Rentals, Lending, and Flips in your Self-Directed IRA

In this episode of the Directed IRA Podcast, Mat Sorensen and Mark J. Kohler break down how investors can use a self-directed IRA, HSA, or solo 401(k) to invest in real estate and private lending. They cover the core strategies—rental properties, flips, land deals, and hard money loans—and explain how these accounts can be used to build wealth in a tax-advantaged way.

Mat and Mark also share real-world examples from their own investing experience, including buying rental properties inside retirement accounts, structuring private loans secured by real estate, and using Roth funds for high-growth opportunities. Along the way, they walk through the basic steps to get started, when an IRA/LLC may make sense, and the key prohibited transaction rules every investor needs to understand.

Whether you are brand new to self-direction or looking for a simple episode to share with someone who wants the big-picture overview, this is a practical introduction to investing retirement funds in assets you know and believe in.

Directed IRA Homepage: https://directedira.com/

Directed IRA Explore (Linktree): https://linktr.ee/SelfDirectedIRA

Book a Call: https://directedira.com/appointment/

Other:
Mat Sorensen: https://matsorensen.com & https://linktr.ee/MatSorensen
KKOS: https://kkoslawyers.com
Main Street Business https://mainstreetbusiness.com

Transcript

SPEAKER_01 0:08

Welcome everyone to the Directed IRA podcast. This is Matt Sorns, and I am here with the incredible Mark J. Kohler. And we are excited to be talking to you about how you can use your IRA account to invest in a rental property, a flip, or maybe even doing some private lending with it. If you've not heard about it, it's called a self-directed IRA, very popular topic, something we've each done ourselves.

SPEAKER_00 0:30

Yeah, and if you're a regular listener, this is the show that you can share with that friend, your family member, business partner that you're like, I've been telling you about this. This is a show where we keep it simple. We're going to go through some examples, all the options that are out there. And then we'll dive a little deeper on a few of the steps and then rentals flips lending, kind of some of what it looks like. So that way you guys can walk away with kind of a bird's eye view. But this is for our regular listeners, please listen and share this. I think this is the one to share.

Real Rentals Not REITs

SPEAKER_01 0:59

Yeah, and we're opening hundreds of new accounts every month, over a thousand accounts back in December, new. So we've got a lot of new people. We want to make sure you know the rules of the rule and what is possible. All right. Well, let's start with the first thing. I just want to get this off the table, which is I've done this. Mark's done this, but like uh we're not just like, you know, cooking the food. We eat our own cooking on this. We love the concepts we talk about, whether it's a tax or legal strategy, retirement account strategy. We've generally done it ourselves. So I bought my first rental property with a self-directed retirement account in 2017. It was a three-bedroom, two-bath rental. When we say buying real estate with an IRA, we're not talking about buying a REIT or some publicly traded real estate company. I mean like the rental property down the street, the duplex or something. So I bought this little three-bedroom, two-bath rental in Indianapolis. It rented, I bought it for$84,000. It rented for$950 a month. I sold it five years later for$184,000. So all that cash flow built up in my retirement account, no tax. That$100,000 gain back into my retirement account, no tax. No need to do a 1031 exchange. I bought that property because I thought it would be better investment. It would appreciate more in value than a mutual fund or target date fund I was doing before.

Proof It Works: Two Case Studies

SPEAKER_00 2:16

Well, I'll take that and raise you by two. Um that is an awesome story. Matt had a few more zeros involved in his deal, but back in 2009, right after the real estate crash, or in the aftermath of all that, if you were around from back then, I bought my first rental property in my health savings account. And it was Chris Albin out in Chicago. Remember him? And I still own it. It was it's the cutest little low-income housing meth lab. I mean, it's adorable. And I bought it for I I'll show the Repsy at a lot of events to show you. I did a 10% down on a fourth,$40,000 Section 8 little, again, low-income housing house, uh two, two one, two one back with a broken driveway, no carport. Anyway um, it's out in Elgin, which is uh has its good and bad areas, but um I did it with 10% down, and back then you could fund a uh health savings account for around four four grand, and it's all I needed for the 10% down, seller carry back financing. I didn't have to sign on the loan. I still own it today, and it cash flows about 200 bucks a month. Uh, there was a couple of years where we had to use the the resources that we had built up in the bank account for um, I think there was a some roofing that we had to repair and this and that. But it's paid for some medical for some of my kids, some dental work and this and that. But I still own it today. It's in my health savings account. It's probably worth about$10,000 more. Again, it's a tough area. But um, if you don't do that, you can do that in your health savings account. Or if if not, you have a bank account at Wells Fargo earning you a quarter of a percent. So I've made more money in my health savings account on that rental property, which is paid for our health care.

