Thanks for joining me today – I’m Mike Hambright, real estate investor and host of the FlipNerd Expert Interview show. Today’s episode is the winner of the 2016 ‘Best Wealth Building Show’ – where I interview Edwin Kelly. That’s why we’re real estate investors, right? To build wealth and along the way, minimize taxes…so we can become financially free. With no further delay – let’s jump into this 2016 award winner.
Are you financially free yet? If not, Edwin Kelly joins on today’s show to talk about how to change that! Edwin is an expert in self-directed retirement investing, and shares some powerful tips in today’s show. We discuss the 3 challenges that you may be facing (and how to change them), how to reduce, defer or eliminate your taxes, and how to take steps TODAY to improve your financial well being!
Mike: This is the flipnerd.com Expert Real Estate Investing Show, the show for real estate investors, whether you’re a veteran or brand new. I’m your host, Mike Hambright, and each week I bring you a new expert guest that will share their knowledge and lessons with you. If you’re excited about real estate investing, believe in personal responsibility and taking control of your life and financial destiny, you’re in the right place.
This is episode number 306 and my guest today is Edwin Kelly, the CEO of Specialized IRA Services. Edwin is an expert in helping people find solutions and strategies to help plan for retirement, but also to help pay for healthcare expenses and your children’s education. There are some very powerful tools that he’s going to share with us today. You do not want to miss today’s show as Edwin shares some sage advice on all that’s critical to your financial well-being. There are some very powerful tools that many of us are not using yet and you’re going to learn about those today.
In fact, in the second half of the show, in the taking action segment, Edwin is actually telling us how to get started right away with maximizing your investments. Actually, some action steps, “here’s what you go do today,” or to get started right away. So if you’re a pro or elite member, you do not want to miss that part. Please help me welcome Edwin Kelly to the show. Edwin, welcome to the show.
Edwin: Hey, Mike. How are you doing?
Mike: Good. Good. Glad to have you back here. Obviously, I just saw you last week at a mastermind that we’re in together. So good to see you again. It hasn’t been too long, but I missed you, though. I missed you.
Edwin: I know. It’s been a couple days, man. I just don’t know what to do without you.
Mike: Yeah. Well, hey, everybody, Edwin is the CEO of Specialized IRA Services and really a retirement expert of how to use retirement accounts for other things other than just real estate investing, but obviously, that’s a lot of his focus is real estate investing. Edwin, you’re going to do a much better job of introducing yourself than me. Why don’t you take a couple of minutes and tell us a little bit more about you?
Edwin: Sure. So by way of introduction, if you don’t know me, I really got my start investing back when I was in middle school, believe it or not.
Edwin: Kind of the funny backstory to this, Mike, is that when I was growing up, I was raised by a single mom. It was just my sister and her and I. My mom was a social worker that didn’t make a lot of money. She struggled financially. I didn’t want to struggle financially. So what happened was I ended up doing odd jobs starting in sixth grade. I’d mow lawns, clean houses. If somebody would pay me to do something, I would do it.
So by the time I got to middle school, I had saved up enough money, like $1,000 and I wanted to invest it. So I convinced my grandfather to open up what’s called an UGMA account. If people aren’t familiar with that, an UGMA account is under the Uniform Gift to Minors Act to open up a brokerage or a financial account, you have to have a custodian, somebody of age to do that. So my grandfather was my custodian.
So he opens up this UGMA account. I put some money in it and I start looking for my very first investment, right? I found it. I was so excited about it. Now, you’re going to laugh when I tell you this, but you have to remember, I was in middle school, like seventh or eighth grade.
Mike: Hey, we make bad decisions as adults. I do.
Edwin: This was actually not a bad decision as it turns out. I bought a stock in a company called Chuck-E-Cheese. Everybody knows Chuck-E-Cheese. It’s the place as parents and grandparents we love it and hate it at the same time.
Mike: Yeah. I mostly hate it, I’ve got to say that.
Edwin: I can’t tell you how many of those dry, horrible pizzas I’ve eaten there since I’ve had kids and how much money I’ve given them. So it’s a place we love to hate. The funny thing is I bought that stock around $18 a share. A year later, it was trading at about $42 a share. For me, this was an eye opener because I made more money in one year investing than I did busting my butt doing these horrible odd jobs. So I realized the money is in the investing. It’s not going out and working hard.
So there came a point in time where I said to my grandfather, “Grandpa, I want to sell the stock.” He said, “You know what? No.” I said, “What do you mean no? I want to sell it.” He said, “Well, here’s the thing. Stocks are for the long run. You don’t sell it.” I said, “Look, Grandpa, I’m not going to go out and buy a toy with the money, but it’s gone up in price.” At that time, I didn’t know anything about sell discipline. These are things you have to know and be really good at if you’re going to actually do stocks and that kind of thing.
Anyway, I said, “I just want to get out of it and I’ll go find something else to invest in.” He says, “No, we’re going to stick with it.” Little known fact that a lot of people don’t know, when certain public companies file bankruptcy, the courts will sometimes authorize them to wipe out all shareholders and issue new stock to recapitalize the company. That’s what happened in this particular case. So Chuck-E-Cheese is around today, but I don’t own any stock in the company anymore because my $18 investment that grew to $42 went to zero. So the thing that I learned from that experience was . . .
