Investing in Real Estate with your Self-Directed IRA: Step-by-Step

To begin investing in real estate with a self-directed IRA, schedule a call with our team at Directed IRA: https://directedira.com/appointment/

In this special episode of the Directed IRA Podcast,  we had Nate Hare (Vice President at Directed IRA) walk through the step-by-step process of buying real estate inside a self-directed IRA. This episode covers how self-directed IRAs work, funding your account, purchasing property correctly, handling expenses and rental income, avoiding prohibited transactions, using non-recourse financing, and when an IRA/LLC or Checkbook Control IRA may make sense. Whether you’re new to self-directed investing or looking to expand your retirement strategy into real estate, this episode provides practical guidance and real-world examples to help you get started.

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For questions or to learn more about this episode's topic, book a call with an IRA specialist here: https://directedira.com/appointment/

Other:

Mat Sorensen: https://matsorensen.com

Mark J. Kohler: https://markjkohler.com/ 

KKOS: https://kkoslawyers.com

Main Street Business https://mainstreetbusiness.com

Transcript

Welcome And Roadmap

SPEAKER_00 0:06

Hey everybody, Nate here with Directed IRA. We're going to talk about one of the most popular investments, but keep it real basic and talk about buying real estate within your self-directed IRA. Now I love talking about all the creative strategies, and we've got a ton of content on YouTube if you want to pick up some of those nuggets. But this one, we're really going to break down the steps, the step-by-step process of buying real estate in your self-directed retirement plans. We're going to talk about who does what, what's our role at directed IRA? What do we do as your custodian when you have a retirement account with us and you want to invest in alternatives like real estate? Then we'll talk about what happens after you buy the real estate. What are the steps on paying contractors, paying it for expenses like utilities and property taxes when your retirement plan owns a piece of real estate? What to do if you get in trouble? What if my IRA doesn't have enough money, but I want to buy real estate or I need more money to put into the rehab? What do you do in those situations? And then we'll even talk about when it becomes useful to have an IRA-owned LLC that we're part of the process on as well to help partner different IRAs together, uh, maybe make the process a little bit more smooth and painless, painless.

What IRAs Can Invest In

SPEAKER_00 1:18

I was gonna say painful, painless on you guys. So for you beginners, if you did not know already, retirement plans can own real estate and other alternative investments. Ever since the mid-70s when IRAs were created, the rules have been generally the same when it comes to what you're allowed to own in a retirement plan. Most people don't realize this. Most people just think of a retirement plan as something that they have at Fidelity or their current employer 401k. And all it's invested in is what we call traditional investments like stocks, bonds, mutual funds, ETFs. And if you want to invest in real estate, you can only do it through a REIT, a real estate investment trust. That is so far untrue because retirement plans, ever since the mid-70s, have been able to invest in anything on the planet except life insurance contracts and collectibles. Those are the only two investments deemed prohibited from being owned inside of a retirement plan. So when it comes to anything you can generally hold title to, including real estate, that can be owned inside your retirement plan. The difference is you just have to use a custodian that will hold the investment on your IRA's behalf. So if you think about your account at Fidelity or Charles Schwab, you don't own those stocks in your retirement plan. The plan owns the stocks. The plan owns the mutual fund. But Fidelity is the custodian that buys and sells it when you tell them to buy and sell it. At directed IRA, we do the exact same thing, just replace the word stock and put rental property, or just replace the word mutual fund and put fix and flip. We're still buying and selling an investment. We're just doing it as an alternative investment. And you still use a custodian that's licensed to do those investments, which is us, directed IRA. We're your friendly IRA custodian that allows you to buy alternative investments that your Fidelity or Charles Schwabs won't hold because they don't make money on those investments. They don't get commissions by selling rental properties. It's just not part of their wheelhouse. When you have a retirement account with directed IRA, we don't limit you to any type of investment. Our account agreement says we'll invest your IRA in anything the IRS allows, but you got to find the investment and tell us what it is. So we are similar in the fact that we are both licensed, us and Fidelity, us and Charles Schwab, to hold assets in our clients' retirement plans. But where we're different is they sell investments, we don't. So the spectrum of investments becomes as large as you can imagine it, but we're still the custodian that buys and sells it so that you get your taxed advantage growth when it comes to owning real estate, land, precious metals, cryptocurrency, investments into private businesses, not publicly traded, energy, natural resources, oil and gas, mineral rights, tax lien certificates, the list goes on and on. And important to note, you can have as many IRAs as you want. You're not limited to one IRA with one company. In fact, most of my clients, I would say 95% of my clients, they have an IRA with Fidelity that holds their traditional investments. And then they have an IRA with directed IRA that holds their alternative investments. And if you're interested to know the difference between alternative investing and traditional investing, well, there's been some unique reports that we've got a chance to peek at, which shows the more alternative investments someone holds in their retirement plan, the likeness of them having a large retirement plan are much higher than most people. If you look at the average American that has a retirement plan, only 2% have an alternative investment inside their retirement plan at all. But when you look at the ultra wealthy, people with a net worth above a million, okay, 22% of their assets are alternatives. When you look at the net worth of people over 30 million, 55% of their investments are alternatives. So this is not a new concept. The rich and the wealthy have been investing in real estate and alternatives since the mid-70s. Now people are starting to learn more about it because of, well, hopefully these c this content that we provide gets out there to the masses. So, general rule of thumb: if you can buy it, if you can hold title to it, your IRA can buy it. You just have to use a custodian that will hold it for you. And that's what we do at directed IRA.