SPEAKER_01 4:06

Yeah, and so when we talk about buying real estate in your retirement account, we're talking about an investment. Like you're buying this because it's a good investment. So if you're someone that like knows and loves real estate and you believe in the future of that as an asset, and Mark and I, we talk to so many real estate investor groups, realtors, professionals in the real estate space, uh, have some in our family. And it's like, well, what do you know? We are always talking about you should invest in what you know. Well, why are you buying a mutual fund if you're in the real estate space chasing deals all day? You should be investing your long-term wealth, your retirement account, in the assets you know and believe in. And this doesn't have to be a publicly traded company. It's these little assets that we've talked about here. We're gonna give you more examples. So let's do two more examples. I love it. Let's keep giving them.

Invest In What You Know

SPEAKER_00 4:49

Yeah, two more examples, um, if I may. Yes. And then we'll give you some steps so that you know like how hard this is. And I want to also make the caveat. You are not pulling this money out of your IRA. I am not pulling money out of my HSA. There's no penalty, there's no tax. I'm just going from fidelity to directed IRA saying, hey, I want to go invest in this. Fidelity won't let me do it. Can you let me do it? Yes. And people have been doing this for 30, 40 years, the self-directed IRA uh industry. So, okay, another example. Um, I like it when you talked about the wholesaling and which is kind of a form of flipping. You're buying land and then selling that land because it gets maybe uh zoned a different way. So I know you got a couple sweet examples, but I'll do a lending example. Now you've done more of this than me, but if you can, I'll steal your thunder a little. So recently my wife and I did a hard money loan and we took money out of our self-directed 401k. So we're showing we're using these examples because it it could be an IRA, it could be an HSA, it could be a 401k, but it was in my wife's solo 401k and her little S Corp, and we did a hard money loan. And it was a 12 and two. Now, what that means is when we loaned it to this builder, he was back east, and we were in first position, they needed money to rehab the property. We got pictures of it, we did our due diligence, we got a first trusteed, we loaned them X dollar, it was over six figures, but we loaned him this. We get two points right out of the gate. So if we loan them 100 grand, we get 2,000 back on day one, and then we get 12% per annum. So 1% a month every month they hold that loan. Well, they held it about nine months, and so we made 9% interest over nine months plus the two points. So we made 11% in nine months on that loan. It was secured by real estate, so it's a form of real estate investment, and we did it in the 401k.

Moving Funds Without Taxes Or Penalties

SPEAKER_01 6:42

Yeah, yeah. And I've done many, many loans out of my retirement account. That's mostly what I do because it's more passive for me. And so if you're someone in the real estate space or you've thought about using your IRA to invest in real estate, think about what's the right investment strategy for you. Also, you know, sometimes the strategies change on the times, you know, private lending's been good because rates have been a little higher. So you can charge more, you know, uh, and flips have not been as popular because the market's been a little flat from an equity standpoint. When that shifts, you know, you might be like, well, I might want to be getting more on flips because the return's better. So a lot of a lot of dynamics there. But um, but one thing I've seen too, which is, you know, we've seen the flip. I'll give a number of examples. I um that rental property that I bought, by the way. Okay. Um, the very first one back in 2017. So I when I bought that property, it was a turnkey rental. Someone else had already bought it. A client of mine with their solo K. They bought it for like 20 grand. Oh my gosh. I don't know how much they put into it. Um no, they bought it for around 40, okay? They bought it for around 40, and I don't know how much they put into it. I bought it for 85, but I bought it from their solo 401k. So their their retirement, their self-directed retirement account, and this can be SEP IRA, Roth IRA, HSA, traditional IRA, whatever. There's dimensions and account types. But their account went in and said, I'm gonna buy this property, pay people to fix it up. You can't go do the work yourself. We'll talk about that in a second. And then I'm gonna sell it for the profit. And that whole profit goes back into the retirement account. Now I came in and said, Hey, I want to just own it as a rental, buy and hold. And and I didn't get the upside on the flip, but I bought it at a good time. The market went up over the time period I held it, and it was a good cash flow. I frankly bought it because it was good at cash flow. Now, another angle on this is, and we'll see this all the time at directed IRA. I mean, you know, we're opening up 30, 40 accounts a day sometimes, and they're all making an investment. Half of them are doing real estate. We'll see this all the time. One person's IRA goes and buys the property, another person, another investor's IRA is lending on the property, fixing it up, and then someone else's IRA later buys it down the road as the buy and hold property.

