← 🎙️ Local Real Estate Developers
🎙️ Local Real Estate Developers
The Retirement Money Most Developers Never Think to Use | EP#64
00:49:39
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- [00:00]
A
This is the Local Real Estate Developer Podcast where we share the stories of locals across the country who took that empty lot or that old building and turned it into something awesome that their community needs. I'm Christy Candle and I've been a real estate developer my entire career. My co host Rafael is a commercial broker and together we're sharing the stories of locals making a huge impact on their communities. And what we've learned is you don't need millions in the bank or decades of experience to get started. You just need the confidence, tools and the right people around you. This podcast podcast is your chance to gain the confidence to get in the game. Because real estate development isn't just for the insiders anymore. It's for people like you too.
- [00:41]
B
Welcome to Local Real Estate Developer Podcast. I'm your co host, Rafael Collasso. I am a commercial broker, investor and developer located here in Louisville, Kentucky and I'm excited to be here with my co host, Christy Candle. Always great to see you.
- [00:54]
A
Yeah, great to see you. And I'm a real estate developer investor and I teach locals how to become developers in their community. And today I'm, I'm excited actually. Rafael. We are about to host to more cool events for our project Elevate Southwest Florida. And this Saturday we have an awesome community event where we basically have a free fitness and sports popup. So we've got pickleball, volleyball, basketball, five free fitness classes. One we just added was aerial aerobics. So we're literally going to teach people how to do like it just looks crazy cool. And we're like, yes, please, come on. So pretty, pretty pumped on that. So that's our Saturday morning event this week and then at the end of July we have basically the same thing in the evening, but we'll make it pickleball tournaments, beach volleyball tournaments, and try and get the food trucks, the, the drinks, the me music out and have something awesome in the summer for the community. So pretty stoked on that.
- [01:41]
B
Yeah, no, it's exciting to see. I've seen some of your all's videos and story updates and everything and it's a great thing that you've brought to that community. So really excited to continue to see it expand.
- [01:52]
A
Yeah. And we're going to need to do a follow up at some point on your project too. And then because that leads into our local developer meetup that we're having at the end of August and we'll get to see your space.
- [02:04]
B
Yeah, yeah, it'll be, it'll be ready by then. I know we talked a little bit offline about something, a little challenge we face. But as, as with all challenges, you can overcome them. So we're working through it. But yeah, it's going to be excited to kind of explain some of the hurdles we've overcome on the project and ultimately it's going to be a great, great opportunity for, for us long term. But yeah, we're excited about the, the event in Louisville later in August and if there's any interest on anyone who's listening to the podcast, definitely go in the description. We'll make sure to include a link in there so you can access a ticket.
- [02:37]
A
Yeah, I think it's what, the 27th through the 29th of August, doing it in your hometown. We've got some pretty awesome people who are coming out with Katie and Cece and Evan, but then we also have a bunch of other developers coming in from across the country and as well as your local people. So pretty, pretty excited to get everyone in the same room and talk about what we do every day and get more people going in it. So yeah, so, so check the show notes everyone and we hope to see you there. And today I'm very excited because this is the guest we have on and what she's going to share about is something that I learned about a few years ago, but when I share this with other people they're like, what you can do that. So it's really awesome to be able to have her on to tell more about what this is and how it can help you actually raise capital as a developer in your community. So I'd like to welcome Karen hall to the show.
- [03:26]
C
Kristi, thank you so much. Really excited to be here.
- [03:29]
A
Awesome, thanks for coming. One thing we like to do is give a little bit of background on the guest of who you are, where you're at, what you do so they can kind of get to know you a little bit.
- [03:39]
C
I'm the founder of U direct IRA services. We've been around 17 years now. I found the company 9 and since then we've helped about 11,000 people or more self direct their IRAs. We've got about 1.3 billion under management and we help people take their money from their current retirement account, move it into a self directed account and in invest in alternative assets. And that includes just a boatload of assets, not just real estate, but real estate is primarily at least the underlying asset of almost every asset that our account holders have. I mean there are other asset classes anyway, so it's a great tool and like you Say people don't know this even though you've been able to self direct your IRA since 1975. Wow. Right?
- [04:22]
A
Yeah.
- [04:22]
C
The longer, like before you were born. Right?
- [04:26]
A
Exactly. And you don't know about it. I feel like every year I come across something new and I go, I didn't even know this was out there. Like, I didn't even know this was an option. So that does make me a little bit curious. You said in 2009 you founded it. What made you go, I'm gonna start this company? The entrepreneur in me just goes, wait, what?
- [04:43]
C
I want to know more. Yeah. Huh? Yeah. So it became an accidental entrepreneur, like so many of us. But it was the Great Recession. I went to work for a self directed IRA company and they had recession issues and fired some of their highly compensated people. I got to be one of those lucky girls. And so I lost my job. Well, I'm a single mom with a mortgage and two kids. Like, huh, okay, okay. You know they say when God closes the door, he opens a window. Right. But it's hell in the hallway. So that's how it was. But. But then what I decided is the really, the only way out was through. And just you walk right through that. And. And there's some more metaphors like burning the ships. Right. Because I didn't have any of the choices at the time. I couldn't make mortgages, I couldn't sell houses, I couldn't do any of the other skills that I have. I'm also been a radio announcer. I'm in Orange County, California and all that's up in la. So what am I going to do? I knew how to do this, Found a trust company to work with. Finally after interviewing some, decided to go forward and opened our doors August 31, 2009 and started opening accounts at that time. And I've been a public speaker, in fact, and I've written this book with biggerpockets called the Bigger Pockets Guide to Self Directed IRA Investing. Catchy title. And so it's been a good run.
- [05:57]
B
Yeah. They say that necessity is the mother of invention. Right. You're forced into a situation and you just figure it out.