What A Custodian Actually Does

SPEAKER_00 5:43

So, just a quick refresher on account types. So we have six different accounts here at Directed IRA that can be self-directed and that can own alternatives like real estate. Now, you might hear us always say, or you might hear this term on the streets, self-directed IRA or self-directed Roth. Self-directed is not a term or it's not a type, but it's a term. It's a marketing term. When you look at the accounts that we have at directed IRA, they're the same accounts you have at a traditional bank or Fidelity or Charles Schwab. Self-directed just indicates you got to pick the investments. So when it comes to the account types, they're no different than you have at your current place. And we have six different accounts that you can own real estate in. Employer, well, we've got personal plans, your traditional IRAs and your Roth IRAs. Both can be self-directed, both can invest in real estate. If you're self-employed, you can also make contributions to and self-direct your self-directed SEP IRAs or the mighty powerful self-directed solo 401k. I'm not going to spend a lot of time on account types today. We've got a ton of education on our YouTube page that goes over these accounts specifically, but I just want to highlight the different types of accounts that are available to you guys. And then I love talking about the specialty accounts because they are almost applicable to anybody on the planet, whether you're close to retirement or not, but that is our self-directed health savings account and our self-directed Coverdale education savings accounts, which are like 529 plans but can own real estate. So if you've got kids or grandkids and you want to start investing an account that benefits them today, whether you're paying for their tuition, their books, their tutoring, their computers, guess what? We have plans here at Directed IRA that can be invested in alternatives, but you could take distributions out immediately to pay for their qualified education expenses. And same thing with the self-directed HSA. Probably the best vehicle on the planet when you think about the three types of tax savings you get with an HSA. And a lot of you guys know who have an HSA understand this, but I get tax-deductible contributions when I put money in my health savings account. It grows tax-free when I invest it in stocks or real estate, but the distributions come out immediately as I decide to take them to pay for my qualified out-of-pocket health expenses, which could cover things like your copace, your glasses, your prescriptions, your acupuncture, and not just for you, you, your spouse, and any dependents that live in the home. So when you back up Airplane View, I just went over three different categories of plants that fit three different avatars of people. Anybody with earned income can self-direct a personal plan. If you're self-employed, you've got some Schedule C income or 1099 income. You can also self-direct a separate soul okay. If you've got that type of income, you can have an account in each category there. But then anybody that's got health expenses or education expenses for their kids, you should really consider self-directing the HSA and the Coverdale. And we'll also talk about partnering these accounts together because I feel multiple counts fit multiple needs. And this is where you really maximize your tax savings on your investments. Jordan, did we have a question? Well, we we do. Oh, already. Let's go. Let's rock and roll. Yeah, I didn't know. I saw you get amped up. I saw you moving.

SPEAKER_01 9:03

So let's Well, the one, the one, and we'll hit that like third. Why don't we tackle two? Sure. And then we'll keep going and then come back. But yeah, they're coming in. So Char Tovar has a question. Do the rules of buying real estate in a self-directed IRA also apply to a self-directed solo 401k?

SPEAKER_00 9:19

Yes. So when it comes to rules to buying, and and I'm assuming that you're talking about, well, let me just say this. They can be invested in the same thing. Okay. So there's not different investment restrictions to different accounts. They can all invest in real estate. When it comes to prohibited transactions, which we'll cover here in a second, those rules also still apply to all the accounts. And we'll talk about that. There are certain people that your plans are not allowed to transact with. Okay. One, I can't transact my IRA to myself, right? I can't tell my IRA to buy my property that I own personally because I'm the account owner. I'm the fiduciary of the account. It's a conflict of interest for me to tell my IRA to buy my own stuff. Same thing with a solo 401k. I can't tell my 401k to buy things from me. The IRS doesn't care what we own in our retirement plan. They do care about who they transact with. That way you don't have any conflict of interest. So at a general rule of thumb, you have to stay at arm's length from the assets owned in your IRAs, 401ks, HSAs, or ESAs. So we'll discuss that here in a sec.

SPEAKER_01 10:22

Great segue to the next question. Okay. From Glenn Hirsch. Is there a way I can manage a multifamily property if I'm minority owner in the investment using my self-directed IRA? Or am I prohibited regardless of the amount of the investment?

SPEAKER_00 10:36

Uh hold that thought because I've got a slide specifically on that. And what we're talking about is uh can you provide sweat equity to the investment owned in your plan? So just keep that. You guys are you guys should come present with me. You guys are already looking at the next slides here in a sec. So it's actually the very next slide. So we'll tell we'll tackle that here. All right, let's let's keep rolling and then we're gonna get some more questions in here in a little bit. Okay, so let's talk about some plan regulations. Okay. Now remember, the IRS doesn't really care what we invest in as long as the investment's not a life insurance contract or collectible. But they do care about who our plans transact with. Now, these are not unique rules to directed IRA or unique rules to a self-directed IRA custodian. The same rules apply to your account at Fidelity or Charles Schwab. The only difference is they never have to discuss the people restrictions because you're not allowed to transact with people. You're only transacting with generally Wall Street. You're buying publicly traded investments, and those publicly traded investments are not being sold by you, the account owner. So there are certain people that we have to discuss, and we have to discuss this because now your IRA, when you self-direct it, you're investing in private investments sold by individuals. And the rules are the same, whether you have an IRA with us or Fidelity, but the assets are different because now we're buying from individuals, not publicly traded investments. So if you look at the IRS tax code, there are certain people that are considered disqualified from transacting with the IRA in question. The main disqualified person to your IRA is you. Okay. You are considered the fiduciary to your IRA. And as a fiduciary, I like to make