Hard Money Lending Mechanics

SPEAKER_00 8:57

And as long as they're arm's lengths individuals, it it's not a problem. Yeah. You now you can't have your own IRA loan to you or your wife's or husband's IRA buy the property from you. But if these are arm's lengths individuals and you get into this industry, or I should say, kind of this community, it's super common. And it and it's there's no cooking the books, it's all fair deals, but people figure out that there's people there's more money available in retirement accounts than people have in their back pockets. And so all of a sudden you start seeing all this movement. One of the other examples I just love to is the buying land and getting it zoned, or um knowing that there's a development going down the street and they buy land and then sit on it, or it could even be uh tax lien.

SPEAKER_01 9:46

Let me give an example on that one. Yeah, okay, yeah. Okay, that's an example. This takes a second, but it's pretty cool and powerful. This I had a client who used a Roth IRA, and I remember him calling Creme de la Creme. Yeah, the creme de la creme, because when that money you make money in the Roth IRA, it's gonna come out tax-free later in retirement. Now, this client, he said, he said, I want to get an option on a piece of land.

SPEAKER_00 10:08

Ooh, an option.

SPEAKER_01 10:08

Yeah, got an option on land. Now, this was this was a sophisticated real estate investor client. This was land up against a highway. Now, he knew that the county and the state were planning to put an exit right around where this land was. And they were gonna connect other roads and all stuff just happening, kind of it's like outskirt development type stuff. And he knew that that land was gonna go from just agricultural low value to highway commercial. So he went and put an option on it. Now, that land was maybe worth like 300 grand. So he went and got an option on it for 400 grand. It's like 400, 400 grand. The farmer was giddy. Yeah. So he told the farmer, he said, Hey, I'm not gonna buy the land from you, but I want the right to buy it from you within five years for 450 grand. And the farmer's like, dude, it's worth 300 now. I know what this land goes for per acre. I'll buy more down the street, you know? It's like not so but my client said, I'm gonna give you 10 grand now for the rights to the option, and then I have this right for five years. And he recorded what's called a notice of option on title saying, Hey, I have a claim for this property at a specific strike price. Well, three years later, this exit actually goes in. Okay. And my client has the right to buy this at 450. Well, this property is now worth one and a half million. So what he does is he doesn't go buy it at 450. He had the right to buy it at 450. He could exercise the option and force the purchase at 450. He sold the option to another developer that wanted to develop and build it out. Right now, there's like a gas station and a subway.

SPEAKER_00 11:33

I know the development. I love it. I love it.

SPEAKER_01 11:35

And so, and so what he did though is that million dollar, he had a million-dollar gain. He put 10,000 down from his Roth IRA, and a million dollar gain came back into it entirely tax-free.

Flips, Turnkeys, And IRA-To-IRA Deals

SPEAKER_00 11:47

Yeah. Because he sold the option for, let's say, 1.5 million. And when he sold the option, he had to still pay the farmer his$450. And so the net result was a million dollars of profit. And the invest the investor developer was excited, happy. The option owner was happy. Farmer wasn't probably too excited that you know he missed out on this opportunity, but he got his$450.

SPEAKER_01 12:09

And he didn't know what was happening until all of a sudden there's a service station in the subway there. And he's like, huh, I wonder, yeah, I they don't know. Yeah. But you know, that's the good investing. You you you find opportunity, you see it, and you get fine, figure out ways to do value. And you that's so hard to do in the stock market.

SPEAKER_00 12:25

Yeah, yeah. Now, here's the takeaway, and then we're gonna get into some steps here, and then we'll get in, we'll unpack a little bit more detail because we don't want to just be, you know, we we love to give real helpful advice here, believe it or not. So I'm I I know some people do podcasts and like you can do this. Well, when? Well, you got to buy a mastermind group in Vegas for 10 grand. No, no, we're gonna tell you everything. We got it. Our helpline, our law firm, the uh the directed IRA uh team and the customer service is amazing. If you want to take action in this area, we've got the resources to help you. So, what the basic point I want to make here is that if you are in the real estate industry in any way, shape, or form, maybe you're into storage units, maybe you're into uh strip malls, maybe you're into uh RV and R. You said strip malls.

SPEAKER_01 13:08

I was wondering where you're going with that.