Mike: Was that in the next year or was that like down the road a bit?
Edwin: It was shortly thereafter. Yeah. I don’t know why they got into trouble. Again, I don’t remember it. I was a kit. They got into trouble and I lost everything. It was a total loss. What I realized was this was something that I couldn’t see coming. So I lost my money. So I said, “There’s got to be a better way to do this.”
So fast-forward, I spent a lot of time in investments, financial world retirement accounts and that’s when I discovered self-directing probably about 10-15 years ago now. I’ve been in investments and retirement plans for about 23+ years. What I saw was super exciting. Self-directed retirement investing or self-directed account investing basically allows us to eliminate taxes, defer taxes, control taxes.
It allows us to invest in things we want to invest in and know and understand, things like real estate, as you mentioned. It allows us to have complete control over our financial future and actually achieve the results we’re looking to achieve. That’s the better way that I discovered and I’ve been doing it ever since and we teach it. We do it. We have a business around it.
Edwin: That’s where we’re at.
Mike: I don’t think I’ve ever told you this, Edwin, but I have a different story but very similar kind of lesson. So I didn’t start in middle school, but when I got out of college, I was a finance undergrad and I went to work for a huge bank that managed literally . . . at the time, I remember when they crossed like $2 trillion in assets under management. It was a huge bank. I won’t say any names. It’s not really a household name, so a lot of people might not even know it.
But they managed retirement accounts for large companies, multi-billion dollar accounts. These are the type of accounts that you don’t have any control over what you invest in. Your company offers a couple of different funds and you invest in one of those.
Having gone through college and being excited about the stock market and picking stocks and having some financial savvy, I was really beat down to learn that all these fund managers . . . I was basically kind of an audit function. So I wasn’t even on the sexy side of the business if there was one. But I would help prepare financial reports for performance. When you start to realize that pretty much most of the asset managers, the portfolio managers, their goal is to try to beat the S&P 500 and almost none of them do it consistently.
So it’s like why not just invest in the S&P 500? So kind of from that lesson to realizing that the stock market, even today more than ever, it just feels like it’s a bunch of financial engineering and you really have no control. When you bought Chuck-E-Cheese, it was kind of the Warren Buffett approach to buy what you know, right?
The reality is that I don’t think that matters anymore. I think there’s so much gaming and financial engineering that’s happening that’s really driving the market and individual stocks that it’s not the right thing to do anymore to just buy a product that you like and a company that you believe in their mission because that has very little to do with their financial performance.
Edwin: Well, the funny thing about that is there’s a lot of money being made in the stock market, but the money is made in a very specific area. It’s called Wall Street. And you and I and everybody listening, we don’t live and work on Wall Street. So we’re not the ones making the money from the stock market, they are. Just as a quick side note to what you shared, something that a lot of people don’t know, I lived in the institutional money management world for a long time and the investing world.
So it’s a game. It’s amazing how, like you said, people are trying to beat the S&P 500. It’s interesting. You can look at the top five fund holdings. Well, it was always funny to me how many funds in the top five positions that they held where they had most of their money invested held the index. They weren’t adding a lot of value, to your point. They were basically buying the index, but they’re able to charge a lot of fees.
The other thing is they report out their positions on the last day of the month. So what do they do on the last day of the month? They take cash. They go into market. Then it shows invested and then the next day they sell it. They may not want to hold, but they can’t show a bunch of cash on records to investors because you’d be like, “Why am I paying these fees if they’re sitting in cash 90% of the time? So there’s a whole game around it. This is why people just don’t get ahead with those kinds of things.
Mike: Yeah. Well, everybody, we’re going to talk today about self-directed retirement accounts. Edwin is going to share some great information with us. For those of you that have been listening to the show for a while, we break the show into two parts.
We’re going to talk a little bit about self-directed accounts and where some people fail and some challenges that people have up front and then when we get into part two, we’re going to really talk about . . . Ed is going to give us some details on how to take action. A lot of people know these are important things. What should you go do right now after you hear this to start making some progress and moving forward?
So, Edwin, maybe you can share some challenges that people have in this space. There are so many people that . . . I saw something the other day, I can’t even remember the percentage. Some insane percentage of people in America don’t even have $1,000 in their bank account. If you’re in that situation, you never feel free. You can’t retire. You can never stop working, essentially, right? What are some of the challenges that people have to just kind of go down that financial freedom path that everybody wants?
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What are some of the challenges that people have to just kind of go down that financial freedom path that everybody wants?
Edwin: Well, you know what? It depends. There are three core challenges that I see that we all have. And then there are other challenges as we’ve worked with clients over the years that have popped up along the way that we see people get into and we’ll hopefully have some time to talk about that because it’s really cool the way you can actually solve those problems with the strategies we’re talking about.
