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Investing In Real Estate With Self-Directed IRA Accounts (ft. Ken Holman)

irei summit market research Jul 08, 2021

Part I: How To Incorporate 1031 Tax-Deferred Exchanges (ft. Ken Holman)

  • Self-Directed IRAs and 401ks
  • Syndications and How I Do Them

Intro to Ken Holman

You may or may not know this, but most commercial real estate agents are not affiliated with the National Association of Realtors (NAR). A lot of times they don't want to be confused with residential real estate agents. In response to this, I formed an organization to try and represent them and any investors that have an interest in knowing more about commercial real estate and commercial real estate investing.

Our company teaches real estate professionals/investors how to list, lease, sell, buy and invest in commercial real estate.... more info at

Investing in Self-Directed IRA or 401k Accounts

How many of you have an IRA or 401k account? Many plan owners that have these kinds of products don't really know much about the companies that they work with. I've had some that have told me, "Well, I think my plan is with Fidelity." or "I really don't know the name of manager that handles my account, but it's a stockbroker, I just go to my company."

Have you had those kinds of experiences? Some no, some yes.

From my experience, in most cases, these IRA and 401k plans are some of the most mismanaged accounts on the planet. If you don't have control of your own account, then it creates serious problems.

I had one guy several years ago, called me up and said, I just retired, I've got $2 million in my 401k account. And my stockbroker is ripping me off. I'm not making 2% on my account, he's making more money than I'm earning. And he said I need some help. So that's what started getting me into all of this stuff. And, and we'll talk about a bunch of just practical ideas today.

You're welcome to even though this a large class, if you have a comment, or you feel like you have a question as we go through this, I've set aside a little time in the end for q&a. But I don't mind just fielding questions as we go through the information. So usually more helpful. And I was thinking the other day about these types of accounts and said to myself, would I let my stockbroker or my financial planner who manages my retirement account, have added says as a cosigner to my checkbook.

I don't think there are many of us out there, that would say, Okay, I'm gonna give him access to my personal checkbook. And yet, we turn around, and we give him access to the most important account we have in our lives, a lot of times, and these guys are known for charging exorbitant fees, they don't have any accountability, they don't have a vested interest in what you're doing.

So it really creates a difficult situation to earn a reasonable return on those accounts. Has anybody found that to be the case? Or am I just kind of up here talking on my own? That is the case. Well, that's what I found. So almost fund managers and financial planners, not and we probably have some in here. So I apologize, if I'm saying this, and you're not one of these guys. But a lot of times they suck the life out of your account, which makes it really hard to earn a good return because they're taking their feeds off of the top.

They keep part of your account liquid so that they can continue to pay their fees. And you get what's leftover whatever that amounts to. So usually, the asset management fee has a tendency to really kill a return. But there is a better way. Self Directed retirement accounts. How many of you have a self-directed retirement account? Okay, several, okay.

I'm even going to talk about the good in the bad of self-directed retirement accounts, and where I think you might want to consider putting your money. These are things that I do from a practical standpoint. So there are 1000 times better than retirement that can be managed by somebody else. In my opinion, you can make a lot more money from them. It doesn't mean they're perfect. They allow you more control over your investment. They ally and maximize your returns and they limit the fees.

I don't know if anybody's talked about I know Mike and Matt Sorenson talked a lot about compliance. How many of you attended his class? Okay, a few. So we will review a few compliance things but I'm not going to get too deep in the woods on that. But if you look at that list, you would be amazed at all of the things that you could invest in with your IRA or 401k account.

All the ones on the left are real estate-related. All the ones on the right are non real estate related. The surprising thing is you can do everything in a self-directed retirement account that you can in any other retirement account plus everything else you can do. So if you do have a self-directed retirement account, we have to use a third party administrator usually, for those of you that have self-directed accounts, you need to have your Who's your custodian, TPA third party fidelity, fidelity Corporation, our Corporation, so I have no choice you reach a certain age you can self direct them

The ones that I used the big ones, equity trust, the interest group. The two biggest out there, the one I really liked the best. Besides Mac sorts is a program, which is relatively new, it's called directed IRA. And so I haven't had much experience with that. You just rolled it out this past year. But Mountain West IRA of Boise, I found to be a really good and double offensive switch. To refer clients to them. So what was the first equity trust?