Which Accounts Can Own Real Estate

SPEAKER_00 12:23

this example. Let's say you have a sick relative, okay, and that relative is bedridden, they need somebody to help pay their expenses, pay their car payment, pay their mortgage payment, handle their finances, let's say. You can be named the fiduciary to your sick relative. But as the fiduciary, your sick relative is considered your principal. You as the fiduciary are not allowed to take advantage of your principal. Meaning, if you're responsible for handling their money, their expenses, all their all their money coming in, it can only be managed to benefit their expenses, to benefit them. You can't, as the fiduciary, take their money and make and buy stuff from you, right? So you have to act in that same fiduciary capacity where all of your decisions for your IRA must benefit the IRA. Okay. You're the quarterback of the deal. You quarterback the transactions, but your IRA is considered the principal. Okay. All the income from the IRA's investment must hit the IRA first. All the expenses on the asset held in your IRA must be paid from the IRA. You're not allowed to use your own money personally to pay for expenses, and you're not allowed to pocket the income that's generated from the investment held inside of your IRA. Remember, you benefit from the distributions. Think about it when you buy a stock. If you buy and sell a stock, the profit on the stock goes back to the IRA. They fideli doesn't send you a check so that you get the income. The same thing applies when you buy real estate. So if we're going to buy a piece of property with our IRA and it's owned by the IRA, all rental income comes to the IRA, all expenses are paid from the IRA. And I'm also not allowed to use my IRA to buy my own property. So we get this question all the time. If you own property personally, whether it's in your name or an LLC that you have set up personally, you're not allowed to have your IRA transact with you or transact with the entity. You have to use your IRA to buy investments from what we call non-disqualified parties. Okay, so who are the non-disqualified parties? Well, it's anybody outside of the disqualified parties list. So these are the people, including yourself, that are not allowed to transact with your IRA. Okay, so if I'm talking about my IRA, Nate Hare's IRA is not allowed to transact with Nate Hare, the individual, any of Nate Hare's LLCs, Nate Hare's spouse, his parents, his kids, their spouses, and any companies or LLCs those specific family members own, control, or manage. So you can see it's a specific list of family, but it's not all family. It's not brothers, sisters, aunts, uncles, cousins, nieces, nephews, or family to the side because in the IRS, eyes of the IRS, family to the side are not usually going to inherit the IRA when you die. You see, they put the other people, spouses, kids, and parents, lineal ascendants and lineal descendants, they're disqualified because when you die, your air your IRA doesn't just poof disappear. Your IRA turns into an inherited IRA. And who inherits your IRA 99.9% of the time? Your surviving spouse or your kids or your grandkids. So at some point, if they're going to have an inherited IRA that you've grown, they're also fiduciaries to your plan while you're alive. So that's the important thing. And that's really the only thing we have to navigate through when we're self-directing our retirement plan and we want to buy real estate. We can't buy real estate from us, our spouse, our parents, our kids, their spouses. And those same family members or same people can also not benefit from the investment directly or indirectly. Okay. So can my IRA buy a rental property from a non-disqualified person? Yes. But can I have my son live in it? No, because your son is still disqualified and they can't receive a benefit from the investment while it's owned inside of the IRA. Okay. So again, how many people does that leave that we can transact with? Trillions of people, billions of people. So just don't get caught up on the rules. Don't let it kill your dreams. You just can't sell your own stuff to your IRA. And that's pretty much it. Now, going back to the question we had earlier, when we talk about being arm's length from the investment, here's another thing that you have to consider when you have real estate owned inside of your retirement plan, whether it's small real estate or big real estate, like the question asked multifamily. Can my IRA own a piece of an apartment building? The answer is yes. With the IRS rules, they also do not want disqualified people engaging in any sweat equity on the investment itself. Okay. Now, this can be a little bit gray, and I'll tell you the textbook answer, and then I'll give you some real-world answers from a real estate investor. Okay. When it comes to a rental property in your IRA, the IRS does not want you acting as the contractor or getting paid for any management. Remember, you're the fiduciary, you're working pro bono on this. All the investment gains are supposed to go to the IRA, and you can't get paid by your IRA outside of distributions to do any work. Plus, the IRS doesn't want us swinging the hammer. Okay. So when it comes to an extension of a service, when you look at tax law, the general rule of thumb that you need to ask yourself to make it whether it's prohibited or not is are you using your brain or are you using your brawn? If you're using your brawn, you're most likely committing a prohibited transaction. But if you're using your brain, you're most likely just being a good fiduciary to your plan. So can I pick the property my IRA purchases without it being mine or disqualified person? Yes, that's my job as the fiduciary. I have to find an investment for my IRA. It can't find investments on its own. Can I pick the contractors that work on the property owned inside of my IRA? And can my IRA pay the contractor? Yes. That's working within the rules. That's being a good fiduciary to the account. Can I be the contractor? Can I be on there swinging the hammer and putting a third bedroom and gutting the no, you can't do that. Because in the eyes of the IRS, you're not only extending a service to the IRA's investment,

Disqualified Persons And Arm’s Length

SPEAKER_00 18:52

but you're growing the asset value without putting cash in the account. You're growing the value of the asset with your sweat equity and your labor. And the IRS doesn't want that type of work done by the fiduciary or a disqualified person. Okay. So can you find renters? Yes. Can you act as the manager? Now, this is this is a little subjective. First of all, if I was ever talking to an IRS agent, I would never admit that I'm the manager of the real estate owned inside my IRA. I would just say I'm just being a good fiduciary. My IRA had to do this and that. I quarterback the deal. I put non-disqualified people in play, right? I'm being a good fiduciary. But I would never say I'm the manager. Okay. A lot of people say that guy managing it, but to what degree are you managing it would probably be the next question an IRS agent answers. So I don't like saying manager, but when it comes to multifamily, it's a little bit different. Okay. Multifamily, you're probably you're usually not the only owner on the property. Okay. Now the question mentioned if I'm a minority owner, do the rules change? Unfortunately, not. Okay. It doesn't matter if my IRA owns 100% of the property or if my IRA owns 1% of the property. You're 1% owner. That doesn't mean you get to do 1% of the sweat equity. You just can't do any of the sweat equity. It has to be hired and performed by non-disqualified people. Okay. Now, that's the textbook answer. Here's a real world answer. Let's say my IRA owns a rental property and I've got a property manager in play, but somehow, because I've been a property manager, but I've owned property with the property manager, and somehow I still got calls about problems with my property. If my IRA owns a piece of real estate, and let's say there's a leaky toilet and it's on a weekend, nobody can get a hold of my property manager and it's a big problem, it's flooding and it's going to ruin the new hardwood floors. Okay. Am I going to go over there as the IRA fiduciary and maybe try to fix that problem and fix the toilet? Yeah, I'm probably going to go over there and fix it. Okay. But I'm not going to report it on my tax return or have my IRA pay me for the labor. But as a good fiduciary, I want to make sure that's not a bigger problem that happens. But I'm not going to be the active contractor doing the swinging the hammer and doing all that labor because I know at that point I'm putting more, throwing more red flags on the field, and I might get deemed for committing a prohibited transaction if I'm doing too much. Now, you just got to, I say, does it pass the smell test? Okay. Am I doing something that would be considered prohibited or am I just going out and fixing a problem because nobody else can fix it at that time? That's a different thing. And I don't think the IRS uh it has a lot of time to audit those small issues if you as long as you're keeping it reasonable and it makes sense.