But I’d say the three big challenges people have fall into three things: taxes, the investments that they hold and expensive fees and commissions. To put that in perspective, there was a report that the Social Security Administration commissioned. IRAs were introduced back in like 1974. So they’ve been around a long time.
So what Social Security said was, “How did this fare for people? Back then, we said to open up an account, participate in the company sponsored plan, work, save put the money in these mutual funds and at the end of your life you’re going to have enough money to take care of yourself.”
So how did that work? They said if you take 100 people at the start of their working career and follow them for retirement, which for purposes of their study was age 65. They said what happened to those 100 people? Long story short is what they found is 5 out of 100 people were considered financially secure by age 65. Ninety-five percent of Americans have failed to do it.
Edwin: The question is why. Well, it’s because of these three challenges. So the first challenge is taxes. A lot of people don’t understand taxes. They don’t understand how it impacts them. But to just give you a quick scenario, if someone were to make $100,000 this year, you trigger federal income tax, state, local, depending upon where you live.
You’ve got Social Security, Medicare. You’ve got these taxes. That doesn’t even include hidden taxes I’ll refer to like vehicle registrations, things like that that they’re just nickel and diming us. Go to the gas pump. This is one of the reasons I like electric cars. I like the Tesla because I don’t like giving my money to the government or countries that hate us and basically that’s the two places that money goes when we buy gas. So I don’t like doing that. So taxes are a huge problem. So to put that in perspective, if somebody makes $100,000 a year, they could be paying $42,000 a year to these various taxing agencies.
Mike: Yeah, easily.
Edwin: So think about how different your life would look if you could keep the $42,000 that you’re now giving away. That has a crippling effect on somebody’s ability to create wealth.
A second challenge is the type of investments that people are doing. So just like me starting out with Chuck-E-Cheese, what most people are doing, when I say most people, 97% or better of Americans who have retirement accounts are investing in mutual funds. The reality of it is that that’s why people aren’t able to retire. That’s why we see people who should be retired working at Walmart and greeting us at the door because they don’t have income coming in.
To put it in perspective, in 2015, 70% of all stock market investors lost money. The Dow had its worst year since 2008 and everybody’s been predicting basically a repeat of 2015 in 2016. Because of that volatility, it’s unpredictable, people just don’t know what to do with their investments. It’s just not performing.
And then the third challenge and the way that works is if you think about it, people are getting taxed. They’re making investments that are sometimes making money and sometimes not, taking away the gains, they’re paying fees, pretty exorbitant fees.
Now, nobody knows what they pay for their retirement accounts because it’s not on their statement, but there are research organizations out there, one is called the ICI, the Investment Company Institute. What they say is that the average person pays about 150 basis points or 1.5% on their assets. So if you had $100,000 retirement account as an example at a traditional financial institution, you could pay $1,500 a year in fees, right?
Mike: Whether your account is making money or not.
Edwin: Whether you make money or not, you’re paying $1,500 a year in fees, right? Or whatever their percentage is. We’ve seen it as high as 2.5%, believe it or not. But 1.5% I would say is a fair average. Some are lower, some are higher, but 1.5% is about a fair average. So when you layer in expensive fees and loads, the volatility and unpredictability of the stock market and then people are getting the hell taxed out of them, this was creating a problem. This was why people can’t get ahead. It’s not their fault because they don’t know what to do. They don’t know that there’s an alternative, but there is.
Mike: Yeah. It’s interesting in the real estate space. I know with self-directed IRAs, there’s been, in my opinion . . . I’ve really only been an investor for about eight years, but it feels like the last several years, there’s so much more awareness of self-directed accounts than there has been, largely because of you and people that are in their industry. But I’m guessing outside of the real estate realm, it’s a small single-digit of people that really understand this as a possibility.
Edwin: Yeah. People are largely unaware, right? Sometimes when I go out, I’ll talk about the secret self-directing. The reason why I call it a secret is it is a secret for most people. They’re not aware of it. They haven’t heard of it. If they have heard something about it, they ask their financial advisor about it and they say, “Oh, no, you can’t do that.” So yeah, people are largely in the dark when it comes to what’s actually possible and what you’re able to do with these types of strategies.
Mike: Do you want to maybe take a couple minutes, Edwin, and talk about . . . I think even inside of self-directed, when people start to understand, “I can do this. I can invest in real estate. I can invest in other things and have more control of where my investments are going,” then there’s still, I don’t want to say complexity, but there’s a lot of confusion that there are the long-term accounts. There are health savings accounts. There are Coverdell accounts for your children’s education and there are a bunch of things you can do. There’s really no restriction on why you can’t do them all, I assume, right?
Mike: There might be some technical reasons why you can invest in one account and not another, but typically, you can do pretty much all those things, right?
Edwin: Yeah. You’ll hear me, I’ll intermingle words from accounts to strategies to solutions. The reason why is because if there’s an account created, it was designed to accomplish a specific solution to solve a problem. So accounts fall into three different categories. One is what we call IRAs or individual retirement accounts. The second category is it will have a couple of kind of headlines, if you will. One will be small business retirement plans or company-sponsored plans . . . SEPs, SIMPLEs, individual or solo 401(k)s.