- [06:03]
C
Yeah.
- [06:04]
B
I feel like there's a lot of people that probably are listening to this in particular, if they've decided to jump ship, jump into something entrepreneurial, that that's probably a similar type of experience regarding that early phase of their career. So I'm kind of curious about that early phase in your career. And then if we could talk a little bit about the mechanics of the self directed ira, that'd be helpful. But, you know, talk a little, talk a little bit about how do those early years formulate for you? I mean, I'm assuming you had some connections maybe with the fact that you were operating in the space previously, but I'm also kind of curious as to how you were able to scale in the early years of your business.
- [06:40]
C
Yeah, your assumptions are exactly right. All the contacts and all the friends that I had made realized the situation I was in, and they're like, this is my girl Karen. Open an account with her. Thank God. And I spoke at all the local real estate investor clubs and the California market, Northern and Southern California, but especially Southern California. We're just kind of one group in a lot of ways. And so we all supported one another during those times when everybody, everybody in real estate was having a fuss. And so it was just part of a big bandwagon. Now, a lot of those people are our household names as a result. But what I did, you know, just my favorite thing is people say, well, what's your business plan? And it's like, just keep swimming. Like, Dory. Like, what can you do? And my son was in football, high school football. And it's just suit up and show up and whatever. Just deal with whatever comes your way. Like, I don't know, maybe your building catches on fire. You know, you just go to work, right? And you just deal with it. We just deal the heck with it. And that is, I think, the definition of an entrepreneur.
- [07:36]
A
Yeah, 100%. I. I like that one when we say, just keep swimming so many times. The other one is, I like to quote the great Kelly Clarkson, what doesn't kill you makes you stronger.
- [07:47]
B
That's a good one.
- [07:47]
C
Yeah, Yeah, I heard that song once.
- [07:49]
A
Yeah, right? Once or twice. Yeah. Yeah. Well, we'll say that. We'll bounce it around, be like, okay, we're in it right now, right now. This is sustainable. But we are just going to keep doing one more thing that pushes it forward and it's. It's going to figure itself out, and it always does.
- [08:03]
C
That's the miracle. Like, it seems eternal when you're in it, and then no, things do get better. So that's, you know, hopefully you encourage somebody who's in the middle of some kind of gigantic, you know, hairs on fire kind of a situation. It will get better.
- [08:17]
A
Yeah. That is so the thing, I just saw something the other day on Instagram and it's just like the thing that you thought was going to take you out now isn't even like a blip on your radar anymore. It's just so intense when you're in the moment. But if you look back, we literally have a proven track record of you make it through everything. Like it's all gonna work itself out. It's gonna find a way. So just. Yeah, yeah, keep going. There we go. Motivational, inspirational for the day. So as you, when you started your company, did you. One of the, so one of the main questions we get is about partnerships. So when you. Yeah, so when you started this company. But then with the. Oh my. I'm sure there are plenty of other stories. Did you form a partnership in house? Did or was it more so partnering with the trust company and then figuring out the team from there and how did. About finding them and getting people that you are willing to at least try it with?
- [09:05]
C
Yeah, I found the trust company after interviewing banks and other trust companies. I was a referral by someone who is a pension administrator and an attorney. So two guys are friends and they said, hey, talk to these people. And I did that. Worked through. I mean, the partnerships. I mean, we'll go have a drink next time I see you. I'll tell you the whole, the whole story. But basically when you, when you get into a partnership, you have to really, the best thing to do is to really create the ground rules. But when you, when you don't know, you don't know. So try to create ground rules. Rules first, like who's boss. I had some partners and I needed some seed money and they came in and they were lovely. I mean, you know, they saw my situation, they wanted to help. It wasn't a lot of money to them, it was everything to me. And they brought in capital. I was super grateful. But then they kind of decided that they were kind of running the show and it's like, well, but you're kind of not. So I had to, I had to just kind of bring things in. Like we would have meetings. But now these were going to be, you know, on zoom at my convenience and if you can make it great, otherwise it's going to be recorded and things like this. And then they, they, they wanted reporting, which I gave them, you know, five reports a month, which is extraordinary. Like 60 separate reports a year. There's a lot of reporting for, for, for a brand new startup. And, but I did that and, and I was, when I wrote them their, their checks, I was proud to do it because, hey, look, you know, wow, look what we're doing. And it really, it did take off pretty Fast because of the recession, because of the great need for capital for deals when you couldn't find it elsewhere. So it took off. But then five years in, we. Long story short, one of the partners, one of those people died, which was craz. You don't usually expect that. We didn't expect it. But that culminated into a conversation about, okay, this has been 5 years, let's wrap this up. And you know, and we did that and then we just honored the agreement bottom out. And it was perfect. Then. Then I owned my own company, a hundred percent and I learned a lesson. Now there have been other partnership things, but that was the initial one and thank God for them because it got me off the ground. I needed some seed capital and they had it. And you know, everybody won.
- [11:03]
A
I mean that right. That right there is literally what every person trying to do their. Is likely going to deal with or go through because they. The biggest question we get is I'm going to do it in my community, I'm going to put in the work, but I don't have the money. I don't have the 100, 200, $500,000. And so being able to come up with it and we tell people all the time, it's like, you don't need a grand slam on this first deal. What you're doing is you're getting the experience to know how to run your business. And development is a business and you have all the different people and partners. And yes, you're not going to have as much of a return because you've got different capital partners involved at first as you prov. Yourself. But you're going to gain the experience to know, hey, here's how I'm going to structure it going forward and what I need. Because now you know what you need to finish the deal. So. And it's just, I feel like that's just so common with business and development across the board.