SPEAKER_00 13:10

Strip malls in Vegas. No. And if you're but if you're you know into like RV parks or whatever it is in the real estate industry, you have insider knowledge. That is not illegal to trade on that. You know something about real estate that someone may out someone else may not know. So you can use your retirement account to play in that game. You do not have to leave your retirement account in stocks, bonds, and mutual funds in Wall Street. All you have to do is move your account without penalty, without tax, fire that investment advisor that's not giving you that opportunity. Be careful what you hear when they go upside down on you and upset that you're pulling the money, and then get it into a position where you can invest in what you know. That's the concept. And you can do it, people. And we've been helping to the tune of over three billion dollars of client account value now. Hear a directed IRA of people that brought their money and taken it elsewhere. We're not gonna tell you what to do with it. It's your money. Yeah, it's called self-directing for a reason. Not Mark and Matt directing, it's called self-directing.

Options, Land Plays, And Big Gains

SPEAKER_01 14:18

Yeah, yeah. I mean, and that's the cool thing about using a self-red, it's like the menu is all of a sudden open architecture. It's whatever you want that's allowed by law. Uh guys, the only thing you cannot buy with an IRA is life insurance, collectibles, and S corporation stock. Everything else is fair game. Now we can't buy real estate and have personal use of that. I want to talk about that in a second. We need to buy it for investment purposes here. But like Mark said, the key here is really getting to a custodian of the IRA that lets you invest in the assets you know and believe in, whether it's real estate, that could be crypto, that could be private funds or precious metals. We don't care. We just want to talk about real estate because that was being the most popular and one that's had, you know, made the most millionaires over the years is real estate. So um, but that's that's it. It's really the three steps. You open an account at directed IRA, whether this is a traditional IRA, Roth IRA, SEP IRA, HSA, so okay, wherever the account type works for you. Step two, you fund it. Maybe that's your IRA at Schwab and you can old 401k. This is your old employer 401k. You don't even know what it's invested in anymore. You can roll that over. Um, this can be new contributions in, you know, and you'll have to get enough contributions in there to do a deal. But then step three is you're like, all right, go invest it there. Go do this deal, go do that deal. And then your IRA owns it. This is the money you make on this isn't going to you, it's going to your IRA and building up the wealth in your IRA in a tax-advantaged way.

SPEAKER_00 15:39

Now there is a step in there between two and three, where you may say, I want to, and this is we have prior podcasts on this and all the support you need, is to say, well, I want to pool different accounts together, or I want more uh easy access and the ability to transact. And that's where this LLC concept comes in, a special purpose LLC, sometimes called an IRA LLC, where you say instead of just calling up the directed IRA and say, go buy this real estate, go fund this LLC. And the law firm sets up an LLC for you, funded by your retirement account or accounts, which is okay because you're kind of pooling the money together to work together. Family accounts can work together in that format. You fund the LLC, that's 2.5. And then number three, you can go buy the real estate or do whatever. But that methodology gives you a lot of flexibility. And you go do it. Go do it for five years, 10 years. All the money goes back to the LLC. And then someday you wake up and go, you know what? Close down the LLC and send all that money I made tax free back to those retirement accounts. And then you go to that retirement account and go, oh, what kind of account is this? Oh, I can pull the money out for medical. I can pull it out for retirement. I can go, and then you just deal with the rules of that type of account once you get it back to the account. But that LLC is yours to build.

SPEAKER_01 16:56

Yeah. Yeah. Now we're two tax lawyers here. So you might be like, whoa, you just jumped a whole nother level there. Guys, it is not that complicated. All right. We have thousands, tens of thousands of clients that have done this strategy and this structure. Um, it's I always tell clients this is like learning a new board game. It's not rocket science. You just need to learn the steps and what to do. Once you've done it once or twice, it's the same thing over and over again. And so that's what our team serves. You can book a call with the team at directed IRA, go to directedIRA.com, book a call, it's right on the homepage. We'll walk you through this, what you're trying to do. Do you have retirement accounts? Your money you're trying to work with, what account should you open? Can I do this type of real estate? We'll help educate you so you know what's possible. And if you're like, oh, I need that LLC or more structuring or advice, you can work with our law firm KQS lawyers too.

Self-Direction Mindset And Custodians

SPEAKER_00 17:40

Yeah, I like the either way you start. I'm gonna I'm gonna throw out that some of you listening, you don't even know a lawyer that knows this stuff. Like, I want you to know we've been in this business for 25 years. We've got 14 incredible tax lawyers that take calls from clients all over the 50 states, get on Zoom, and we're gonna talk about your situation. And it's attorney client privileged. We have a fiduciary duty to tell you what's best for you. We aren't selling you anything, and it's actually extremely affordable for a couple grand. You can get a new entity set up for your retirement account, meet with a real attorney, and we could build a diagram for you and say, okay, here's all your options that are at your, you know, fingertips. And oh, by the way, how's your estate plan coming? Oh, how's your other tax planning coming? We're gonna see things. And um, it's a really, really powerful consultation. And you can do that before or after you talk to directed IRA. So just know that this this uh synergy between our two companies is so so powerful. And that's k o slawyers.com. You can make an appointment there. Okay, now let's talk about. Can we we kind of went through the steps? Now it's yeah, let's let's talk about rentals. Maybe, or no, did you want to?