And then you have what we call tax advantage savings accounts, which under that category, you have education savings accounts and health savings accounts. So the first two categories are designed primarily to solve the problem of, “I want to stop working at some point in time and I want to have income coming in.” That’s what retirement is all about. I call it wealth without work because that’s basically what retirement is. We get the income, we maintain or enhance or lifestyle. We just don’t have to earn it anymore.
Mike: Yeah. Well, you learned it by working hard up front.
Edwin: Yeah. You worked hard. You saved. You invested smartly. You created a cash flow that that comes out that’s very predictable and consistent. So you earned it before you’re spending it and enjoying it now. So there’s that transition that takes place.
If you look at the tax advantage savings accounts, like a health savings account as an example, that is designed to handle the challenge of healthcare, meaning healthcare costs money. Medicine, treatment, procedures, doctors, it all costs money. So how do we get the best possible care and get the care we want and we choose and use the lowest dollar amount to be able to accomplish that with, if that makes sense?
Education, I can’t tell you how many people I’ve seen who have derailed their own retirement because their kids go to college or a vocational school. They don’t have the money so they take money out of the retirement account to fund the kids’ education so they’re not racking up $100,000 in debt and walking out of college with a mortgage without owning any real estate, effectively. But what they just did is they cost themselves their retirement because now they’ve got to go back and rebuild. So every account is actually a solution to a problem, you just have to know how to use it. That’s really the trick of it all. That’s the magic. So that’s really what we specialize in, actually.
Mike: Yeah. I want to kind of mention to folks . . . Edwin, we talked ahead of time, he’s offered . . . I think with a lot of self-directed IRA companies, they don’t necessarily guide you on what to do. They don’t really talk a lot about what are your issues and let’s help solve your problems. It’s more of transactional-type stuff. I know that Edwin and his team have really built a consultative approach.
So they really have a great system there because a lot a lot of people need their hand held. That’s why we’re talking about these things today. These are really important things. Edwin has actually offered a consultation, a really great opportunity for our listeners on FlipNerd. We put together a link. It’s actually FlipNerd.com/IRA.
So we talked about they’re not all retirement accounts. They might be health savings accounts and other things. At FlipNerd.com/IRA, check that out and you’ll learn more about what Specialized IRA Services can do for you. So just a little side note there.
Well, Edwin, today, I know in the back half of the show, we’re going to talk more about the process for where people go from here. I just want to take a couple more minutes in this first segment of the show. We actually have a question. So we started asking our listeners for questions. And by the way, if you want your questions answered on our shows, you can actually either tweet or post them on Facebook and use #FlipNerd or you can email them to [email protected]
Today’s question comes from Hannah A. on Twitter and her question is . . . I haven’t prepared you for this. I told you there was going to be a question, but I wouldn’t tell you what it was.
Edwin: I’m on the spot.
Mike: It’s kind of along the lines of what can you do or what can you not do. It’s, “What can I not do with real estate deals in my health savings account?” What are some things you can’t do?
Edwin: Well, really, the big thing that you cannot do with a real estate deal inside of your health savings account is buy a piece of real estate you own already. So in other words, if you want to set up a health savings account, here’s a really cool strategy. We’ve actually had clients implement this. We’ve educated people on this.
So let me give you a scenario and this will help answer that question. You established a health savings account. You can contribute to the count. The nice thing about is that every dollar you deposit into that account, you get a 100% tax deduction on. No matter how high your income is, it is a true tax deduction to you. You take that money in that account and let’s say you go out and buy a property. And we’ll have clients actually buy turnkey rental properties inside of that HSA.
That rental property spins off rental income every month, right? Six hundred to 800, on average, is probably what we see coming back to the account. Then when you go back to the doctor and you have a bill that you pay the doctor, where does the money come from? It can come from your HSA. But where’s the money in the HSA coming from? It’s coming from the rents.
So effectively, you have a piece of real estate, an asset inside that HSA account that is spinning off consistent income so whenever you go to the doctor, when your kids need braces, you need Lasik surgery, the money is there. You’re not paying for it anymore. Your investment is actually providing the income for that. That works.
But as an example, if a client said, “Hey, I already own a piece of rental property and I want to take my own personal rental property and put it in that HSA account.” That would be an example of something that cannot be done because of rules and regs in place. So can you buy a new investment property in your HSA? Yes. Can you take an existing property you already own and put it in your HSA? No. That would be the distinction.
Mike: I see. Awesome. That’s great. One thing on your example there, correct me if I’m wrong, if you use a Roth self-directed IRA or solo 401(k) if it’s a Roth variety, then those rents and things that you’re receiving to kind of pad your account are all tax-free, right?
Edwin: Yeah. So that’s the really cool thing about it. The HSA is a tax-protected environment. That’s one of the cool things about it. All these accounts we’re talking about are tax protected, meaning when your investments generate income or gains back to that account, you don’t pay any taxes on it that year. The nice thing about the HSA is that you’ve got a tax deduction going in. What happens when you take the money to spend on qualified medical expenses? Well, guess what? You don’t pay any taxes on that. It spends like what we call a Roth IRA, tax-free.