Yeah, they go by eating, trust And then the other one is called the M trust route. One, m trust. So both of those are really good companies. But when it comes to investing in real estate, not all retirement accounts are created equal 401 k account counts are far superior to IRA accounts. Okay, when it comes to earning more and being able to directly invest in income-producing real estate, how many of you heard that before?

I discovered this as I was starting to learn how to teach these classes several years ago. And I thought I kept bumping up against some issues with IRAs, and how to deal with real estate. And you may not know this, but every realist, the IRS permits every IRA and every 401k to be self-directed. The list that I have given you is all IRS-approved accounts. Well, and so you have to ask yourself if you got your account with fidelity or somebody else, how come I don't get to invest in all these things. You don't get to invest in those things.

Because the company that you put your IRA with, will not permit it has nothing to do with the IRS or what they prevent. So they limit the accounts that you can invest in, they don't want you to invest in real estate directly because they don't earn a fee. And it's a bigger management headache for them. So they just deal in publicly traded stocks and stuff like that and preclude you from being able to count. So IRAs are 70 to two different types of taxes.

The 401k accounts are not unrelated to business income tax and unrelated debt-financed income. Have you heard those two terms before? Yes, yes, definitely. And what I was going to ask you would be if as we talk about the various options for investing, you could make sure if likes are those that are good generate, because there are plenty that there are those that we'll take a closer look at after this tax season that I can tell you ever again.

Every every income-producing commercial or residential real estate property that you buy with your IRA, that has data is subject to unrelated business income taxes, and unrelated debt finance in-depth, depending on how much debt you've put on the property. Nobody likes to talk about this. And, I have clients that, that insist on investing their IRAs with me in income-producing real estate. And so I don't discourage them from doing that for two reasons.

I still think we can earn double the return that they could earn, even with these two tax liabilities. And then on the projects that we get involved with, I made sure I do everything I can to minimize those taxes, and I can show you some ways of how that gets them. And I set up a solo 401k. Girls, my IRA balances, absolutely, you can't set up a 401k and roll your IRA balances if you have a traditional IRA or 401k IRA, or a Roth IRA, to traditional IRAs myself. So maybe about setting up a solo 401k. Okay, I didn't do a slide on this.

But there are two types of IRAs, two types of 401 K's, there's a traditional, which is you get a tax deduction when you make your contribution and a Roth, and you don't get a tax deduction, because you make your contribution after tax. The Roth is a better account, you can do the same thing on 401, K's, make your contributions pre-tax, and that's probably a traditional 401k. And you can make your contributions after tax. That's called a Roth 401k. And whoever your administrative rule is, has to help you keep track of that. But the benefit of Roth accounts versus traditional accounts is when you have a Roth 401k. Date, first of all, you're putting your money in after-tax.

So you take your money out anytime you want, that your contributions don't have to wait till 59 and a half if you have an emergency that you need in your bed. The second thing is the earnings are all tax-free period, end of the story. She never pays any capital gains tax on them. depreciation isn't an issue. You don't worry about any of that because it is tax, total bypass traditional IRAs, traditional 401, KS, and Roth 401, K's all require you to be kin taking what's called required minimum distributions rmds when you turn 70 and a half-year-old, okay, why they picked 70 and a half, I don't even know.

But there is one account that you do not have to do that in and that is a Roth 401k I need a Roth IRA. a Roth IRA is not subject to rmds, you never have to, when you turn 70 and a half, you can leave those in, you can let them grow, you can do but there are some limits. There are some restrictions. So let's go back to UB IP and UDF fi for just a second and talk about those. And we'll move on to some of this other stuff. But if an IRA is down financing to require real estate, the acquisition is subject to the payment of a tax on that portion of the income that's attributable to this debt financing.

The other UBI key relates to if you acquire a business within your IRA, but this one relates specifically to real estate, which is what we're talking about. And what that means is if you bought a piece of property, and you put 30% down and you use your IRA money to do that, and then you went out and got that for 70% which has to be nonrecourse in relation to the account owner, but then 30% of that account, your IRA money not so Do a tax.

The other 70% of the income that you earn on there is subject to UDF I unrelated debt finance income tax. And that is not achieved tax is the trust rate, which I think is 35% right now. Okay. So the way I get around that, it's not really getting around it, it's trying to minimize it. For an IRA owner who wants to get in and do it, do a real estate deal with an IRA. I always do cost segregation and depreciation. And what that does amp up the depreciation in the early years, reduces the amount of net income that you have that's reportable to the IRS.