SPEAKER_01 18:52

I just want to hit some rules.

SPEAKER_00 18:53

Oh, rules. Yeah, let me just hit some rules. Yeah, yeah.

SPEAKER_01 18:56

So there is a rule though. There's a big rule called the prohibited transaction rule. Okay, I wrote a book on self-directed iries, it happens to be the number one book in the subject. I've got like four chapters. It's got four chapters on just prohibited transactions. I'm not trying to plug it, I'm just saying.

SPEAKER_00 19:11

So, okay, in acknowledgments, he mentions me. So do you? I think I think you do.

SPEAKER_01 19:16

Yeah, definitely. Yeah. Yeah. Go read it.

SPEAKER_00 19:18

Go read it out loud, you know. This looks really well written. I ought to read this sometime. You can do it. Go read it read the preface. Acknowledge. Who do I think first? In the first sentence, oh my gosh. I would like to specifically thank my partner, Mark J. Kohler, CPA and attorney. Wow.

SPEAKER_01 19:33

Mark introduced me to the subject of self-directed iries over 12 years ago and continues to be a leading expert in the field. As a successful author of books on taxes and asset protection, Mark also shared valuable insights that helped me navigate the book writing process. Thank you.

SPEAKER_00 19:48

I knew that I hadn't read that for a long time.

SPEAKER_01 19:50

Give credit where credit's due.

SPEAKER_00 19:51

Thank you. Is this this is second? 14 years ago. And this book, that's 20 years ago now. This book's been out for six years. Yeah. Third edition is coming out. You guys would love this. It's a good book. Go get it on Amazon.

SPEAKER_01 20:01

Yeah. Sorry, I got on a little tangent there. But I what I wanted to say is there's some rules here. Here's the gist of it. When you're investing your IRA, you're trying to grow your IRA. Not personally make money because your IRA did something. All right. So, or personally benefit. So, for example, when we say your IRA buys a rental property, you're not staying at that property. Your kid's not staying at that property. You're trying to grow the IRA. You're trying to find the tenant that will pay the most money possible. When you sell that property, you're trying to find the person that'll pay the most money to go in and grow your property.

SPEAKER_00 20:33

Your kids will not do that. I will just forewarn you. Your kids are not the right renter or buyer. They want to do, you know.

SPEAKER_01 20:41

So, um, and the Congress knew that. And so, like, we're restricting you from using your IRA and transacting it with yourself or certain family members, like your kids, your spouse, your parents. Those people are all restricted to your brother-in-law is fine.

The Three Steps And The IRA LLC

SPEAKER_00 20:55

Because we know we know you're gonna screw your brother-in-law over. So, you know, just have at it. Yeah, your sister even is okay.

SPEAKER_01 21:03

Brother and sister, siblings, aunts, uncles, cousins. Your IRA can't actually Suzanne.

SPEAKER_00 21:06

I would not do that to you. I just want to throw that out. Yeah, yeah. But way clear. But there's a couple brother-in-laws I would. Yeah. Not to stay unmentioned here.

SPEAKER_01 21:15

One other thing, let me just note, is a couple other things that could come up in real estate. Let's say you're doing the flip property. You can't work on the property. Okay, your IRA can pay a contractor to go do the work or a handyman or whoever to fix up and repair. But you physically can't put on the tool belt and go work on the property. That causes a another type of prohibited.

SPEAKER_00 21:34

And you might go, well, what the hell? I'm in the flip business. That's where I really get that extra 10% return is because I'm, you know, elbow grease and I know all the angles and I don't have to pay for that contract. I know, we get it. But book into the deal, okay, you have to do the math here. What's my baseline? I'm gonna take my IRA and go buy Tesla stock and sit around who knows how long, and it could it go up, could it go down? I have no control over that, not that Tesla stock is bad at all. Or I go do a flip and yeah, maybe pay a little five or 10% more for a contractor to go put the rain gutters on rather than me on a Saturday afternoon. Will I make a little less on that flip compared to me doing it myself? Yes. But will you make a lot more than sitting on a stupid stock in Wall Street? Yes. That's what you're comparing it against. So don't overthink it and say, well, I can't do the work, so it's a bad deal. No, no, no, no. Look at your R-O-I-Return on investment. That's what you're comparing it against. So be okay with that. In fact, this will all work for Matt because he does not want to put it on a tool belt. I mean, it's really maybe at Halloween. You could be village people. I guess so. I guess. No.