- [11:52]
C
Yeah. And I think that's when you're raising capital and maybe you've got a like, like even have gone to the extent of getting like a, like a reg D offering or something where you're raising some major capital. I mean, then all the rule, the rules are laid out and they know that they're passive investors, but you still answer to them. You know, you still, they're still your partners. Every single one of when you're raising capital, everybody you borrow money from is a partner, you know, in some way. Right?
- [12:17]
B
Yeah.
- [12:19]
C
So you just, you have to be prepared for answering to them. And maybe not 60 reports a year, but you want to report to them.
- [12:27]
B
Well, and to your point, having that mentality where it's like, you know, you are obligated in some way to the other person. And so you have to be willing to put in to be able to meet whatever expectations there are. And if you're not willing to do that, that's okay. Sometimes the expectations of another person aren't in line with what you're willing to do. But in that case, you probably shouldn't get into partnership with someone about that. I mean, also, I've been in partnerships on different deals we have locally, and I think the biggest thing that we've found is that we just need to have open and honest communication. And if there's any conflict, it needs to be addressed immediately. Because otherwise you have situations where things fester and it's not a good situation for anyone and you're going to make mistakes. I feel like that's probably like anything, you're just going to have challenges. But as long as the other person on the other side is willing to work with you, that's. That's half the battle.
- [13:14]
C
Well, if I can add to that too, it's when you make a mistake, just talk about it right away to your partners or something goes wrong. Because something's going to go wrong. Don't think, you know, just put your pride aside and talk about it. Don't worry what you're going to look like. Tell the truth. And the sooner you do it, the better. Because if, because this is how Ponzi schemes happen, because someone's embarrassed and they're pride, they don't want to talk about, hey, we have a problem. Because maybe one of your investors has the answer. You know, maybe the answer is you actually need more capital to get over the hill. But if you're not discussing that with your investors, then you're not going to solve the problem. And then later when it does blow up in your face because your, your pride is getting in the way, then you're really going to have a problem. So the ease, the earlier you disclose issues to your investors, the better it's going to be for everyone, in my opinion.
- [13:59]
A
Yes, 100%. And I say this all the time with contractors too, because like, like, and we, I was just at a networking lunch yesterday and I was talking to some different contractors and like, the issue never goes away just because you ignore it. It only gets bigger and worse. So they're like, they really harp on their guys to bring it up to the property owner or the developer or Whoever it is that they're working with, because they're like, it's never going to go away. It just costs you more time and more money the longer you let it go and you lose trust. And I think that's the. The bigger thing is that your reputation and the trust that you've built, that's everything in. In this industry. And so, yeah, yeah, swallow. Swallow your pride. Check. Check your ego and go, hey, guys, we're gonna figure this out. But here's the current challenge that we're up against, because nothing goes perfect. And if someone has enough money to give you money, they understand this. They have done something to earn that much money. They know it's not perfect. They didn't hire, they didn't give you money because you're gonna go flawlessly execute. They gave you money because when stuff hits the fan, you're gonna go figure it out.
- [14:57]
C
And it always does, doesn't it? Something always hits a fan, and it's so normal. And you just say, hey, fan, fan, hit. And they're like, oh, I'm alive. I've had something hit the fan for me too. I totally get it. Let's fix it. Let's go. And put your pride aside. And they're going to understand 99% of the time, in my experience, but I love it. Yeah, yeah.
- [15:17]
A
We tell people all the time, like, your deal is going to blow up three to five times in the process, like, at minimum. At minimum. And you're going to be like, head in your hands going, what is happening? And then you go, and now we're going to go figure it out.
- [15:29]
B
Yeah, well, and it's also, you know, to your point regarding ego, I feel like some people think, oh, well, if I tell them that something went wrong or I made a mistake, that they're going to lose faith and trust. And oftentimes it's the opposite. It's like if you come to people and say, hey, this is the problem we're facing. This is what we're going to do to try to fix it. I mean, as an investor, I would be thrilled about that because. Okay, well, obviously, we knew from the beginning. You have a nice spreadsheet. You have your nice pro forma. At the end of the day, we knew that it's not going to be exactly as we laid it out. So the fact that you're willing to come to us and talk to us about what's happening and how you're going to fix it keeps that line of communication open. And I think half the battle with any type of business is just communication.
- [16:12]
C
And when you're honest like that, you earn their respect. It's like you said, definitely.
- [16:18]
B
Well, and I'm kind of curious about some of the mechanics regarding the self directed IRAs, because that's an area honestly that I haven't explored a lot of. I know several of my clients who have leveraged a self directed IRA to buy property. But I'm kind of curious if you could kind of elaborate a little bit on it and then maybe we can dive into the mechanics of how it can apply for the audience.
- [16:40]
C
Yeah, I just love this question. Well, let's start off with that. This is a $49.1 trillion pool of money. Okay? So that is how much is in American retirement accounts, at least as of earlier this year. It's greater than the national debt. So if you think there's no money out there, you're so wrong. Because like, you know, like you're saying, Christy, people don't know that their retirement accounts can get involved in things like the projects that you're working on, all these development projects. And anyway, just I'm thinking about the possible returns on development, how great it can be. So, and, but all, you know, pitfalls, ups and downs, all good, good. But the good side is, can be so good. So love it. But if you want to invest and take advantage of development projects, it's. You can using a retirement account. And as capital raiser, you just ask a simple question. When you're telling something, someone about your project, they're getting all pumped. When you're talking about what you're doing, you say, well, by the way, do you have an ira or do you have a. Okay with another or a plan with a different. With an old employer. And they go, oh yeah, you know, they used to work over here and I've got this plan over here, I haven't moved it yet. Great. That money can be in my deal. And they. You'll blow their mind. What? You've got to be kidding me. But literally this is what. When IRAs were created by the ERISA law in 1975, it said an IRA can invest in anything except life insurance contracts and collectibles. Right. So that pretty much means anything. There are like three exceptions. Life insurance contracts and collectibles. Right. So and, and a couple other things. They don't even know it. And you've always had this power for all these years. So that is a very simple qualifying question. As a capital raiser or as a developer looking for capital, do you have an IRA, do you have a 401k with the previous employer?