Mike: Right. So a health savings account is unique in that regard to where it’s kind of tax-free whether it’s a Roth or not, right?
Edwin: Right. So the HSA, people are sometimes familiar with traditional IRAs, which are tax-deferred, you get a deduction this year, you pay taxes when you spend money. Roth IRA, you put the money in after tax put you never have to pay tax again when you spend it. With the HSA, it’s the only account where they married the two tax benefits of Roth and traditional together in one account. So you get the deduction going in, you get tax-protected growth on all your income and gains and then you get to spend all that money tax-free on medical expenses. So it’s one of the most powerful accounts that the government has actually given us and it’s one of the most under-utilized accounts because again, people don’t understand how to make it work for them. They don’t understand the benefits.
Mike: Yeah. I know from just . . . I talk to a lot of people just like you do. I know there’s some complexity around there. So, folks who are listening, we’re about to jump into the second part of the show here, the taking action segment. But again, if you go to FlipNerd.com/IRA, you can talk to Edwin or a member of his team and they can help how your hand through this stuff. It’s fairly complicated the first time you go through and that’s why you need somebody there to help you out.
So, Edwin, are you ready to jump into the . . . really tell us how to take action today?
Edwin: Let’s do it.
Mike: So let’s kind of jump in. We just alluded to the fact that it’s important to work with somebody that can help you through these difficult things. Really, I guess the older I get, the more I see value in having partners that are experts in certain areas. I think especially as a real estate investor, you’re always frugal. We’re all cheap asses. I guess I can curse on my own show.
We try to do everything that’s value-based and sometimes you’re like, “Well, I don’t need somebody else to tell me what to do,” or there might be some fees or some costs association what that. I’ve changed completely on that recently. It’s like, “How much is it going to cost me if I do this wrong or if I screw this up?” We’re going to jump into the process of getting started down this path.
I think a lot of people, it’s like anything, even buying your first property, you just need some handholding. You need a mentor or a coach to help you get over that hump. Then you’ll look back later and say, “That’s not nearly as hard as I thought it was, but I needed somebody to help me get over that hump. So let’s jump into the process of how people get started using self-directed accounts.
Edwin: That’s one of the things that we focus on at specialized IRA services is because what we know is when people step into the self-directing world and we’ve been in this space, like I said, for over 10 years, right? It’s been a long time. What we’ve heard are two different challenges that people face when they decided to self-correct. So they say, “I don’t want to get away from the stock market or I want to diversify away from it at some level,” maybe not all, but they want to get some diversification going, get into some real estate notes, some other things.
So then, what happens is they have two common questions or issues when they step into that world. The first is what we call service and the second is support. Service is narrowly defined if you really drill down on it is as just is the platform easy to use? Is it simple? And are you fast at processing speed? So that’s one aspect of that.
The great thing about it is that we’ve built the fastest processing time in the industry, which we’re very proud of and we’ve been maintaining that for about the last eight months. We can process faster than any competitor. So we’re proud of that. The second part is support. This is equally important if not way more important.
I had one person put it to me this way. She transferred an account to us from another self-directed provider and she said the reason why I decided to transfer to you and your company is because every time I called my company and asked questions, they said, “The only thing we need to know is where to send the check. Where do we send the check? That’s all we need to know.” She said, “That’s just not helpful. I don’t know if I’m doing this right. I just don’t know. There are so many things I don’t know that I would like some help on and get some information.”
So the way that support begins and the best way to get started is that we offer a free consultation with one of our self-directed specialists. So in that consultation, they’ll spend 45 minutes to an hour with each individual person on the phone, they’ll be asking you different questions, “Tell us a little bit about your situation. Tell us a little bit about your background, your knowledge, your expertise, accounts that you already have set up that you might be able to work with,” understanding goals so they know how do these different strategies play in. What’s the right fit?
So the consultation, a consultation with a specialist, somebody who can actually take the time to understand your situation and the show you the different types of accounts that you qualify for and how you can use them to achieve your goals and solve the problems that you’re trying to solve. So that consultation really is the first step in the process.
At that point, the most important thing to figure out is, Mike, do you want to be in control of your financial future? Self-directing is not for everybody. If someone says, “I don’t know what’s going on. I want to just check out. I’m going to hand my money off to somebody and it’s going to do whatever it’s going to do.” You know what? Truthfully, self-directing is probably not for you.
But if you recognize that nobody cares more about your money than you do, that Wall Street doesn’t care about you and Wall Street isn’t going to take care of you, they’re going to take care of themselves.
Mike: They get paid either way.
Edwin: They get paid either way. Whether they take care of you or not, they get paid. They’ve ensured that. Then when you make the decision that you care more about your financial future, you care more about taking care of your family and meeting your goals because you deserve to meet your goals, you want more, at that point, you’ve made the decision effectively that, “I’m going to self-direct my account.”