SPEAKER_01 22:43

All right. I'm I'm more like the chief. You're the Indian. Yeah, that's what it's for. All right. So, okay, let's hit one other last rule I just want to know. Okay. And um, and we're here to help. That's what I say. We're here to help the team at directed IR. You can hire the lawyers if you need to as well, but we're here to help you along in the process. Um, one other thing. Let's say you're a real estate agent buying a property, and that the seller's offering a 3% buyer's agent commission. You cannot receive that. You might be, but Matt, I'm licensed. My IRA is not paying me. It's the seller of that property that's paying me. Yeah, but you're if your IRA is buying the property, that's like enabling this transaction, and you're financially benefiting personally by getting paid because your IRA made an investment. And the IRS is like, that's a no-no. So you can be an agent, you can even represent your IRA buying the property, but you're gonna waive the commission. Easy solution, just reduce the purchase price. Your IRA can benefit, you just can't benefit from your IRA making an investment.

Prohibited Transactions Explained

SPEAKER_00 23:41

Yeah, I love it. So if you're already pretty entiful, this sounds this sounds really enticing. Your next step. Now we're gonna give a couple other specifics here on uh examples on buying a rental, let's say, but this is the opportunity to say, you know what? I need to subscribe and like this podcast, get updates whenever they do a podcast, because I need to learn more about this. Our first 10 podcasts on this topic go back in our history. We try to go through step one, step two, step three in depth. Yeah, we try to joke around and make it fun, but the point is a little bit of education on this is gonna go such a long way. And start booking your first appointment. Book an appointment with directed IRA, customer service, or the law firm and say, I am going to take action and I'm going to start learning about this. And people, once you start doing that, the universe is gonna bring you a deal. And you're gonna go, oh my gosh, here it is. And it's gonna be freaking awesome.

SPEAKER_01 24:36

Yeah. And we have webinars on this. We have a guide, and we're gonna put a link in the description too. We have a beginner's guide to investing in real estate with a self-directed IRA too that'll help give you some tools and other resources. What we're trying to say here is we got you. We got a lot of resources. We've helped tens of thousands of clients do it. Um, this might be a new concept to you, but for many people, this is something that's very interesting, empowering, and exciting. It gets you connected to your money and to this wealth that we're building. Guys, there's$45 trillion in US retirement accounts. For so many of us, it is where the vast majority of our wealth is. But we want to be proactive about it. We want to be investing in it in the best way we can so we can grow it and have a retirement we're looking forward to.

SPEAKER_00 25:16

Okay, so here we wanted to leave you with a couple examples of a specific asset type. And maybe we can go back to the examples we already shared a little. I'll go back to my little single-family home in in the Chicago area uh suburbs. Is let's do the steps. I had actually opened my health savings account at Wells Fargo. Right now, Wells Fargo is not opening up HSA accounts. They used to do it, they don't know. But back in the day, I had opened up my HSA and put my four grand in there. Then I um realized with Matt as we were launching, we hadn't even launched directed IRA at that point. That's right. I had opened, went and opened up an HSA at one of our competitors. I won't say their names. They were the only ones that would open up an HSA. We were we were pioneers in this people. We really were. We wanted to figure it out before our clients. And so I opened up my HSA with this uh trust company, and then I moved the money from Wells Fargo to the trust company, and it was four grand. I probably opened up the account, it was like 300 bucks, whatever, four hundred bucks. Opened up the account, moved that. Now I could pay for the account fee personally. So I paid for the account fee personally, kept my whole four grand ready to go. Then my called my friend Chris Alvin, give him a little shout-out, awesome real estate investor in the Chicago area, and I said, Hey, you're doing single family homes out there. You got anything cool, like a cheap deal, seller financing. I've got four grand down payment. I know it's small, but you're doing these. He had like a portfolio, if you remember, like 200 grand.

SPEAKER_01 26:45

He's a former school teacher, turned real estate investor. Yeah, it was awesome.

SPEAKER_00 26:48

He was just buying all these little turn and burns. So he said, Yeah, yeah, I got this grandma, she owns this property. Um, she's going to live with her kids. She'll sell it and carry the paper because it's mailbox money to her. And um, I'm like, okay, cool. So he put the deal together. I can show you the Repsy at an event here sometime. And I bought it for approximately 30 something because I only have four grand. So I had to have money for closing and all that. So I bought it for about 35 grand. But before we went into closing, I opened my LLC. You can go to the Secretary of State. This was back when I was more of a privacy was not as much of an issue. This is over 12, 13 years ago. I went and opened an LLC called Kohler Holdings. LLC. No, state state website of Illinois, and you'll see it. And that LLC is 100% owned by my HSA. Open up a bank account back at Wells Fargo. Then I moved the money back to Wells Fargo to the LLC.