The Three-Step Setup To Buy

SPEAKER_00 21:36

So let's talk about the step-by-step process and some useful tips. Okay, and I'm going to address some of the questions that already came in, so just hang tight here. First, how do I get an IRA from, say, Fidelity or Charles Schwab and get it to directed IRA to buy real estate? It's really a simple three step process. The first step is you just have to open a self directed IRA. Um, I suggest that you book a call with one of Our IRA account executives. They are on staff all the time, ready to answer your questions. You can even go and call them right now and they'll pick up the phone, or you can schedule a call with them. We do have a special promo right now through the month of May, actually, where if you use the promo code SPRING200, you get 200 bucks off every account for the first year. Okay. So 200 bucks off your Roth, 200 bucks off your solo 401k, 200 bucks off your HSA or any ESAs for your kids. So make sure you use that promo to open multiple accounts while that promo exists. If you scan that QR code, it'll take you right to the book a call page, or just go to directed IRA.com. You see the web address down there at the bottom, click schedule a call, and it'll go right to our IRA account executives calendar. So get the account set up. That's number one first priority. Next step is we fund the account. Now there's three different ways we can put money into our self-directed IRA. One is through a contribution, right? You just link your bank account through plaid. Okay, you send an ACH or a WIRE directly to your IRA account. You take care of your annual contribution. And again, there's annual contribution limits for each of your plans. Okay, that's one way to get money in there. Another way, more commonly, is we're just gonna transfer some money from an existing IRA that we have at another company. Okay. You fill out a transfer form with us, indicate how much that we're looking to transfer, and then we're gonna send the transfer form or send the transfer request to the current custodian dictating how much money you want moved. Now, some tips on this. Number one, the most common reason we get transfers rejected from other custodians, like a Fidelity or Charles Schwab, is because you, as the client, have not liquidated the account to have it cashed. Not liquidate the whole account, but let's say you've got a half a million dollars in your Fidelity IRA and it owns some stocks. If we send a $100,000 transfer request to Fidelity, they're looking for reasons to kick that back. If they see that you still own stocks and there's not $100,000 cash, they just reject that transfer. Okay. About 30% of the transfer requests we submit get rejected for that reason alone. So make sure before you fill out the transfer request that you've already indicated to your current custodian, you need to liquidate enough of the investments over there so that there's enough cash to transfer. Because we can only transfer cash between Fidelity, Charles Schwab, and us. For real estate investors, if you haven't identified a deal and you wait to get the deal for setting up the account, I would say you might lose that deal. If you're looking to get in an investment, the first two things you need to have is at least the account opened and enough money in the account to cover the earnest money deposit. Because real estate is not a, we buy it and we we make the offer and we buy it. There's usually a 30 to 45 day process. But the first capital that needs to go out of your IRA is the earnest money deposit. So what I usually tell real estate investor clients of mine is get the account set up. When you get the account set up, you'll have your vesting that you're going to use on the buyer's line. We're going to get to that on the next slide. But at least have enough money in the account so that we can send and deploy the earnest money to the title company or attorney's office. This way you don't have to move $100,000 and let it sit there in our IRA making 0% interest until you find a deal. Just move enough money to cover the earnest money deposit. Liquidate five grand in stocks and just move that. That way we're ready to rock and roll and we've got those steps out of the way. Once you find the property, you put it in the name of the IRA, you have us sign the contract, we send the earnest money. And usually if we've got a 30-day close, we've got plenty of time to move the rest of the money over from Fidelity or Charles Schwab. So just some tips on the transfer process there. We do not have account minimums. We don't require you to have cash in the account, but it is helpful to have at least enough to cover the earnest money deposit. Okay. Number three, once the account's opened and funded, you invest the account. Now, how do you invest the account? Well, we've made it pretty easy. Okay, and I'm going to just show you this real quick. Okay. If you have an account with us, you simply log into your directed IRA portal and you say invest account. You'll see some tabs similar to this. And you can see right on the right hand side, real estate. Okay. You're going to submit real estate as the investment and you're going to have some prompts there, but I'm going to come back to the slide in a second. I just want to show you how easy it is. First, I want to talk about who does what.