Then, and then you have to pay a portion of the tax on net income. Usually in a new real estate development deal, which is what we specialize in. Sometimes we do acquisitions, but I really go after cost segregation and amp up the depreciation. And usually in those first years, even though you're earning cash flow, for reportable income, they can show negative income. And so they never have to hit that. Hit that up IP or using that by taxes. That's what I do to try and minimize that for those that invest in real estate.

Now, I'm going to give you some ideas of what I do with my IRA here. The best type of 401k accounts is obviously the 401k. They have two different types of self-directed they have, and we'll talk about a few of these. But 401k accounts are not subject to use CIT and UDF II. And so there is no tax. I did a little research one time trying to figure out why that was the case.

Come to find out, colleges invest a lot in real estate. And they use the 401, KS, and Ira, the 401k case of all of the employees and in the college. And they were able to lobby Congress and get them to draw a tax from 401k accounts. And so really helpful for them. But it's helpful for any of us that want to do it for if you're a real estate professional, how many of your bike brokers Okay, your real estate agents or something? All right, several of you.

If you're a real estate professional or an independent contractor, a sale independent contractor sale from type for almost any organization, the best retirement account, you could have this what's called the one-participant 401k. Okay, there are three requirements to have a one-participant 401k and I noticed some of you're taking copious notes. That's good. But let me say this. First, the next week, I've written a white paper on this whole thing, about 50 pages of information.

Everything that's contained in my slides is contained in that white paper. If you go into our Noriega,, you can sign up as a basic free member, you'll have access to that white paper, you can download it as a PDF and have it available to you, all of my free presentations are on there. So so that might make it easier. And you can drill down on any of this information we're talking about today. So, you have to have the presence of self-employment activity, taxable compensation during the year, and the absence of full-time employees. So how do you set one of these up because a 401k, unlike IRAs, which is directly related to the individual, a 401k has to be related to an entity and ownership?

So I set up an LLC completely separate from everything else. And or this is how I would do it right. My situation is more complicated because I have employed but I have our own 401k account with all of our employees set up a self-directed so every individual and his wife and self-directed through the 401k the LLC has to have earned income that they pay you and you can contribute 100% of whatever you're paid into your 401k Up to the limits. And I believe it's 18,500.

This year, it used to be 18. So I think went up a little bit this year. But 18 five as an employee, you can contribute, you can contribute up to almost 54,000 in one of these accounts, but the other 35,000 or so they've been put in there has to go in as a traditional contribution, the other can go in as a raw, so you want to make it a little bit depending on how much you put in there gets foreign 401k is you have to make a contribution by December 31. IRAs, they like to make a contribution to April 15 of the following year. So you can make an IRA contribution for 2018. But you've lost the window for a 401k for 2018.

You have to take that into consideration when you're doing it. So. By far the best retirement plans are funded with Roth contributions rather than traditional contributions. And here are some important rules and restrictions governing any IRA or 401 k self-directed account. The first set is called prohibited investments. You can't invest in life insurance, except annuities, collectibles, and antiques, like wine, stamped coin collections, certain types of points are permitted. That's why you see some of these gold companies doing this.

There are minor points for the government, who are bending them, and then they're selling them to you, and your personal residence. So you can invest in your personal or you can invest in a second home with your retirement account, and then you go live in. Okay. And there are certain types of transactions that are prohibited. You can't deal with a disqualified person. We'll explain that in the companies that are controlled, you can't deal with companies that are controlled by a disqualified person.

You can't lend money between your retirement account and a disqualified person. And you used can't use your retirement cat as collateral for a loan you want to take out. Okay, those are all prohibited transactions. So who is disqualified from your IRA or 401k account? Anybody that you have a Livio relationship with, you know, you would say, account holder, believe it or not, are disqualified. disqualified persons to your account. Your parents, grandparents, great grandparents, and their spouses, your children, grandchildren, great-grandchildren, and their spouses. The fiduciary that manages your account service providers, or you know, somebody that's giving you advice. And so I've chosen not to be a fiduciary or a service provider because I want to be able to earn fees from the IRAs and 401 K's that people invest with.