The reason why you’re self-directing your retirement account is because of the tax benefits you get, asset protection, a lot of this we’re not going to get into right now, but when you make that decision, then you establish your self-directed account. Now, which account is right for you? Well, guess what? You find that out through the consultation because if you’re starting a brand new account, if you’ve got multiple accounts, if you’ve got money accumulated, all of those are considerations.
This is not a one-size-fits-all. Every client is unique, which is why we do the consultation. So we help you identify the right account or strategies for you and then you establish that account. That’s step number one in the process. That takes all of 10 or 15 minutes. No time at all. Fill out some paperwork, scan it back, done.
The second step in the process is . . . and here’s what happens, Mike. A lot of people want to jump to step five, but here’s what I always tell people. The people who get stuck and don’t proceed or make progress are the people who try to cram too many steps together at one time. So when we talk about taking action and actually moving this forward, I’ll give you an example. People say, “What am I going to invest in? I don’t have an investment identified yet.” Well, that’s okay because guess what? You don’t have an account. You don’t have any money in the account that you can’t invest.
So you have to take it one step at a time because, as an example, if you start an HSA and you have $5,000 in your HSA, you might be doing something different than if you have $100,000 in a Roth IRA. But until you have an account set up with money in the account . . .
Mike: You couldn’t do anything anyway. Yeah.
Edwin: There’s way to answer the question what you’re going to invest in. That’s why I say don’t get too hung up on trying to combine too many things. We take it one step at a time. Do you want to self-direct? Yes. Okay. We’re going to establish the account. The second thing is you’re going to put money in the account.
Now, how do you put money in a self-directed account? Well, you have some different places you can pull it from. You can make a contribution. So if you have money in savings, you can move that into a self-directed account. If you have an IRA, you can move that into a self-directed IRA. If you have an old 401(k) or TSP company-sponsored plan, you can move that.
Mike: Roll it over. Yeah.
Edwin: Yeah. You roll that into a self-directed account. Some people start with all their money. Some people start with some of their money. So these are all the considerations. But until you have the account set up and money in your account, it’s really hard to say what you’re going to invest in.
Mike: Yeah. Quite frankly, in the real estate space, we’re in the opportunity business anyway. Opportunities jump up, pop up and you need to jump on them and pounce. Even if you’re using hard money or some other way to finance, you need to have those things in place before you can do a deal because the deals come and go quickly. When the deal pops up, you’ve got to jump on it in that moment and you need to know that you have the mechanism in place to be able to do the deal. So that makes a lot of sense.
Edwin: I’ll tell you this is an interesting thing. On that point, I’ll tell you about an opportunity that a client lost out on. What happened was he had talked to us. He said, “Yeah, I know what I want to do this.” Then what he did was he wanted to find the investment first. He went out and he was working with a turnkey provider. He found this property. He liked the property. He liked the location, liked the numbers on it, liked the tenant in there, long-term tenant, wanted that particular property.
So he says, “Okay. I’m going to buy it on my IRA.” They said, “Do you already have one?” He said, “Oh yeah, it’s over at Specialized.” Well, he didn’t actually set it up yet. So, of course, he calls the same day to set up the account, transfer the money, do all this stuff. Well, we get out part done in 24 hours. The problem is what takes the time is wherever that money is sitting now, that financial institution . . . Wall street doesn’t like to let go of that money real quickly because they lose their fee revenue, right? So they’ll drag that out a little bit. That can take three, four, five weeks sometimes.
Now, we do everything within 24 hours. They’re taking three to four weeks, in some cases, to do it. Well, guess what? He lost the property because another investor stepped in and could close the deal within two weeks. So that’s why I say to take advantage of the opportunities like we see, you have to have your ducks in a row. That means having the account set up, having the money in the account, which takes you to the third step in the process, which is now you direct your money into a specific investment that you want to make. That’s really what makes this a self-directed account.
At Specialized, what sets us apart from the larger financial world is that we allow you to make your own decisions. We don’t sell you an investment. I don’t have the hot stock of the day I’m going to call you about. We don’t do that, right? That’s not what we do. What we do is we empower you, the client, to get control over your retirement account, which for most Americans is actually their largest investable asset and to invest in anything allowed by the government that you want to invest in. That’s the benefit of self-directing.
Mike: To take personal responsibility.
Edwin: Yeah. You take responsibility and you get the results that you generate. But that’s where see people generating more consistent, predictable results because they’re taking the time. They’re involved in a process.
Even if they’re working with a turnkey provider, the couple case studies that I’ve used so far today, what happens there is they’re looking at the investment. They’re looking at the provider. They’re looking at the manager on the property. They’re evaluating all these things, so when they’re making an informed decision, they know more about that property and how that property’s going to run than they know about the mutual fund holdings that they have right now. It’s night and day difference.
Mike: No doubt about it. Even if you know what’s in that mutual fund, that’s going to change tomorrow.
Edwin: So we see clients achieving different results because they’re more informed and they’re making better decisions for themselves.
Mike: I can vouch. A lot of listeners know this. I know you know this. We started a turnkey consulting business just recently in the past few months, PassiveRental.com. It’s kind of powered by the FlipNerd platform. We have partners all over. So a couple of things that you said that I’ll vouch for. One is there’s a lot of demand right now for rental properties, especially the turnkey model.