Contract Vesting And Earnest Money

SPEAKER_00 26:32

When it comes to self-directing your IRA, what are your rules and responsibilities and what are the custodians' rules and responsibilities? Now, the number one thing, the word the the reason self-directed, that term exists, is you got to find the investment. We do not have investments to sell. We don't have a bunch of rental properties that we hold here at Directed IRA. That's not the nature of our business. The nature of our business is we put the keys in your hand and you tell us what we're buying and selling. And I'll show you what we do here in a second as the custodian. But first step, once the account is open and funded, you find the property, you identify the property, you negotiate the terms with the seller, okay, and make sure that your vesting on the purchase contract is correct. Okay, the vesting is always going to read the same, regardless of what you're investing in. But the vesting always starts with the custodian name first, followed by FBO, which stands for for the benefit of, followed by your first name, your last name, and IRA. So if my Roth IRA, I want to buy a property owned in my Roth IRA, when I find the property and I'm sitting down there with the seller, okay, on the purchase contract, the name is not going to be Nate Hare. Nate Hare is not buying this property. Nate Hare's LLC is not buying this property. Nate Hare's Roth IRA is going to be buying this property. So on the purchase contract, the buyer is going to read directed trust company for the benefit of or FBO, Nate Hare, Roth IRA. If I'm using multiple accounts to buy the same property, you just put multiple buyers. Directed trust company, FBO, Nate Hare, Roth IRA, and Directed Trust Company, FBO, Nate Hare, HSA. That's perfectly okay. You can put as many buyers on that buyer line as possible. Here's one tip and trick, okay? And we'll also sign the contract. So once you get the offer approved, you send the contract to us, and then here's where our steps begin. We're going to sign as the buyer. Remember, we have to sign any investment docs because we're the custodian. We don't tell you whether it's a good or a bad investment. That's for you to decide. All we do is sign the documents as the custodian when you indicate to us you want to make an investment and what that investment is. Okay. Now, real estate investors, we're going to go outside of the textbook here for a second. Okay. This is the real world answer on how it should be done. Everything from start to finish should be in the name of your IRA when your IRA is going to be the owner. But I know how real estate works. Let's say you're wheeling and dealing on a weekend. Okay, you meet a seller, you love the property, you want your IRA to be the buyer. The seller might get a little antsy when you start saying, Well, you know, my IRA is going to buy it, and I can't give you an earnest money deposit right now, even though I've got a checkbook in my back pocket, but my custodian will send it to you on Monday. You might lose deals saying that to a seller who doesn't really understand what you're trying to do. So this is not the textbook answer. This is a real world answer on how you can get that property under contract and not lose the deal. Okay. Get the contract under your name or your LLC name. Give them an earnest money out of your pocket. Okay. Lock that deal up on that Saturday, but let them know ahead of time that, hey, I'm serious about buying this property. I'm not going to be the end buyer. Okay. It's going to be my retirement plan. But once we can get my custodian to sign off on the purchase on a new purchase contract and send an earnest money, can we swap the checks? Okay. Use your name and your and your money if you need to to just get it locked up under contract, but we've got to replace it so that the IRA owns it and we got to get a new addendum for the purchase and we got to switch out the checks. Okay, we could do it that way, or what we've done for many clients is we'll still draft an addendum or your agent will draft an addendum showing your IRA is the new buyer. Okay. And then when we fund the investment through the title company, let's say the purchase is $200,000 and you personally gave a check for $5,000 for the earnest money. Instead of us sending $200, we'll send $205. Okay. We'll give an extra $5,000 through closing. That way the title company will just reimburse you your check. Okay. This keeps you out of hot water with the IRS. Technically, you didn't transact with your IRA. You just wanted to make sure that you didn't lose the deal. Okay. But at the end of when we get to closing, the IRA covered the earnest money deposit and the IRA was buyer on contract. Okay. So that's a way to kind of get around that rule. Another way to eliminate that problem is through an IRA LLC. We're going to talk about that here at the end. Okay. If you want to just simplify the process going forward and not even run into that issue, that's fine. We've got a solution for that to make the process easy, where your IRA can own an LLC that you manage. And now when you do have a checkbook, the checkbook is based on an LLC owned by your IRA. Okay. So that's a that's a solution. It's not a requirement. But for those of you who are not using an IRA LLC, I just wanted to cover that, how you eliminate that problem. Don't lose deals. I'll just tell you, don't lose deals, but make sure we process it toward the end. And our transactions team is very great at fixing that potential road, road bump or speed bump when you get there. Back to our vesting. Remember, on the purchase contract, we're going to use Directed Trust Company for the benefit of our first name, last name. And anywhere there's a mailing address, we make sure to put the custodian's mailing address, which for us is 3033 North Central Avenue, Suite 400, Phoenix, Arizona, 85012. Once you get the contract done and the offers accepted, you send the contract to us and we sign it. Okay. With that contract, we also need you to go through the directed IRA client portal and submit what's called the direction of investment. Okay. That is similar to this right here, right? You're going to go in here, you're going to click the tab real estate. Okay. Real estate's going to take you to another tab and it's going to ask you, are we just deploying earnest money? I need to pay earnest money first for a deposit fee. I have the purchase contract and I'm ready to submit. Or we're ready to rock and roll. Real estate purchase, I'm ready to close on the property. Okay. There's two options there. This request is the equivalent of you logging into your Fidelity account and say buy stock. Okay. We don't have buy, we don't have the real estate available for you to buy. So we just have to still get an authorization from you. And this is covers the authorization. This is the official request coming from you, the account owner, and telling your directed IRA custodian to buy this real estate. And then with that, we need a copy of the contract. Okay, I'm going to skip to this. Here's an example of a client that just closed on one. I took their name out and it's really pretty simple, just so you guys can see it. The contract and the vesting. So we see the parties, we see the seller, we sell who the see who the seller is conveying the property to. The buyer, which says directed trust company, FBO, black out the name, Roth IRA, the address, the purchase price. Is this an all cash transaction? Or are you buying on terms? In this case, it's all cash. Okay. Nothing changed other than the buyer on the contract. The sweat equity is the same when it comes to finding the property. Okay. The due diligence is the same as if you were buying it yourself. We're just putting a different name on the purchase contract because it's not us buying it, it's our IRA. Okay. So pretty simple here. Once we close on the property, the warranty deed is going to reflect that the IRA owns the property. Okay. This is the document that we hold in our safe as this as the custodian that replaces stock certificate. Right. If you ever saw what Fidelity does, they buy stock, but they hold stock certificates that show Fidelity Investments, FBO, your name, and account number. We don't hold stock certificates, we hold deeds. We hold promissory notes. We hold PPMs and operating agreements. We always hold a document that shows what the IRA owns. And in the case of real estate, everybody knows this commonly as the deed. Okay. So every time we close on a property owned by the IRA, we always get a title packet from the title company. And one of the important documents is the deed and owner of record. And you can see right here at the bottom, directed trust company FBO, blacked out client name, Roth IRA with the mailing address to the custodian. Okay. So it's as simple as that. Okay, so let's talk about some fun stuff.

Paying Bills And Collecting Rent

SPEAKER_00 34:44

Okay. What happens now? Now our IRA owns it. We've gone through the raw right process. Directed IRA helped in the enclosing on the property. What happens when it comes to income and expenses? Let's say our IRA owns the property. And let's say we immediately have expenses that need to be handled. Whether let's say we got our IRA has to pay a contractor, maybe we got to catch up the property taxes. There's some sort of expense related to that property, but our IRA owns it. Remember, I'm disqualified from paying it personally. Unless I'm partnered with the IRA, then I can pay it based on my percentage. But let's assume that your IRA is the only owner. Okay. How do you pay expenses? Well, I'm gonna skip to this. Here's an example of a payment authorization. You can find this in your directed IRA client portal as well. If your IRA asset needs an expense paid and it's owned directly through us, we pay it. What do we need? We need an authorization and an invoice. Just like when we fund an investment, we need a direction of investment and a contract. Okay, we always need you to just fill out an authorization and give us a copy of what we're paying or tell us what we're paying. Here's a recent example of a client that did an expense pay to a contractor after they closed on the property. They submit the payment authorization to our team, they accompany it with an invoice of what we're paying, and we pay it pretty easy. Now I will tell you, it usually takes about 24 to 48 hours to pay these. Okay, well, I'll give you some solutions on how you can pay them quicker here. But if it's just uh if there's not a lot of moving parts to the investment and you don't want to pay a lot of extra money setting up an entity, you can just have us pay invoices. This usually works well for long-term rentals, right? You don't, you're not necessarily on fix and flips. If you got to pay a lot of people and it's a lot of work, you're probably not gonna want to submit every invoice to us. But if it's just a low rehab deal, maybe some touch and paint, wholetail, whatever the case may be, we can process expense pays through a payment authorization and a copy of an invoice. Okay, so that's how you pay expenses. When it comes to income, remember all the income must flow back to the IRA. I will say there's a couple different ways you can do that. Okay. Let's say you own a rental property and it's just one renter. Okay. You can tell the renter to pay the rent every single month or ACH it with the following instructions payable to directed trust company, FBO, your name, IRA. Okay. Give them the mailing address of directed IRA. Every month, every week, we get cases of checks that come in from IRA-owned asset expense income. Okay, checks from renters, checks from uh borrowers of private money loans. They're all sending the payments to directed IRA, and that's deposited as income. Okay, very important. Income is not considered a contribution, by the way. A lot of people say, well, this I've Nate, I've got you've got this client that gets $20,000 a year in rental income. How is that? How is that possible when the contributions to a Roth IRA are only $7,000? Because contributions are what you take out of your pocket and put in the account. Income from a renter is income. That's not a contribution. That's income from the investment. There's no limitation on how much I can make off the investment income. So all the rents have to come back to the IRA. Now, can I use a property manager? Can the property manager find the renter, right? Put a renter in the home, collect the rents. They usually charge a 10% fee, right? So if I'm renting it out for, you know, $1,100, they keep $100 and then they send the thousand to directed IRA. So you can use a property manager. You don't, it's not required, but property managers become useful if you own multiple properties in an IRA and they're all in the same area. Property manager might work. Some people say, can I collect the rents? Be very careful with collecting the rants. If I'm gonna say, no, I don't want a property manager, but I want to make sure this person pays. I don't want to wait for the check to go in the mail to directed IRA and wait another week to see if it's deposited on time. Here's what I can do so that I'm within the rules. Can I tell the renter to pay me but make the check payable to directed IRA FBO my account? Yes. Okay, I can hold the check. There's nothing prohibited from me holding a check made payable to my IRA, but I can't deposit the check. Okay, once I deposit the check, I just took my IRA's income. But I do have clients that say, I prefer them to mail the check to me just so I know that they paid. I can cross it off my responsibilities list and then they just forward the check to directed IRA. But I would say make sure it's payable to your IRA. Okay, even if you want to collect it, don't deposit it. Just forward that check on to us and we'll deposit it in the account.

