opportunity one month to buy some discounted receivables, earn your three to 5%, and maybe two or three months later the next opportunity comes, but still pretty solid returns. This is buying small. You’re not buying the whole lot; you’re just buying a portion.
IVAN: And by the way, for anybody watching and listening, we’re getting into some nitty-gritty stuff. All of this is informational purposes only. We don’t know your goals, we don’t know your financial position, we don’t know if you have a dollar or a million in the bank. So take it with a grain of salt. Always, like he just mentioned, consult your attorney, your CPA for everything. This is kind of just high-level advice.
So other alternative assets. Oh yeah, there’s a farm animal right there, brother. So my pot belly pig qualifies immediately.
TED: Yeah, as long as it’s a live, living farm animal, but you also have to have a good accountant. There’s certain ways that stuff needs to be record kept. I am not a subject matter expert on it, but we do see investors put money into livestock, movie projects, equipment leasing. People that lease Bobcats and backhoes, their IRA owns the equipment. I’ve got a friend personally here in town, he invests in startup restaurants. He’s in them two to three years, sells and moves on, or sells his interest in it and moves on.
Private company stock, there might be great opportunities to buy into a company at some stage in their life cycle. Maybe they’ll be acquired in the future, maybe it pays a great dividend. Whatever your focus is, you have that. Oil and gas is a huge thing we see here at Advanta IRA. It really is an income-producing investment. Forex accounts, all this algorithmic trading today, because it’s such high-velocity turnover trading that generates a lot of taxable short-term gains on the investments, it’s usually best to have that in an IRA so you don’t have to pay the taxes. If you hold that outside of an IRA, you’re going to receive a 1099, and that might mess up your tax bill for the year.
Precious metals, partnerships, I mean, anything. The possibilities and creativity are endless, and that’s really the fascinating part of this business.
IVAN: That’s beautiful. Since we’re kind of in the last 10 minutes, I’d like to just shortcut to, let me see, let’s go to page 35, and just kind of talk about what it could look like to start the process.
TED: Yeah, it’s actually very simple. We pride ourselves on ease of doing business, and I’m glad because I’m not someone that likes to get tied up in administrative details. It takes all of 15 minutes to open an account. We do it as an online questionnaire, and then you’ll receive a few minutes later from DocuSign an email, and that’ll be the account opening documents for digital signature. Just do that. In 24 hours, we’ll get the account opened. Most cases, we just need a wet ink signature on a transfer form if that’s where the money’s coming from, another IRA. We’ll email that out to you, and you can just email it back to us. Funding the account is as quick as the losing custodian can do that. In most cases, it’s about two weeks or inside of two weeks. And then from there, the account’s funded, and then you just let us know what you’re going to be investing in, and Advanta IRA will be the one making the purchase on your behalf as the investor because it’s got to be titled in the IRA name.
IVAN: Correct. So why does it have to be a previous employer plan? Why can’t it be a current one, for example, with funds in it?
TED: Yeah, there is a rule for most people. You need to have terminated status with the administrator to be eligible to roll out the money from a previous employer’s plan. However, and this applies to a very small slice of the population, there is written in the federal law on certain retirement plans that there could be what’s referred to as an in-service non-hardship withdrawal. Generally speaking, you need to be age 59 and a half, and there might be some additional qualification criteria imposed by the employer. Could be a length of service requirement, that’s usually what we see. Could be vesting, how much of the account is vested versus unvested. But if one qualifies for an in-service non-hardship withdrawal, then they could, while still working, roll out a portion or maybe even all of that account balance. But if you’re at least 59 and a half and you’re curious about it, check with your retirement plan administrator. They’ll tell you if it’s permissible or not under the plan.
IVAN: Okay. So I would qualify because I’m 82 years old?
TED: Potentially, as long as your employer allowed for it. Where I do see a lot of it is with federal government employees. The TSP, that is a feature of the TSP that’s permissible. I helped two individuals this month do that.
IVAN: Okay, let’s go over some of the prohibited stuff, the don’ts, on page 37.
TED: Yeah, getting into some of the prohibited transactions. First of all, you cannot physically hold the assets in your possession, such as cryptocurrency or precious metals. If you’re buying gold coins that are eligible for IRA, they got to be held by a depository. It goes back to that question: are you receiving a benefit? The law requires that this be one step removed from your control, so that’s why there’s a need for a depository to hold those assets.
I also mentioned life insurance, collectibles, you can’t do that. That is prohibited. You also have to be careful of the individuals involved in a transaction. You cannot do business with your IRA between direct bloodline relatives of your direct lineage. That means you as the account owner and your spouse, that is a no-no. You cannot do business with your parents, your grandparents, great-grandparents if that applies. You cannot do it with your children and their spouses. That’s your direct lineage, and it all revolves around taxes. Face it, that’s what the IRS is there for, but there’s also the estate tax laws, etc. They don’t want anything messing that up or going outside of it. That’s why the prohibition is there.