- [18:17]
A
And then once they do that. Okay, cool. What does that look like? To even figure out how to get the money to transfer it and probably from both sides to go from the capital raiser, but also the person who might go, oh, shoot. I've been listening to all these developer stories. I really liked what Deidre is doing. I'd love to invest in her deal. How do I do that? Hey, can we chat for a second? Since you're listening to this podcast, you're already thinking like a developer. You see the potential in your community and you're ready to do more than just watch from the sidelines. That's exactly why we created the local Developer Vault. It's a free resource full of tools, templates and training to help you take action. And here's the best part. When you sign up, you'll also get access to our local real estate developer community. It's full of people just like you who are making real things happen in their neighborhoods. So don't just listen to the stories. Become the next one that we spotlight on our show. The link in the show notes to unlock the vault and join our movement.
- [19:11]
C
Yeah, it's. When I first got into the industry, I had first learned how to spell IRA right. You know, I mean there was, I had so much to learn, but it's a real. So I made it as simple as possible, possible for myself. It's a three step process. You open the account today, that's a digital form that maybe takes 15 minutes. It was a lot, a lot more brain damage before, but it isn't today. It's a simple digital form. And by the time you're done filling that form out, if you're moving an ira, you've always, you've already put that information in. So by the time you hit submit and you've opened the account, we're already starting the transfer process. So you open the ira, it's a digital form and then that's step one open. The second step is fund. And so you fund it by transferring an ira. If it's a previous employer plan, then you set up the ira. You've got an account number. You call your previous employer's plan administrator, say, hey, I need that money moved to an ira. They say, great, give me the account number and an address. You give it to them, they move the money over, the check is made payable to your new self directed ira and they put it in the mail. So this is, you know, snail mail is going to happen. So you have to allow for some time. So a rollover takes longer than transfer. For that reason, IRA to IRA transfers a week, a rollover two weeks. It takes now the third way to get money in an account, it's like it's a rollover transfer, but it's also a direct contribution. So every account has slightly different rules about how much you can put in and the taxability or the tax treatment of that money. So it depends upon your age, your account type and your income, how much you can put in. So there are three ways then to get money in the Iraq. So you've got it opened, you funded it now somehow. And while you're doing all that, you're choosing your investment. Maybe you started off with the investment, but now we're looking at that asset. So it's not you, the human that's the investor, it's the human that owns the ira. The IRA is the investor now. So that's how it's titled as the ira, as the owner of that asset. And so we review the, you give us the documentation and now everything's digital and online. You give us permission to move your money, then we'll disperse this as you direct. You know they're, hence the name, right, you direct IRA services. So, so that's what we do. We can send a send check, we can wire, we can ach. You know, we don't do carrier pigeon anymore. We let that go. But we do almost everything else. So I mean as far as like parts, easy, open fund, invest. How do you get money in rollover, transfer, contribute. It's not hard. It's what our brains do to us. Like, oh, this sounds so hard. It's not, it's. That process is easy. My opinion is that the hard part is, and the real part, where your brain should be is the due diligence on the deal. Yeah.
- [21:51]
A
And what I found, good ish. Was that there was and I guess to what extent do you guys review the actual terms? I guess. What are you reviewing? If I, if I say hey, I'm going to self direct into this syndication or into this joint venture deal, are you just making sure that their paperwork is in line but not necessarily looking at the content of, of what's in it and the returns and things.
- [22:10]
C
Our obligation is just to look to make sure that it's titled correctly. And we are looking to see if it's a prohibited transaction, but it's self directed. So all the responsibility of the asset and the deal is on the account holder. Our responsibility is to Move the money accurately and in a timely manner. Our responsibility is to make sure that the IRA owns the asset. Obviously we definitely are taking next steps. I mean if it's me, I'm going to go pretty deep on that. If you bring a deal to me as a CEO, I'm probably going to go deep on that and say, hey, is there UBIT or UDFI in this deal, which is advanced class, we can talk about that. Yes, these accounts are income tax deferred, but they're too special taxes because don't they love to tax us? You know, that can apply. So I want, I want to see if you're going to give me the deal to look at. Is there UBIT or UDFI in this deal? And it doesn't mean it kills a deal. It just means you better know that going in because you're going to need to file a high level.
- [23:05]
A
Explain what those are.
- [23:06]
C
Yeah, I mean super high level. Here's where you read about it. So you can, if you want to go deep. It's the IRS's website, IRS.gov like how easy is that? Right? It's six, you know, six digits in a period. IRS.gov and you look up publication 598. So it's 598 hub 598 will give you the whole thing. But what you really want to do when you're investing is bring your advisors in, talk to your competent tax professional. Hey, look, I'm opening this IRA and I'm going to make a contribution. Is my contribution tax deductible? How does this fit into my tax strategy? When you're contributing? And then you also want to make sure that you're as an investor, that your tax professional understands you. But in UDFI tax, it's the same as any other tax free entity. Like a charity would file a 990T, which is what an IRA would file if this tax is owed. Now sometimes you can take deductions. Your tax professional will get in on that. It doesn't have to be a deal killer if your asset sponsor is doing a cost seg. That can really help you if there is a tax. So it doesn't have to be the end of the world. You just have to know what you're dealing with and how you're going to deal with it. You don't want to be surprised later on. I had someone call me one time. They got a letter from the IRS for back taxes because they never filed a 990T. He had no idea. Smart guy. But now if you're listening to this podcast now. You're one of the ones who, you know and you know to look for that. And we're always here to provide a free consultation. We have an schedule us link on our website. Definitely take advantage of that with all your questions because you know, we're here. We'll answer your questions for you.