When The IRA Runs Out Of Cash

SPEAKER_00 39:23

What if I run out of money in the IRA to pay expenses? You got a couple different options here. This happens from time to time. Let's say you got your IRA involved in a property that needs a heavy rehab and you maybe you went over budget, right? And you need to pay the contractor another five grand. Well, first question I would say is how do you, if you don't have enough money in the IRA, have you made your annual contribution to the IRA? Sometimes that will fix the problem right away. I bought a property in my Roth IRA. We just went past the uh uh tax filing deadline, so I already made my 2025 contribution, but I haven't made my 2026 contribution. But we're in 2026. So I can make a full contribution to cover 2026, and hopefully that contribution to my IRA will cover the expense needed to be paid out of my IRA. What if I already made my contribution? What are my options then? I can't put another contribution in Nate because I already did that. Well, there's a couple different uh solutions to this. One is can we transfer some more money in from Fidelity or Charles Schwab? Do you got some money sitting over there, liquidate enough in stocks and move the cash from the IRA that you got somewhere else? Okay. If it's a lot of money that we need to influx on the property, okay, there are banks, the same banks that I'm going to show you here in a second, the non-recourse lenders can finance a property after you've bought the property. Okay, let's just assume you bought the property all cash, but you're going over the rehab and you want to tap into some of the equity on that property. Most investors understand this as a cash out refi. Yes, you can cash out the equity of a property, but you got to use a non-recourse lender. Okay. That lender will give you some financing terms on the property as it stands. Okay, they'll most likely have a loan to value somewhere around 60 or 70%, but they'll give you cash that'll go right into your IRA that's available to fund any any future rehabs or invest in more property. I have a lot of clients that will buy property cash, at least when they start, and then they find a second or third property and they say, I don't got enough money. Can I cash out the equity of this existing property I own in my IRA so that I can buy two more properties? The answer is yes. You can also use that money to cover any related expenses that you might not be able to cover because you've already exceeded your contribution limit for the year. And then here is the creative one, okay? And I call this the Bob solution. Okay, everybody has a friend or a neighbor or a cousin or a brother named Bob. I just use that name because it's fun and it's easy to remember. Okay. But the Bob solution is let's say that I don't want to go through a lender. I've already made my contribution to my IRA. I only need like five, 10 grand to finish the rehab. Remember what we can't do. I, as the account owner, I'm not allowed to pay the contractor. My wife's not allowed to pay the contractor. My son, my my dad, my mother. Okay, they're disqualified. They can't they can't help in this situation. But can my brother? Yeah. My brother can. And when we sell the property, maybe my IRA can reimburse my brother for what he paid. I use it, I call it the Bob solution. You just find your non-disqualified person or buddy named Bob. It could be your neighbor, Bob, just any non-disqualified person named Bob. And all they need to do is when you we need to pay them back, okay? When you've got money in the IRA, let's say your brother Bob pays for the expense to finish the rehab. Now you've got the property rented, you've got a little cash coming in. How do we pay your brother back? Expense payment and invoice. Have your brother draft an invoice for us. You submit a payment authorization, we'll reimburse your brother because we can reimburse non-disqualified people, but we can't reimburse disqualified people. So use the Bob solution. That is not a legal term, that is Nate Harris term. Okay. Questions? We're all good. Okay, good. All right.

SPEAKER_01 43:09

Uh yeah, we we Duffy took care of it.

SPEAKER_00 43:11

Okay, so I'm gonna wrap, I'm gonna try to wrap it up here. I think this has been great so far. Let me know if this is helpful, by the way, in the chat. Let it let me know if this is good. We should do more of this. Okay, remember, how do we sell the property? Same thing in reverse. Once we buy the property, it'll be listed as an asset in your client portal. When you want to sell it, you just click the asset in your client portal, click manage asset, and click sale of asset. We're gonna need that, we're gonna take that instruction as your direction to sell, not direction of invest, but direction to sell. And then we're gonna need a copy of the sales contract. And remember what we're looking for. The seller is properly vested as your IRA. Hey, you've got the seller, and then we sign the contract, sell it back to your seller's agent. It's the same thing in reverse. Are the taxes, are the gains taxed? No. All the gains, the capital gains and the rental income, are all tax exempt as they flow back. To your IRA. Now, the only difference with pre-tax and after tax accounts, we kind of mentioned this, when you start taking distributions when you see fit, you are taxed when you take distributions from a traditional or most CEPs, but you're not taxed on distributions if you have qualified distributions from a Roth, a Roth 401k, HSAs or ESA. So again, those are my favorite accounts because all the capital gains remain untaxed. Untaxed to the plan, untaxed to you for qualified distributions. Now, what if I don't have enough money in the IRAs to buy all