So when we get properties or our partners get properties, a lot of times, there’s a line. They put orders in to take a property. So you can’t wait around. You’ve got to have your financing in place to do a deal. But absolutely, we see that people are very engaged and sometimes traveling to the market. They want to go look at four or five different properties and choose the best one or maybe choose five or 10 sometimes. But it’s such a great thing.
If you think about the way I grew up investing is you just pick some company . . . I see you keep sipping on your Starbucks there. I invested in Starbucks at one point because I was going there every day. I was like, “Okay. Yeah, this makes sense.” Then at that time, the stock did horrible for the next two years.
But I wasn’t that informed. I was a consumer of it. But I was never like, “Let me go back in the kitchen here and check these operations out,” anything like that, but we see people doing that all the time with turnkey properties and people are much more engaged and taking personal responsibility, which is a great thing.
Edwin: If I could, if we have a couple minutes, I can share a great case study about taking action and how this kind of comes together.
Mike: Yeah. Absolutely.
Edwin: I said at the beginning there are different challenges that people face. The three I shared were very common challenges that we all face. We all have those three things in common. But let me give you a specific situation on how self-directing can actually solve a much larger problem.
So we had a client who was about 50 years old. I can’t remember exactly. He was like between 50-53 years old. He lost his job. He lived down in Atlanta, lost his job. He knew at his age it takes about 18 months on average to find another position and it will probably pay him half of what he was making before. So he’s got a mortgage. He’s got kids in college. He’s got a car payment. He’s got life, just like everybody does. He says, “Oh my gosh, how am I going to get through the next 12 to 18 months before I get a job?”
So his only solution was, “I’m going to draw down on my retirement account because he had the company-sponsored 401(k) plan and he says, “I can start taking distributions. Now I’m going to pay taxes and penalties on that money because I’m not of age yet. So I’m going to draw down on that money, but that’s the only way I know to pay my bills.”
So, fortunately, he had called us. We looked through the consultative process. We looked at this and said, “Wait a minute.” Hey says, “The problem is I’m going to end up drawing a lot of money out of this account and I’m going to pay a lot of money in taxes and that’s going to derail my retirement. I really wanted to be able to retire at around 60 years old, 62 and I don’t think I’ll be able to do it now because this is my only place to go to get money.”
So we said, “What about this?” We literally outlined a strategy. This gentleman had about half a million dollars accumulated in his company-sponsored plan. So that’s a pretty good amount of money. But here’s what happened. He ended up transitioning, redeploying that money from the mutual funds into turnkey properties. So keep in mind now all these properties are paid for in 100% equity and they’re all spinning off income.
So now what he’s doing is he’s distributing the income from the rents every month to himself. Is he still paying taxes and penalties because he’s not of age yet on those distributions?” Yes, he is. But here’s where it’s cool. He’s not drawing down on his assets, so he hasn’t derailed his retirement. He hasn’t had to change the date and when he gets back to work, guess what? He stops taking distributions. Taxes and penalties stop and the cash begins to accumulate in that account so he can buy more properties.
Edwin: So it’s just again an example of when you’re working with someone who’s going to take the time to understand your situation, you can create a strategy to solve any problem you have. That’s one my favorites because we were able to preserve his retirement, didn’t have to change his date of retirement and he was able to get . . . he’s getting through the lull of not having income.
Mike: Yeah. That’s great. I know in a number of people that we’ve talked to on PassiveRental.com in the turnkey business, a number of people that I’ve talked to, they have a plan, like, “I want this number of properties because I want to retire in four years,” or whatever their plan is. And I think that’s the right way to think about this stuff.
I think part of the problem with investing outside of the self-directed realm is that you just start to become so disconnected, like a portion of my check goes there, but I don’t know what it’s doing, you’re never talking about what your plan is, like why are you trying to do these things, what are trying to accomplish. So that’s powerful stuff.
Hey, one thing I wanted to clear up. I know the answer to this, but I want to throw this out there because I know a lot of people ask this question is we’re talking about buying properties and all this stuff in your account. But just to make sure that people understand, you don’t have to put a half-million dollars in your account, you don’t have to put $80,000 or $100,000 in your account.
You can roll over as low as even a couple thousand dollars to get started because one of the things that you can do, and we probably won’t get into all the details here, is you can actually use your retirement accounts and can actually borrow money to leverage up investments. Am I saying that right, Edwin?
Edwin: Yeah. So one of the things that people aren’t aware of is what I call a legal backdoor to the contribution limit. The only thing we’re limited on when it comes to our retirement accounts how much we’re allowed to take from our earned income and deposit or move into our self-directed or any retirement account, for that matter. That’s the only thing that’s limited. There’s no limit on how much money you can make. That’s the only limit. The thing is I’ll give you another example.