- [24:38]
B
So you're saying with that if a deal sponsor is presenting an opportunity with you, they have to follow a specific process with that deal so that it isn't taxable or the people that they're raising money from or is it just a particular election that they make?
- [24:54]
C
No, I hear what you're thinking, but it's not like that. So when somebody submits a deal to us, we're not saying if it's a good or bad deal. Whether or not there's tax in there is for the account holder to determine if they ask us to look, you know, hey, is there UBIT or UDFI in there? We can look at it for you, but I mean, we're not advisory. I think that's the bottom line. We're not going to tell you if it's a good or bad deal. It's you as a self directed IRA investor, have a lot of responsibility and it's not like everything else that someone's going to do, going to do it for you. This is self directed. So when I name the company you direct, this is such a good analogy. I was going hiking with my friends and as I was heading toward this little place, you'd love it, Christy. And we'll go there when you come see me. But I drove right past a U Haul and I'm thinking, I'm trying to think a name for the company. U Haul, U Direct. A similar concept like U Haul, they don't put your furniture in there, they just give you it, give you the vehicle. They just want you to bring it back, you know, unbroken and that sort of thing. So it's sort of similar. We give you the vehicle, you put your stuff in there. There. What you do with it is your responsibility. We just, if you break a law and then it's, it's, it's quite a, an analogy actually. So we're not going to. Yeah, go ahead.
- [26:02]
A
Yeah, I was going to say, I think with that it's just making you aware that just like when you form an entity and you go, well, what kind of entity should I get? Well, your attorney is going to have a different perspective than your cpa and it's all based on how your whole Portfolio is set up. So it's just a matter of just don't blindly assume that it's tax deferred. Just make sure that you engage your CPA and that they see in the documents and go, hey, we'll just make you aware that this is a possibility, that this will come up in the processor. Just that each year when you file your taxes, like I have questions of mine that I always will ask and it's just one more thing to make you aware. But it's not, it's not anything crazy or scary. I self direct into syndications. I also do private money lending. I self directed into a flip, which I would never do again. But it's all of those. It was so seamless because when you think about getting a loan from a bank, you are literally giving them your firstborn child and you are trying to convince them to get the money. Whereas if you're pulling it and you're self directing it in, it's on you to make sure it's the right deal, it's the right people involved that, that you want to be in. But it's so seamless and, and user friendly that. And at any point in time you finish the investment and you go, hey, I don't want to self direct anymore. Then you just roll it right back into Vanguard or another account and you go, cool, just make me money in the stock market.
- [27:16]
C
Exactly. I mean, I couldn't say it better. So there you go, I'm done.
- [27:20]
B
That's great.
- [27:21]
C
That was perfect.
- [27:22]
B
Well, and I appreciate that context. So maybe if it's okay, let's walk through a few scenarios and see how it potentially could work for the people that are listening. So you know, let's say that someone does have a 1K or some other, you know, IRA that they want to transfer into being a self directed ira. If they're looking at, let's say a commercial property, that maybe it's a vacant property and they want to be able to buy it, fix it up, put a tenant in there and that becomes kind of a long standing asset for them over a period of time. I mean, would that be something they could do and how would that really function? Is it one that you can couple with bank financing? And also if we could kind of elaborate on that.
- [28:05]
C
Okay. For you direct, our average account size is 209,000. Okay, so we'll start there. So if it's a commercial building, it's probably going to cost more than $209,000 typically. Right. I'm just saying. So can you get bank financing. You can, this is when people create a syndication or something where they can raise capital from others. Because you've got X amount of money. But you probably need opm, right, other people's money to get into that deal. So you can take, you can take on like partners, but then there gets to be a place where the SEC says no, no, no, we need to approve this. You know, you've got to, you need, you need to know what, where that line is. So, so you've got $209,000. You want to get into a commercial building, say it's a, I don't know, like a five unit apartment building or something. So maybe, I don't know, we're talking about small numbers there. Considering the number, say a five unit building, you don't have enough. Maybe you bring on a partner, but you've got your IRA and you need some leverage. An IRA can take on leverage, but it's a special kind of loan. You do not go to a regular bank for this. It's a commercial loan called a non recourse loan. And I'm sure a lot listeners know what I'm talking about. And by the way, if anybody would like a list of non recourse lenders, they're not easy to find. So we do, we'll give you that list. Email us infodirectira.com we'll shoot you that list. Very happy to do that. So, so you get a non recourse loan and of course the lender is not so much looking at your FICO score as they are, as the, they're looking at the cash flow of the property. Like what's the asset going to cash flow in? And if it's, say it's a five, a five unit building they're going to be looking at, well they're going to want rental agreements in place before they fund that thing. So they want to make sure for their security that this thing is going forward. So you can get debt. Now when you have a loan, that tax that might pop up pops up because it's called udfi Unrelated Debt Financed Income Tax. So your IRA has invested in a deal and took on debt in order to do that. So say for example, you're 30% leveraged. So your IRA had this much, but you took on 30% debt. So that means that now you get some proceeds, whatever it may be. 30% of those proceeds were earned by that IRA because of leverage. And so it's that 30% that's subject to the UDFI tax. And this is when you bring your tax person in, since we don't give tax advice, and you discuss what that's going to look like. It doesn't have to be brain damage, because when it's real estate, usually there are deductions and, and you just file a 990 like we do a 1040. An IRA does a 990T. It's not a long form. And you're working with competent tax professionals. They know what that is. They'll file it, boom, you're done. So, and you deal with it. If there's any tax due, your IRA pays it.