There is a couple of interesting twists in here. You see calls in the heads, brothers, and sisters, you're gonna pass with all the other thing that kind of is a little bit deceiving is one thing that you can do with your IRA or 401k Ah, you can invest in a project at the same time and put private money in at the same time you put retirement money into the same new investment. Where they talk about self-dealing is they don't want you to buy with your IRA a home from a hole You all, you know, they don't want you to buy a $300,000 home and sell it to your IRA for $1.

You know, so they restrict any of those kinds of activities. But if you and your IRA are going into a new project at the same time, you can absolutely. So key points when buying real estate with a self-directed retirement account, the retirement or the real estate owned by the retirement plan must be held for investment. No disqualified persons can limit the property. The income derived from the properties paid directly to the retirement account when you purchase real estate, the retirement account must be listed on the purchase contract as the buyer. All funds do the set to the seller must be paid by the retirement and campaign financing obtained to acquire the property must be nonrecourse to the account owner.

Does anybody know what I mean by that? What is the term nonrecourse? It just means it's not personally guaranteed. So they can't come after you if the project goes south. Exactly. So you can't personally guarantee a piece of real estate that you're buying. But and this is what I do. I put together real estate transactions where I'm the personal guarantor, and then at the IRA or 401k. So it's nonrecourse the dam even though it's recourse to me, and that makes it possible for somebody that has an IRA or 401k to invest and meet the qualifications.

So and retirement accounts can invest in limited liability companies. Unlike a 1031 tax-deferred exchange, they have to do what's called a life change stage but retirement accounts get investment by ownership and LLC. Types of self-directed retirement accounts, I list listed them here I'll just highlight a few tax deeds and tax liens, real estate options real estate investment trusts, both public and private, residential real estate investment that includes fix and flips, single-family homes, duplexes. triplexes fourplexes, you can invest in promissory notes, hard money, loans, commercial real estate, retail, I do triple that leases, office buildings, multifamily apartments, many call ads assisted likely in medical office land, industrial Self Storage, Cali you invest as all of them are permitted. So here's how I set up our deals. And I put together what's called the real estate syndication.

I mentioned the other day, it has nothing to do with the mafia by the way. It's just a term where a sponsor and a group of investors pool their money together to buy a project that's bigger than they could do on their own. And most of our projects are started a couple of million dollars and go up to as high as 33 that I put, offering low offering things on back there are low brochures. I had one that's about eight, and then the other two were ones about 20 in about 30 minutes. And we're raging just the equity portion of the debt portion of that. So it winds up being about 25% of what the total value is what you trade equity capital. So these projects that I do are regulated by the FCC.

Because I'm an LLC, a real estate project, it's owned inside an LLC is called a security. The LLC is security, not real estate. So the FCC regulates any entity. That's true, that's tradable white-collar security. And so, they avoid having to spend 1000s and 1000s of dollars to register these offerings we do, we fall under an exemption, which is called rule 506 of regulation D, that secure Securities and Exchange Act or the Securities Act of 1933. And if you follow rule 506. You can do these without registered Registering and what the SEC. So we have a securities attorney. And we were very hard at knowing how to do that.

When you do that, if you had all accredited investors, you could do general solicitation. But if you have limited if you have up to 35 non-accredited investors, then you are prohibited from doing any general solicitation. But you can have an unlimited number of accredited investors and up to 35 non-accredited. And so we watch the types of projects we do, and sound we offer with non-accredited investors that we permit to come into our deal with some of the smaller projects, they still earn the same good returns, and some of the bigger projects are all limited to accredited investors. And, we put together the private placement memorandum or private offering memorandum. Do we want to provide full disclosure? Yes.

What is it? That is the funniest? That is a really great question. And it's pretty funny, actually, the FCC doesn't define that term. And so it's left to all of us to try and figure it out. Okay, I think what they're trying to say, and no disparagement to Grandma, or grandpa, because I am one and making sure that I ever went, but. But if you get somebody that maybe inherited a bunch of money, and they don't know how to analyze these financial projects, then you're in deep trouble if you go after somebody like that, take their money to lose a forum and the FCC finds out about so sophisticated means that you either have the ability to analyze a financial investment yourself or the financial resources to hire somebody to do it on your behalf by a tax attorney to count somebody.