Partnering And Non-Recourse Financing

SPEAKER_00 44:34

cash? Okay, you can partner different plans together and co-own the property. Partnering is very good. I've partnered on notes before. I partnered on OneNote where we had eight different IRAs partnered on one note. Same thing goes with real estate. You can have that many partners. Do you do you want that many partners? Usually not, especially on real estate. Loans are a little easier to manage. But if I'm going to own something tangible like that, I'm probably going to try to just partner with my plans, right? Which may include my traditional IRA. Maybe it's an old rollover from my old company. My wife has a traditional IRA. We both have Roth IRAs. Our kids are working, they have Roth IRAs. We set those up for them. We talk a lot about that. Getting kids started early. My HSA has got about 30 grand in it. And I've got some ESAs for the kids. All those accounts can partner together to buy one rental property. And when the checks come in, you still have the renter just pay one check to directed IRA. Okay. But we'll split, we'll know the asset that the checks coming in for, and we'll split the rental income pro rata based on each plan's ownerships. I'll show you how you can do this easier than doing it like that, though. But you can also use seller financing. Again, if we don't have enough cash in the IRA, okay, you can structure the deal where the seller finances. Okay. This is called seller financing, or in other words, you buy the real estate on terms with the seller. In this circumstance, you're only giving the seller a small piece of the uh through a down payment, and then your IRA is gonna make payments to the seller until the note with the seller is paid off. You can go to a non-recourse lender, you can use other arrangements like buying property subject to, again, we got great webinars that discuss that. Buying real estate with and without debt, if you want to look at how that works. Buying sub two means we're gonna buy the property, but we're just gonna take over the loan that's already on the property. We're gonna just take over buy the property subject to the financing already on it. But those types of structures, you only need a small down payment or small investment to get started. Or you can use real estate contracts, real estate option contracts, and wholesaling to kind of get your IRA jump started without actually even owning the property. You're just controlling the property or controlling the contract to buy it and assigning it to somebody else. Okay, if you need an IRA lender, you can go to directed IRA. These are not all the IRA lenders, this is just a handful. But if you go to directed IRA.com forward slash resource slash directory, or if you go to our website, just go to directed IRA.com. You'll see a tab at the top that says clients. Drag down, you'll see an option called resources. And then when you hit resources, hit non-recourse lenders. It'll take you right to this page. Okay. Some of the larger banks, uh, I would say are North American Savings Bank. They're a national outfit. They do non-recourse loans pretty much in all 50 states. Another large one is First Western Federal. Uh there, I think their website's myIRALender.com. You can also use non-recourse loan.com. Okay, this is run by my buddy Ryan Hughes. They they loan in all 50 states. Oftentimes, non-recourse lenders like to stay a little bit more regional. Some hard money lenders also offer non-recourse loans. If you're in Arizona, Boomerang Capital is a great resource for you to look into for financing property specifically in Arizona or Texas. Okay. And you can look elsewhere. You don't have to use these banks. These are just some of the ones that we've grown close with through our education, and they do a great job financing IRA purchases. Now, I will tell you the sweet spot for most of these lenders is they like income-producing property. So rental, small, multifamily. If you're buying land, it's going to be hard to find a non-recourse lender that will finance land because land doesn't immediately come with cash flow. Okay. Part of the DSCR loans or that loan avatar is they want to see the income on the property to justify the down payment. Does that mean you can't get a non-recourse loan on land? Absolutely not. I have a client that bought land in Las Vegas. He couldn't go to any of these lenders, but what he did is he had a good relationship with his community bank. He had a lot of money parked there with him. And he said to them, he said, Hey, would you guys be willing, since you draft your own loan products, would you be willing to give my IRA a loan on this land if I put down whatever down payment that you guys required? And the not the uh community bank said, sure, we'll do it. You've been a great client of ours. Uh show us the property. And what they did is they gave them a loan for 60% of the value. Okay, but this was on land. So it's not that you can't get non-recourse loans on land. You just got to get creative. You might have to get outside the box and use your network, whether that's a community bank or a private lender that is not an institutional lender. Even IRAs can loan other IRAs dollars, provided they're non-disqualified people. So let's say Jordan's IRA wanted to buy a property and Jordan was having a hard time finding financing uh through a non-recourse lender. Could Nate Hare's IRA loan to Jordan's IRA? Yeah, that might be a good investment for both of us. Nate Hare's IRA gets the interest income from uh uh Jordan's IRA being the borrower. Jordan's IRA gets to buy a property that no other bank would finance, and I'm still secured by the property, so there's collateral for me as the lender. So as long as we both like the deal, my IRA can loan to his IRA because we are non-disqualified parties. Again, Bob solution. I'm not named Bob, but I can act as Bob. Okay. Last portion.