Agents, Commissions, And Arm’s Length

SPEAKER_01 27:45

Which was from the self-directed HSA at a self-directed HSA custodian. Yep. So the they said, all right, this HSA is gonna own 100% of Kohler Holdings. And it and to buy 100% of Kohler Holdings, it put in that four grand, which was in the Kohler Holdings LLC bank account at Wells Fargo. Just connecting the dots.

SPEAKER_00 28:05

Yep, no, no, I love it. I love it. I jumped over that spot a little quick. But it was funny because the money had made this route. It had gone from HSA account at Wells Fargo to the trust company. Then I opened up the LLC bank account owned by the HSA, and then the money came back to the Wells Fargo account, not in the HSA account at Wells Fargo, but the LLC bank account. Then Chris called me up and said, Hey, closings next week, whatever, send me a check or wire. And I'm like, all right. And I sent the money from Wells Fargo over to a title company in Illinois and took title to the property and the name of the LLC, signed a promissory note to this little lady to this day. I'm still paying that note. And um Chris is the property manager because remember, I can't own the tool, do put on a tool belt and be the property manager. So I hired Chris at 10% of rent. And he's been the property manager ever since. I talked to him the other day. He's doing great. And so cash from the rent goes into the property management company. They pay certain bills or whatever, and then they send the money net back to the LLC bank account and it pools up. Sometimes I'll draw it out. And if I want that money, I've got to send it back to the HSA. Now, once we open the directory directed IRA trust company, I told that other competitor, you're fired. And I move the HSA account to directed IRA. So you can open up an HSA at directed IRA right now, still fund it for last year if you had a high deductible account and insurance policy. And uh, I don't know, am I missing any steps? But it still collects rent.

Resources, Webinars, And Getting Help

SPEAKER_01 29:41

Yeah. And then that LLC, like you said, I think that's that last step is you don't take money from the LLC. You don't own the LLC. In Mark's example, the HSA did, or your self-directed IRA. So you'd send money from the LLC back to the IRA or HSA. And maybe, you know, once you're 59 and a half, you can start pulling the money out from your IRA tax-free. For the HSA, it can go against medical, you know, your kids' dental orthodontists, you know, bills, everything stuff that you were doing. But um, so my LLC, just since we're sharing our LLCs here, you know, yeah.

SPEAKER_00 30:08

You know, so you should show me your LLC out of mine.

SPEAKER_01 30:12

Yeah. So my account's at directed, you know, and um it set up an LLC or the the subdirected account owned the LLC 100% called Legend Legend, I-N-R-E-L-C. Okay. Okay. Legend, it's not Kohler Holdings, you know.

SPEAKER_00 30:29

Yeah, I don't want to be. You're you're smarter. You're smarter. A little unique. For KG.

SPEAKER_01 30:33

It was uh, I think my LLC, some of them are off of album names. So that's the Bob Marley album, Legend, is a good one.

SPEAKER_00 30:39

Okay.

SPEAKER_01 30:40

And INRE Indiana Real Estate. I needed something unique. Anyways, so but that LLC, same same process here. Money went from the IRA to the LLC. LLC has a bank account. It's a Titan Bank, Titan Bank's who we use now and coordinate with a lot of our IRA LLCs. And then it bought the property. It the cash flow was going there, rental income is going there. I had a property manager too. Now you don't have to have a property manager. This was in Indiana. Marks was in Illinois. Let's say I bought one in Arizona. I could kind of manage the property. I can't do the work, but I could go show it to a tenant, write a lease, bug them if they don't pay, you know, and I can cut the bills for the checks and everything. I don't want to do that anyways, even if it was here. But I'm just saying you can do some of that self-management if you want. Um, and then when I sold that property, the money went back in the LLC. And for the most part, I've done some other things. I've invested in some private sectors.

SPEAKER_00 31:33

I like your lending, I like your lending idea. So now the money's there. Yeah. How do you do you do a lot of due diligence or what? So some of you may go lend. How do you lend out of your LLC? Do you mind giving one example of that? Like someone says I'm a contractor.