Right? Or you have to offer this as opposed to let's say, have a family member or a partnership. So maybe if you're buying real estate itself, and you're doing it as individuals, you're not subject to this. The minute you say partnership, for a legal document, you're into this by law, but from a practical standpoint, does the FCC have time to go after every family member that is trying to put these deals together? They don't follow this disclosure real accredited investor earns millions of 10s of million dollars in network excluding their own or they have earned income of 200,000. If it's a couple it's eventually 300.

I'm going to give you just a couple of quick examples of deals I've done I showed these the other day, on a slide when we were talking about 1031 investors. Because I mean, I don't know anybody else that does quite what I do. But I think I figured out how to take the 1031 investor and have to take IRA and 401k investors and private individual investors that are investing discretionary income and marry all at the same project. And nobody fights about it, which is kind of cool. And so the thing I want to say here is I we did a big launch store up in Helena, Montana, put several IRA and 401k investors in it, and they can analyze your 1031.

That's the body of the real estate. Ira or 401k to buy any interest in the LLC that owns that real estate asset. Another one we did that has several IRA and 401k. Investors. His project we did Woods cross another one we did in West Jordan. We're doing another one in and Mesa, Arizona. So we're just growing this part of our brand, which we're excited about. But that kind of is a presentation. Any other questions we haven't answered What do you think? Is this? Did you learn anything new?

Why don't want to, why don't I end with what I do with my accounts, which is a little bit more, it's probably the most sophisticated approach you can take because you really shouldn't be doing this. Unless you have a lot of experience at this. I formed an LLC, both my wife and I have IRAs, Roth IRAs.

Years ago, I converted my traditional IRA to a Roth IRA paid the taxes on it, and said, I'm done with that program. And so we both have Roth IRAs, we both have Roth 401k accounts. Every year we contribute the maximum of the boat, once I got a certain amount of money pool together, I took those four accounts, created an LLC, they each bought an ownership interest in that LLC. And so they got like stock, it's not the, they call them units and an LLC them call them shares. But they each buy units in that LLC.

The money came into the LLC, and I'm the manager of the LLC. So I don't have to go through by self-directed third-party administrator, when I want to write a check on that account, or pay a bill out of that account. I handle and control that LLC that has all of the money. And I can't since it would be self deeming for me to buy an interest in my own project that I am personally guaranteeing the loan on.

I take that pool of money, and I lend it to others. And I am earning two points and 12% on the investments that I put out, and it's mainly guys that want to do fix and flips, people that I'm familiar with and know how to work with, but I take, we take a deed of trust, and they sign a promissory note, I am generally already about 15 every account the points that I take the interest rate, I'm earning about 15% on that account.

It's doubling about every seven. So that's what I'm doing with my IRA and 401k. If I could invest it, which I would love to do, if I could invest in my own personal accounts, I would rather get it in there. Because I can earn almost double what I can get outside of that with investments. I most of our investments are clicking off about 20 to 25%. And so I would much rather have it in one of my personal accounts to do that. So I invest a lot of discretionary income and personal real estate.

I don't know if that's helpful. Yes. So once they buy shares in themselves, and you want to contribute the following year. Fewer rocks, that you'd have to contribute on the same percentages every one of the accounts that you put in there--that makes sense. Directly to the rock, the rock would contribute to the Roth and the Roth would buy more shares. Well, thank you so much. One more question. Where did you get started?

Well, I nailed the so I won't say that I was drinking one night. But I started thinking about all this stuff. And maybe one of the first projects I did was we had an opportunity. We have a construction company we had an opportunity to build a Family Dollar Store in Thermopolis Wyoming.

If none of you have been intermodal owners, it's pretty fun. But and I thought how do I raise that the $250,000 I have to raise on this little store. For the equity capital I have. I have a lender lined up And john boy who's with bout West IRA said, Come on up to Boise and give a little presentation to our group. And we went up there, gave a presentation on what we were doing, and walked out of there with the project fully funded. And I thought, hot dog.

I didn't even know I don't really say a guy and I didn't know any of this was going on. And so that's when I started learning. And there wasn't at that time, there wasn't anybody that was teaching me stuff, the joint that I've got to teach real estate guys how to do this. And that was the formation of Daria, it started there and it grew from that point. So it's kind of cool. And that's how I got started and, and been doing it ever since. Now. We raised several million dollars through that platform.

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