- [30:44]
A
And then is it simple to list? Because there's certain things that you can't benefit from directly, like you couldn't use it to buy a house that you then live in or something like. Can you maybe go through that line?
- [30:56]
C
One of the things so many people, like I said, general contractors. And you probably know a lot of GCs, right? They're GCing on a deal and they want to put their IRA in their deal because they want to say, hey, look, invest in my deal. I'm invested in my deal. And it makes sense. But your IRA cannot invest in a deal where you have so many things, personal benefit, for one, where you, not only are you earning personal money from the deal, but your IRA is actually earning. That's not okay. So you can't have personal benefit, you can't have indirect benefit. For example, you also cannot provide services to the plan, which is how the tax code is written. The tax code for those that like chapter and verse, it's IRC for Internal Revenue Code. 4975 is where you'll find prohibited transactions. For IRAs, it's elsewhere, but that's where mainly. And so as a gc, you can't provide services to the plan, which is the supervisory services. So your, your retirement account can't go in that deal. But there are people you can't invest your IRA with, and it's yourself, your spouse, your kids and grandkids, your parents and grandparents are disallowed, plus any 50, 50 business partner or anybody who's a fiduciary to the deal. But the people you can invest with are like your brothers and sisters and your nieces and nephews, your cousins. It doesn't mean just family, it just means where they are in family tree. So think of it like if you're going to pass away on your family tree, who would get your estate? These people up and down the family tree would be in line, right? And it's kind of one way to think about it, but yeah. So there are disallowed parties that you cannot do business with and you are the number one on that list. So your IRA doesn't make a loan to you. You don't have personal use of a property that your IRA has invested in. It's arm's length, everything is arm's length.
- [32:44]
B
And how does it function with the proceeds generated from that transaction? So for example, if you buy an investment property and let's say you do have enough cash in the deal, or you have enough cash to where you can buy the property outright and it's just a straight investment property, how does that work for cash flow, ongoing expenses, that sort of thing?
- [33:08]
C
Okay, so you're saying that you've taken the IRA out of the deal.
- [33:12]
A
Now say it's the ira, but say you didn't get a loan. So like maybe you picked up a commercial property for 500,000, it was already stabilized, you've got two tenants in there. And so that's now cash flowing. So your IRA owns it completely and it's collecting money. But then you know that oh, I've got a fifteen hundred dollar expense that just came up, but I'm also collecting
- [33:32]
C
5,000 of rent maybe somewhere. I just had a little brain fog there. So I totally get it. So expenses, yeah, proceeds, okay. All expenses of IRA owned assets have to be paid for by the ir. Except maybe like an account. Anything that's to do with the account is pretty much okay. Or certain one time fees. But like your account fees you can pay personally. But everything else the IRA has to pay if it's about the IRA owned asset. So like a new roof IRA pays for that, you know what I mean? If your IRA owns the building entirely, but also with proceeds, now you've got proceeds and your IRA is paying proceeds to the investors. I just want to throw out there that sometimes asset sponsors, being human beings will sometimes cut those checks out to the person and not the IRA account. So if you are that IRA investor, never, never, never cash that check. Just say, hey, hey, asset sponsor, so appreciate you sent this money, could you, I'm going to send you the check back. Just cancel that thing and reissue the check to my ira. Because if you, you know, if your ira, say your IRA was an investor in the deal and now you've got a check personally, if you cash it, at best it's a withdrawal, at worst it's taking, you know, personal distribute or personal possession of or having personal benefit from your IRA asset So you want to make sure that all the checks are made payable as they should be. But then they go, you know, then, then your IRA disperses the funds as, as they would normally in any other deal. But with IRAs. Yeah.
- [34:59]
A
So I ran my flip through like Equity Trust or in my other stuff. So basically once the funds were over the there and say I needed to pay the electrician or something, I submitted a request online and said hey, I need to pay 156933 to this electrician gave the contact and it was just like putting in a check through like a Wells Fargo or a Chase bill pay and then they, they in their system cut a check and paid my vendor.
- [35:21]
C
We do the same.
- [35:22]
A
And then yeah and then with my private money lending I basically I gave the initial hundred thousand dollar loan. The person paying me back was able to set up automatic automatic deposits. So literally every single month there's a deposit that comes back to that account. So I never physically touch it, but I can see it just like any other bank portal or, or investment portal and I see the money going out and coming back. I just personally don't ever touch it.
- [35:48]
C
Yeah, we, we also, we also have a portal and, and with, with those same functions. So yeah, I get. Maybe I'm just thinking about the olden days when we had checks because it's yeah an analogy but I mean sometimes we do use them. But you're right now, now money's electronic. Yes, we have, we have a really robust portal and they're even, even on our portal. You can do things too like invest in cryptocurrency through the portal. You can also invest in precious metals through the portal. Now we don't sell investments or participate in that but it's a service. So because we don't sell assets. But just saying the portal is very
- [36:22]
A
robust and then as a, as a plan sponsor. So for what we're doing with elevate, I mean it's a $140 million plus project. So we're going to have accredited investors, we're going to have crowdfunding, we're going to have all sorts of complexity that will also include we'll be taking people's IRA dollars. What I found interesting is that I could technically work with as many custodians as I wanted to be like hey, we're all raising capital and I'm basically just going to put on a, like tell my people who are investing like I'm not endorsing anyone but here are self direct IRA firms that you can then Vet and see who you want to work with, because it's you directing your dollars so you're going to have to work with them. So I found that. I don't know, I guess I thought as a sponsor, I would need to just partner with one group. And it's like, no, actually we. We don't need to do that because it's up to the person investing to. To figure out what company they want
- [37:11]
C
to do it is. And. And we also have things like if you're an account holder, then if you refer a friend, say for example, you've got people investing in the same deal, then we give you a break on your fees. You know, once your friend has opened an account with us and it funds, then we'll give you a break on your fees. So, you know, we give incentive for or referral in that way.