HSA Rental Walkthrough

SPEAKER_01 31:46

Yeah. So uh for example, I lent money from my IR LC to a uh a real estate investor named Natalie. Okay. Okay. Then I got a YouTube video on this. Okay. I met her, I went to the property, we're going through the property. Now, Natalie was like this hairdresser, contractor slash real estate investor. Oh my gosh. But she like owns the salon and everything. She's cool. And so um, but the the house was like uh it was in such disrepair, a bank wouldn't lend on it. Okay. And so, but it was a good value. And in fact, the the lot was a lot that could be split. Okay. And she and the sellers didn't know that or care to like go through that process. So there's an extra value there in just the land right next to it, not let alone the property she was gonna rehab. So it felt really good about the property that it had the equity there, lent her the money, and I did the same 12% interest in two points. It's what I always lend on, typically. And she went and bought it. Yeah, she went and bought it, she rehabbed it and and later sold it and paid me off. And so, um, and then when that money came back in, I had it lent back out in two weeks later, you know. That's the thing. When they're lending, you want to get it right back out. Um, and so what it takes is what I'll say is at first it might seem hard. Well, I don't know anyone that wants to borrow money on a real estate deal. Go to your local real estate investor association meeting and say, hey, I'm a new private lender looking for deals. You're gonna have a lot of new friends.

SPEAKER_00 33:12

I'd wear a bulletproof vest because you're gonna be tackled in the hallway. I want to borrow money, I want to borrow money.

SPEAKER_01 33:17

Use some discretion, maybe not lend to someone doing their first deal that doesn't have any assets or anything to their name. You don't want to be careful about that. Use someone that has some experience. Um, but also what I found is the the people that I lend to, they're always doing the next deal and they want to keep rolling money. And so you kind of start work with people you have a good relationship with and um that that's the private lending use.

SPEAKER_00 33:39

I like it. And we've got a great podcast on due diligence. Like, how do I loan the money and not lose it? What are the steps with a trusteed and confirming your own first position and all that? So we go back into our list of shows if you really want to go there. But the the other thing that I want to point out that Matt kind of glossed over is 12 and two. Now let's think about that. Matt said, soon as I got that money back, I was out two weeks later with another loan because he's got two or three people that love to borrow from him. So they're always like, hey, are you available? You know, isn't it? Can I because they're going doing deals. So if you're getting 12 and two and you do it twice in a year. So Matt loans someone money for six months, yeah, and then another six months. So he's done two loans, and most borrowers that are doing rehabs, they don't want to have that money for more than six months.

SPEAKER_01 34:26

It's costing them.

SPEAKER_00 34:27

It's costing them. They want to, I mean, Matt's sending out some guy with a bat named Vinny. So I mean, they want to get that money back to Matt right away. So 12 and 2 means he's getting 14% on that first loan in the first six months. He got he averaged 12 and 2. Remember, it's six months, so that's six percent interest, one percent per month, plus the two points. So he made eight percent in that first six months. Then he turns around, does it again, gets another two percent? Now he's up to 10, and he's got six more months of run mate. So now he is averaging sixteen a year. Guys, I'm sorry, is your mutual fund giving you 16% with a guaranteed first trustee? Oftentimes Matt's praying they default. Yeah, because if he defaults, he goes and takes the property and sells it and gets to keep the profit too. So he's averaging 16% with complete guaranteed rate of return.

SPEAKER_01 35:20

Yeah, I mean, guaranteed a little strong there. You know, they could not pay you. Yeah, there it could be risk. Yeah, there could be some risk. Yeah, there's risk. But you get the property, you know. Yeah, yeah, but it's secured, you know, there's an it's backed by an asset, not by some promise or an unsecured note. And so, yeah, and I think, you know, if you guys know the rule of 72, you take what's your annual rate of return, 16%, you divide it by 72, that tells you how long it takes for your money to double. 72 divided by 16 is like four years. When you're getting a 16% annual rate of return, your money is doubling every four years without putting any more money in. I ran the numbers. If I just lend 100 grand at 16% in in 18 years, that'll be$1.6 million. Making no new contributions, just getting being consistent about that and getting the money invested and investing in an asset you know and believe in over time. So we went on a little bit. Moral of the story, moral of the home. Bring us home. Bring us home, baby. Moral of the story is the world is your oyster. Don't believe in Wall Street trying to sell you the things for your retirement account that's on the menu that they happen to have. You can invest in stocks, bonds, or mutual funds. You can buy annuities. I'm not saying that's not bad. I'm just saying if you want to invest in real estate because you know it and believe it, you can do it with your IRA or 401k. We do it for clients every day here at directed IRA. Give us a call if we can be of assistance to you. We've got a ton of resources. We've been dropping them through the show. So please reach out to those resources and grab those if you can. We will see you next time. Until then, stay calm. Self direct on