When An IRA-Owned LLC Helps

SPEAKER_00 49:59

Should I use an IRA LLC instead? Now, this is one of the products we've kind of grown a name for ourselves in the industry because of our sister company law firm, KKS Lawyers, that sets up this unique entity called the IRA-owned LLC. Now, we have terms single member LLCs is when an IRA owns an LLC, and multi-member LLCs is any any any amount of IRAs, two or more. Okay, I have clients that have 14 IRAs that own one LLC. Very important. Okay. This is not the LLC you already have. Okay, we're not talking about an existing LLC. We're talking about forming a new LLC with original owners being IRAs, or it can be a combination of IRAs and individuals. Okay, going back to that person that talked about can I partner my IRA together. Oftentimes, if you're going to partner personal funds and IRA funds, sometimes it's easier, especially when it comes to the accounting of who's paying the expenses and who's collecting the income. It's hard to do it when we're both sitting in our own lanes. Okay. When I get a rental check, let's say I partner with my IRA on the purchase of a rental property, but I did not use an LLC. Okay. I just went in, buyers on the contract were Nate Hare's IRA and Nate Hare personally. Well, when I have the renter pay rent, I have to have them cut two checks. I have to have them cut my portion of the check to me personally, and I have to have them cut the IRA's portion of the check. Prorata to the ownership percentages. That could be a little onerous on a renter. So the easy way to fix it is have everybody who's going to own the property or everybody that's going to invest together have them own a multi-member LLC. Okay. There's specific language in the operating agreement from KKOS. This is why you want to use KKOS. It's not that I love them to death, it's because they are proficient and experts on self-directed IRA rules. So there's specific IRA language in the operating agreement that your normal attorney is not going to understand. So I prefer you using directed IR or KKOS, but KKOS will set up a multi-member LLC owned by your IRAs and even you personally, but you can act as the manager of the LLC. Okay. You, as the fiduciary to your plan, can act as the manager, which gives you the authority to write checks on behalf of the LLC, send wires, collect income, but all the income and all the expenses are just paid out of the business checking account owned by the LLC, which is subsequently owned by your IRAs. So it's an easy way to partner different accounts together. It makes it seamless when you want to partner personally, okay, and have all the income, the rental income just go to the LLC's bank account, and then you can take your portion out if you like. But this is an easy way to see to make the process more seamless. Okay. What are some key points to consider before using or setting up an IRA LLC? One is you're going to get checkbook control. Okay. That's a double-edged sword. Checkbook control could be really good if you're responsible. If you're not responsible, it could be really bad for your retirement accounts. It does give you an added layer of protection on your IRA's investments through the asset protection that LLC gives you. I will tell you, it is not a requirement to have asset protection to that degree because when my IRA owns a rental property and the renter wants to sue, they can't sue me. I'm not the owner. So most people who are looking for asset protection, they're looking for isolation from themselves personally. Your IRA already is isolated from you personally. But a lot of people have a lot of assets in their IRA, so they don't want other assets commingled with maybe a rental property. So they put some of their dollars in an IRA LLC to isolate that rental property in one LLC. Okay, so it does give you that sense of asset protection. Single member LLCs do not require a tax return. Multi-member LLCs do. This is not a directed IRA rule. This is a tax rule. Anytime you have an LLC with more than two or more members, the LLC is required to submit a partnership tax return. Okay. So that is something to keep in mind. Yes, the IRA LLC partnered with different accounts, does make a lot of things smooth and painless for you and make things a lot more efficient. But one thing to keep in mind is you do need to file a partnership tax return. Doesn't mean your IRAs have to pay a tax, but just because it's a multi-member LLC, it does require a partnership tax return at the end of the year. And last slide, the goods and the not so goods about an IRA LLC. Because I want to make sure you guys know it's not a requirement and there's no real right or wrong answer. It really comes down to what are you investing in and how much control do you really need? So the good things about an IRA-owned LLC is you get the asset protection at an LLC level. You have the ability to partner multiple plans together more seamlessly. As the manager, you have access to the business checking account, which allows for on demand deployment of funds at your discretion and the ability to handle investments with moving parts, okay, or cash on demand. Remember, moving parts, I got a heavy rehab. I'm gonna have to pay a lot of contractors. Might be a lot easier for me to not own that investment directly in my IRA and submit payment authorizations for every payment. I'll just have my IRA own an LLC that I manage and I'll pay the contractors and pay the expenses right out of that account without contacting directed IRA. Okay, the not so good. More responsibility means more risk for you. Okay. I say this because once you have your IRA funds in an LLC that you manage, we don't get to see what's going on in the LLC. Okay. This means that you might be subject to prohibited transactions if you don't understand the rules because we're not there to stop you. Your friendly IRA custodian can't say, yeah, you know, you're not supposed to pay yourself a management fee out of your IRA. When you got it in LLC, we don't see anything. So you got to understand the rules. More responsibility for you, okay, comes with greater flexibility, but greater flexibility comes with you got to understand the rules.

unknown 55:56

Okay.

SPEAKER_00 55:56

I I mentioned that, no line of sight. The initial setup costs, obviously, there's initial setup costs and state filing fees in certain states. In Arizona, it's a great state. There's uh where the filing fee is perpetual. Um, so you want to account for that. There isn't a fee for setting up the IRA LLC and the filing fee with the state. Those aren't our fees, but just keep that in mind. But it could save you money down the road with you know our investment processing team and just save you a lot of time uh at the end of the day. Okay. Last thing. I always ask this. If somebody asks me if they need an IRA LLC, I ask them, what are you investing in first? Tell me that. Does the investment have moving parts? Does the investment need additional asset protection or not? That's very rare that I see it needs additional asset protection. Uh, do you need to fund the investments with uh quicker than 24 to 48 hours? Most real estate deals are not done in 24 hours. They usually have a closing. So again, it's not about the acquisition, but it's more about what do we have to do with the property afterwards. Uh, do you have multiple accounts that need to partner with? I will tell you this one thing that I can think where an IRA LLC becomes vitally important. I just had a talk with a client that's buying property auction. Okay, if you guys ever go to the auction where you're buying foreclosures or pre-foreclosures, you're going down to the local auction and you are making bids on properties and they want cash on the spot. Okay. The trustee is going to want cash on the spot. How do you give them cash on the spot when it's all parked in your IRA? It's almost impossible until we bring in, voila, the IRA LLC with the checkbook. So you can go down to the trustee office, you can make a bid, you can win the bid, you can write the check, right at the name of your IRA LLC. The more passive the investment is, generally you don't need an IRA-owned LLC. So for my lending, I don't use an IRA owned LLC. I'm just deploying money to the borrower to the title company and they pay interest payments back to my IRA. Why do I need an LLC to handle that? That's pretty well managed because of the nature of my investment. And do you want control? Remember, control comes with greater responsibility, and with responsibility comes greater flexibility. But make sure you understand the prohibited transaction rules and that you're just using the IRA LLC to deploy funds and collect income that are benefiting the owners of the LLC without paying yourself indirectly or directly outside of that. Okay.

Promo Code And Next Steps

SPEAKER_00 58:09

If you guys are not clients and you want to start investing in real estate or alternative investments, we have a special promo. This does not last forever. Go to directed IRA.com, click schedule a call or open account. And when you do, make sure you use Spring 200. That gives you $200 off every account that we offer. Traditional IRAs, Roth IRAs, SEPs, Solos, HSAs, and ESAs. Get them all open. Make sure you guys save money. Well, it's been an enjoyable afternoon now. Now it's afternoon with you guys. So make sure you reach out to Directed IRA. If you want some more education, go to our YouTube page, look up directed IRA webinar or directed IRA page. Look up the types of investments you want to do. And I just sure you we've got a class on it. Okay. Awesome.