- [37:32]
A
Great.
- [37:33]
B
Well, yeah. And curious about the book itself. I'm kind of curious about that. How'd that come about? Because I've written a few books myself. I'm kind of curious as to what gave you the inspiration to write the book.
- [37:46]
C
Yeah, I got really lucky in so many ways. But I started the book 10 years before it got published. You start writing it. And I was inspired. There's this awesome attorney out there, you might know him, Gene Trowbridge. And he's like, karn, you should write a book. Yeah. So Gene told me to do this. It's like, yes, Gene, I will write the book. So I started writing the book and many iterations of it. And then my friend Amanda Hahn, who, you know, we started our businesses around the same time, and she. She had just published her first book with bigger pockets and. And through her recommendation, biggerpockets nudged me and said, hey, you know, we'd like to publish your book. I thought that'd be kind of nice. So I gave them the manuscript and they kind of held onto, yeah, no, we're not going to do it, you know, so that gotta happen. And then that lingered for a couple years. And then one September, you know, recently they. They hit me up and they said, yeah, September, we want to publish your book in November. So, you know, we want your whole manuscript in November. Okay. So I got it done and gave them everything. And it was a really fun process working with their editors and going back and forth. They were so helpful. And then they would ask me questions. They're like, in other words, to help. Help me flesh out something. And they would ask a question, I'd simply answer it. And that would be in the book. You know, so that's how it was written. And then where I, what I handed them initially was a storybook with people's stories of what they had been doing. But what they decided to do is ours was the first in the BiggerPockets guide of guidebooks. So it started as a guidebook. So it's more of a. They took the stories out. As you see, it's not a big thick book, but it's a good reference book. Like how do I do that? What's UDFI like? It's the basics in there. So it's the first in their guidebook series.
- [39:30]
A
Now you got me curious though about the stories. I'd love to hear some of them to kind of see what people have done.
- [39:36]
C
Yeah, I mean it's projects like you're talking about light construction. So one of them is this. These developers purchased a, what would a duplex in LA, but it was zoned R4, right. So they thought, huh, money forced equity here. So what they did, they brought in a bunch of self directed investors through, you know, through U Direct and they proceeded to rip down that old building, you know how you do and build a fourplex. And so same property, everything, but now you're getting, it's a brand new building, it's la high demand and now you've got four units pumping off rent. And so, so that was a situation. And you know, with their stories, obviously we all have stories how our deals go and ended up turning that into a pretty nice cash cow for those IRA investors who are, you know, enjoying that, you know, the fruit of that. So that's just one developer project that I can think of that was especially good for the investors. Funded mainly by self directed IRA people.
- [40:35]
B
Yeah, it seems like a great tool for individuals who are looking to fund opportunities. So in particular sponsors like, you know, because that's an area that I've never really even considered, you know, recently started raising money for just a small deal we're looking at here locally. And that process in and of itself is a pretty, you know, elaborate process. Especially as you start involving other people that you don't necessarily know, friends and family, it's just like, hey, they're investing just because they know like and trust you. But when you start incorporating people that don't know you, I mean a lot of it, you have to kind of make sure that you got your T's crossed and your I's dotted so well and just.
- [41:12]
C
And you bring up a point. I mean you could. An IRA can be a debt or an equity Investor. So the IRA can lend money. So if an IRA lends money on your deal, there's no UDFI tax. If my IRA owns lends money to you, to your deal, then I'm as an IRA owner in my IRA that has given you a note does not have to pay UDFI tax because I'm a debt investor, not an equity investor. Does that make sense?
- [41:38]
B
Yes.
- [41:38]
C
So that is a great way so you can be both a debt and an equity investor in a deal. So if you're raising capital, of course, friends and family with self directed IRAs, you've got those disallowed people you have to watch for. But it's kind of the same thing. Friends and family might be kind of a way to say it. You know, your sphere of influence is great with self directed IRAs. And it's a simple question again, do you have an IRA, do you have a 401k with your old employer? That's a conversational question. They say yes. Well, guess what, what are those dollars doing now? Like how do you like how the stock market just dropped? You know, it's like would you rather invest inside, you know, and the stock market's not bad, but would you rather invest in assets that you can, that are tangible, you can touch and that are more under your control, you know, where you have a better idea of them.
- [42:20]
B
So it's usually to your point, you could still invest in the stock market too in a self directed ira. Correct. I mean you could have exposure in the stock market, but now you open yourself up to other asset classes, real estate stuff.
- [42:34]
C
Yeah, Self directed sort of implies not the stock market. I mean the self directed part is not market correlated. So they're kind of two different things.
- [42:42]
B
Okay.
- [42:43]
C
You have, you have your market assets and your, and your non correlated assets
- [42:46]
B
as two different in theory could invest in. Yeah.
- [42:51]
A
A business, you can be a invest in a business. So like say someone's starting up a company and it doesn't have anything to do with real estate. You could be a seed investor into their or H Vac company or something.
- [43:02]
C
You can. And as an IRA investor, perhaps you want to be a debt investor in that. Because if you're an equity investor and it's an active business, that'll throw off the UBIT tax, unrelated business income tax. And so you could look at that, at that tax, not to scare anybody away, just go in as a debt investor.