However, nieces and nephews, aunts and uncles, siblings, you can do business and loan money back and forth between them. They’re not prohibited. I just did a loan with my brother. He was building a new swimming pool, going to refi his house to pay for it, but had to put down the deposits, struck a good deal on a contract. I loaned him the money. Forty-five days later he paid me back with interest.
IVAN: Okay. What does that look like because there’s not a property manager in position in between? What does that look like from a procedural perspective?
TED: For that loan I did with my brother?
IVAN: Yeah.
TED: Just like any other loan, Ivan. We agreed to terms. It just has to be market terms. IRS is not an expert, but if I said, you know, 1% is what you would owe me on the interest, they might frown on that. So I just said, “All right, this is the loan amount. You’re going to pay me interest at prime, that’s the annualized rate. We’re putting it on a promissory note, we’re both going to sign it, and I’m going to hand it over to my custodian and they will fund the loan.” And that’s all that it took. My brother was paying me for two months until he got the house refi’d, and then he just made the last interest payment, the principal payment, and that was it. I just released him from the loan. It’s very simple.
IVAN: Yeah. Wow. I guess the last slide, let’s go to 40. That sounds like an interesting one, the types of properties in this case.
TED: Oh yes, the rental condo on the beach. Yeah, this is one where the rental condos on the beach are totally fine. The rules around them are you cannot use them for personal use. They are solely to be an investment. You can’t be in there doing the maintenance, the repair, and the cleanup. You got to pay third parties to do it. The rent needs to be paid to the IRA, so it’s no different than the house example we were talking about a few moments ago. But one of the issues that comes up is when you’re renting it to family members. If it’s direct lineage, that’s a no no. Could you rent it to a sibling? Probably. Is it being done repeatedly? IRS might frown on that if it’s repeated because is that being used for family use or investment purpose, right? So you get into some gray areas, but really this is where common sense prevails.
If you’re going to buy it for purely investment purposes, just keep the transaction clean. Don’t lease it to family members. Don’t use it for personal use. Just make sure it’s third parties. Could be your neighbor, that’s fine if they want to rent your condo. Make sure it’s at market rate, and then, you know, common sense prevails. Just keep good records. If the IRS asks questions, you know you have a defensible position.
IVAN: Mhm. Would it also be, like, let’s say, not personal use, would it qualify if I rented it at market rates for a weekend?
TED: For non-personal use?
IVAN: I mean, I guess it would be kind of personal use if it was a vacation, but I’m thinking about, like, as if I was an average person paying, you know, $100 a day and it was rented for $100 a day every other weekend. I guess it would still not qualify because I’m essentially the owner indirectly, so I can’t.
TED: Correct. You couldn’t do it because even though you’re paying rent, you’re gaining a benefit because you’re stuffing your account with cash.
IVAN: Oh okay.
TED: Yeah, that’s a no no. You couldn’t do that. However, you know, as I said, you could lease it to your neighbor, business associate, someone there in the office wants to go to the beach and use your condo, charge them rent. Okay, no problems there. What I can tell you is don’t do what one individual I know did. They thought it was the best investment ever because they were pocketing the rental cash. They bought it through the IRA, but the rent payments weren’t showing up in the IRA. IRS audited his tax return, uncovered that. Taxes, penalties, everything applied, and the IRA was completely disallowed. He wished he never did it. It cost him a ton of cash.
IVAN: Yeah. Got to make sure you have your ducks in a row.
TED: Yeah, and just check with the custodian. We’re here to provide advice and guidance on that as it relates to the IRS rules. And just make sure you’re applying common sense and ask questions when needed. You avoid a lot of headache that way.
IVAN: Yeah, wow. Well, you just covered a lot of mind-blowing stuff, man. I’m sure for a lot of people, they got it in simple terms too.
TED: Well hopefully I kept it simple enough for everybody because I know there’s a lot of rabbit holes you can go down with
this material.
IVAN: Yeah, and feel free to reach out to Ted. He’s a great guy, always very casual, like you’re having a drink with him. The conversations, the first time we talked one-on-one last week, we ended up talking for like an hour, hour and a half, because it went so well.
TED: Yeah that was kind of the genesis for doing this..
IVAN: Yeah, exactly. Okay, well, as we wrap up here, what’s the best way that folks could reach out to you?
TED: Yeah, best way to reach out to me is simply by phone. Ivan, I’ll send you out just a PDF version of the slides you can email to everybody or post on your website. My phone number here at the office is 470-866-6185. Or if you go to the Advanta IRA website, you look at the team, you can click on my photo and there’s all my contact information: advantaira.com.
IVAN: Yes, and like you mentioned towards the beginning, they have webinars all the time. They also have Zooms where you could get to know other folks that are actively with Advanta IRA and other property syndicators and etc. But yeah, reach out to him if you want to invest your IRA into self-directed assets, and yeah, thanks for your time. Can’t wait to see you in the next episode.
TED: All right. Absolutely. Thank you. Bye-bye.