I had a client. His name was Gary. He’s 53 years old, opened up a Roth IRA. That was his first retirement account ever, never started a retirement account. Fifty-three, wakes up, says, “Oh my gosh, I have no money.” He was an attorney. He said, “I don’t want to work the rest of my life. What am I going to do?” He came to one of my seminars and opened up a self-directed Roth IRA, put $4,000 in it because that’s all he could do back then. The contribution limits change from year to year sometimes. So he had $4,000 in that account. He said, “What do I do with $4,000 now?”
So we spent some time, again, helping him create a strategy. That’s one of the things we can do. So we developed a strategy where he was borrowing money inside of his Roth to purchase real estate. He would have a mortgage on that property. That’s why I say it’s a legal back door to the contribution limit because the rules allow you to borrow money in the account. It just has to be done a certain way, but we can explain that. You’re allowed to borrow money in the account if you don’t have enough money to do an investment.
So clients will borrow money, use some IRA money as a down payment, borrow the rest, buy the property, put a tenant in there, use a tenant to pay off a note and then they have a free and clear property that’s going to cash flow when they want the money in the future. So there are so many cool, creative things that you’re able to do.
Mike: Yeah. I know there are some complexities with this and I won’t try to solve those today, it’s typically referred to as a non-recourse loan that your account has to borrow, but you can even, if you had as low as a few thousand dollars, you can essentially lever up, use a non-recourse loan to buy a house that you might wholesale, that you might rehab, kind of fix and flip and sell it. All those profits can go right back into your account, right?
Edwin: Yeah. Absolutely. So in a nutshell, that’s how it works. You put some money down and like I said, Gary started with $4,000. We have clients open up accounts with just $500 of contribution in it because the key is that one of the things I always tell people, another quick example, when I was in college, I was a broke college student at The Ohio State University . . . they’re very particular about that “the” part, if I have any Buckeye fans you know what I’m talking about or anybody that hates the Buckeyes.
But the funny thing is that I set up my very first retirement account when I was a broke college kid at Ohio State University. I remember my friends saying, “You don’t have any money. You’re a broke college kid. Why would you have a retirement account?” They said, “You can’t afford to save.” My response was, “You know what? I can’t afford not to save.”
I started out saving $20 a month in a retirement account. That’s all I could do back then. But you know what, because I started and I started somewhere, I am way ahead of all my friends who thought I was an idiot and thought I should be spending $20 on beer because that was a better use of the funds. Maybe it would have been, but in retrospect, it clearly wasn’t.
So it’s about starting somewhere. That’s the great thing about self-directing. With $500 on the account, you can get going. There are investment strategies you can implement with just $500 on the account. So any amount works.
Mike: You can lend. There are a lot of things you can do. Most people, $500 isn’t going to solve their problem. There are a lot of things you can do. If you’re busy and you don’t have the ability to go out and find properties and do all the stuff that full-time real estate investors do, all full-time real estate investors need funding, lending, which is much more passive and less involved than certainly doing the deals yourself. There are a lot of ways you could use that money.
Edwin: Yeah. Absolutely. There are so many different options out there that we see clients implement. It is not uncommon. For a rehabber, as an example, he gets into a rehab and needs another $5,000, $10,000 because something popped up along the way. You’ve got $5,000-$10,000 in the account, you can do a loan to the rehabber on that investment property and make 10, 12, 15%, depending upon whatever you negotiate with that rehabber and you can put small dollars to work.
And $5,000-$10,000 may not sound like a lot of money, but when you put it in perspective that you can put your money out there, you can get 8, 10, 12, 15% doing something different where your money is secured by a real asset, that’s a huge deal. If you do that over a period of time, that’s going to grow immensely.
Mike: Yeah. Awesome. Well, Edwin, I know we can talk about this for a long time, sometimes we do. I will tell you one of the things I appreciate about Edwin and Keith on Edwin’s team is that I’ve had a number of conversations where I’m an innovative guy. I like to think, “Can I do this?”
I think a lot of times real estate investors, if you’re an entrepreneur, you’re always thinking outside of the box. So “Can I do this in my account?” and they’re like, “Yeah, absolutely.” Or maybe they’ll take it to another level where they’re like, “You can actually do this . . .” and you’re like, “Wow, I had no idea.” Or tell you, “No, don’t do that because you’re going to blow your account up. I think it’s important to have those folks in your corner.
So, again, if you go to FlipNerd.com/IRA, you can get in touch with Edwin and his team and learn more about a special offer that they’ve made for us so that you can have some consultation and get started. Other than that, Edwin, any other ways that folks can get ahold of you? Why don’t you share any other final words you have on how they can take action and get started?
Edwin: Yeah, well you can always find us on the web, www.SpecializedIRAServices.com. One of the best ways to get some more information too from us is to like us on our Facebook page. We have a lot of fun with Facebook. We do a lot of videos. You’ll hear from clients on our Facebook page. We do some fun, crazy posts. I won’t refer to some of the crazy ones. But we have a lot of fun with it. You just go out and you find us and you can find us at those outlets as well.
Mike: Awesome. Edwin, thanks so much for joining us. Everybody, thanks for listening today. We’ll see you next time on the FlipNerd Expert Interview Show.
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