- [43:19]
A
Yeah. And same thing. A lot of times we don't necessarily want to give capital away or equity away in our deals. So if we were to just, and it's literally just saying, hey, I'm raising a million, but it's debt only. Here's the terms of that. You're basically giving a note. And then that way you have all the equity on the upside. They have less risk. So it's a little bit easier maybe to sell to people outside of that sphere of influence to go, hey, don't even worry about the equity upside of the fluctuations. Like you're, you're giving us a note and here's, here's how we're going to do it. And then you could avoid the bank that way and, and you could correct me if I'm wrong, but could he do two types, like, say he wanted to raise 600 of debt but another 300 of equity. People, people, could he do that all from retirement dollars?
- [44:00]
C
You know, if you want to talk to a lawyer about structuring the deal, that's one thing. But you could, you could, you know, I mean, I mean, yeah, like most people to talk to, but it's possible. Yeah. Yeah. And your ira, if, you know, I mean, technically could be both a debt and an equity investor in a deal like that, if it made sense.
- [44:18]
A
Yeah, very cool. And I know that was like. And I think this is the reason most people, they start to hear stuff and they like, okay, that sounds like a cool vehicle. It also feels like a lot. But the biggest thing I would say to people is just start, start small and just understand it. Like, even if you were to invest 25, 50, 100 grand into, from your retirement into something, instead of going, cool, I'm going to put the full 500 or whatever into it. It's just like buying your first house. You don't understand necessarily the nuances of what you're going to deal with, with the agents, with the inspections, with getting a mortgage, with insurance. But it's just all stuff, steps of the process. And once you do it once, then you go, now I, I understand it. It's taken away this, this chunk of knowledge that I didn't know. And then it allows you to, to go into it further. It's just one more avenue that we wanted to share with you guys to let you know, here's what's possible and then go do more research, talk to more people. And what I found super interesting is once I realized this was a, another vehicle to use, the more people I talked to like, oh, yeah, I knew about that, blah, blah, blah. Well, you never told me, but it's just one of those things that you're unpeeling an onion to go. Oh, oh. I'm now mentally ready to, to hear this and understand how it could apply. So just one more, one more tool in your tool belt.
- [45:28]
C
Yeah. And, and a great tool that, that helps you build for the future. I mean, nobody is going to say, oh gosh, I'm so sorry I saved for my retirement or that you know, we definitely want to build wealth in so many different ways. But this gives you the freedom to do it. You're not just locked into one, you know, one asset class which is, is the stock market. You, you want to be able to spread the risk around and invest in, you know, assets that you again like people that you know like and trust. Right. Things and also tangible assets, you know, things you can touch like houses and buildings and metals and things.
- [46:00]
A
So, so true. So as a business owner and I know you've also invested into some real estate stuff and just across the board with, with you know, what you're doing. What advice would you give to a developer who is just getting started, who, who's now going to take on. And they're, they're full on business mode at that point. They're wearing all the hats in the business. What would you give them to just kind of keep them, keep them motivated, keep them going just to as they
- [46:29]
C
get started they have a really good bookkeeper. Yeah. If you want to know where that money is and what it's doing and it's going to the right places, you want to be talking to that person. I think that's, that would be my first hire. It was my first hire as a bookkeeper. So that you understand that. Because in a project you've got money going all over the place. Am I right? You know, to all, to all different kinds of people, investors or you know, tradesmen. You just need to keep track of that. And if you're going to manage the deal, how else do you do it if you're not looking at the numbers? So that's where I'd start. But yeah, and so that you can really track that. And there's so many systems now. I mean when I opened Udirect 17 years ago, most of what exists today didn't even exist then. What we can do and how we can systematize and just make it so stinking easy. And really with a self directed ira, I know there are nuances. We'll talk you through it if you've got questions. I've talked about some worst case scenarios that rarely happen. But just to let, just to tell you about what could happen. But we're always here to answer your questions. But it's easier than a bank loan. It's more straightforward. It's really person to person as opposed to entity to entity in a sense. And it is investing with people you know like and trust because it's your IRA and their deal and you typically have met the person when you're going forward with it. So it's a more kind of a grassroots kind of thing.
- [47:47]
B
Definitely. No, no, we're. And I'm excited to hear the feedback from this episode. This obviously is the first time I've heard, I've heard of self directed IRAs, but I haven't really dove into the mechanics of them and thankful that we were able to do so today. And I'm again like looking forward to hearing the feedback that people have on this episode. And you know, if people want to learn more about your offerings and how to get in touch with you if they have any questions or would like to schedule a consultation, what's the best way for them to do that?
- [48:14]
C
Yeah, our website probably that's where you can schedule a consultation. Just click the button and pick. You know, there's a calendar that'll pop up, you pick a, that works for you and then ask all your questions. I mean that's what we're here for. And then discuss opening your account and all the, all the details and we'll cover those with you. That's really the best way. But we're all over social media so if you want. I do a lot of like talking head reels where I talk about little aspects of self directing like little bite sized chunks and that's. You'll see that primarily on Instagram. So you can follow us on instagram @udirect ira services. That's a good click to make and, and then you'll see all kinds of information and it's just there at your convenience to review in like 60 second sound bites.
- [48:52]
B
I love it. I love that. Yeah, Christy does a phenomenal job of making sure we get clips out too. So we have a lot of that as well and it's very helpful. So I'm looking forward to following you on Instagram and making sure we include all those links in the show notes. Well, we really appreciate your time. It was great to meet you and we're looking forward to staying in touch throughout the coming months and weeks and everything else. For those of you guys who are watching this on YouTube, please like and subscribe. It makes a huge impact on our ability to broad audience and we greatly appreciate the support board along with that. If you guys are listening this in a podcast format, whether that's Apple Podcasts or Spotify, please leave a five star review. The more five star reviews we achieve, the broader reach we achieve and ultimately more and more people get inspired to take on their first real estate development project. So thanks again so much for tuning in and we'll see you all next time.