Today’s REI Classroom Lesson

Clay Malcolm explains that there are investors with money in their IRA just waiting to be used for investments.

REI Classroom Summary

With some education on how the process works, these relationships with investors can provide you with money needed for your next deal.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Clay: Hi everyone, and welcome to the REI Classroom. My name is Clay Malcolm from New Direction IRA. Today we’re going to be talking about raising IRA money for your projects.

Mike: This show was sponsored by

Clay: Many of you may know that IRAs whether Traditional or Roth, SEP or SIMPLE, or even HSAs can invest in real estate. And so if you’re putting together a deal in raising money one of the first and foremost things you might think about is that those IRAs that your contacts or your associates have might be investors in the projects that you’re putting together. A lot of people don’t realize that that money can be invested in real estate projects, so it may be one of the situations where you need to introduce that concept to them and just say, “Listen, if you have this money on the sidelines or it’s not performing the way that you would like it to or as well as it could be in this project, you know, maybe that’s something to consider for your finances.”
So really, the person that you already have a relationship with has two pots of money almost like they’re two different investors. One is their personal finances and the other is their IRA. And IRA is a different legal entity, it has a different name, different tax benefits, and it also is controlled in a different way, so it’s being held in trust for the IRA holder so it’s actually coming from the IRA provider. But both of those pots of money so to speak are controlled by the same person, so you may already have a relationship or several relationships that could yield two investors instead of one.
Now, one of the things that I see most often from real estate investors who are raising cash and using up the IRA tools that they need a couple of things from their provider. One is they need some education. Once you have that education, you can deploy it any way you want. But usually when you’re introducing that concept that somebody’s IRA can participate in your project, you need to give them a little bit of IRS background, make them feel comfortable, have them understand the dynamics that’s to play there, right, because we are talking about people’s retirement money.
So strategic education is an important thing, so make sure that you get that support whether it’s just your learning or tools from a provider or from the IRS or whoever you get them from. But being able to transmit that information to investors is probably going to be part of the equation that makes it successful, excuse me.
The second part is it’s got to be pretty easy. You know, one of the things that the revolutions I think that we’ve seen over the last few years certainly in your personal banking is that it’s become very electronic, very fast, and pretty intuitive. IRA investing is trying to catch up now but there’s a very wide range of technological offerings from providers. So definitely look to utilize a self-directed IRA provider that has technology that helps your investors to realize their returns.
So for instance if you’re going to have your investors loan you money for a project, maybe look for a provider that will accept loan payments back to the IRA electronically or things like that and they will vary provider by provider. So that’s a good way to look for a partner in this particular instance because that technological convenience will make it so that the investor will think, “Okay, well, this is something familiar. I understand how this works.” And hopefully, they’ll be able to invest in further projects as well.
But the key part of this all is really just understanding that when your courting that investor, to kind of put yourself in their shoes and understand what the ramifications are. And one of them I’ll also share with you before we go is just that when you’re talking about investment participation, usually you’ll have two choices that’ll either be loan based or equity based. Equity based, both of those are fine with the IRS by the way, but equity based is likely to have some unrelated business income tax associated with it for the IRA account holder.
Now, that’s not a penalty, there’s nothing wrong with it. But it is a little bit of an extra effort to file a 990-T, to file that, to make sure that you pay the UBIT that’s associated with it. Loans on the other hand never really have a UBIT calculation associated with them because there’s an exception in the code that says that loan participation is passive and so it’s not, because the return is already determined, there’s no participation in the profits of the transaction itself.
So those are the types of things that would be great for you to understand as you go out into the world and hopefully raise money using IRAs, but there are a lot of IRAs on the sidelines and you probably have a lot of people who are believers in the projects that you have and just don’t know that their IRA could be an investor right alongside their private money. So hopefully that helps and we’ll see you next time in the REI Classroom.

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Clay Malcolm
Clay Malcolm is the Chief Business Development Officer for New Direction IRA. In this role, he oversees marketing, education programs, and facilitates the training of business development and client representative teams. Clay has shared his expertise regarding self-directed IRAs and HSAs at speaking engagements across the United States. Currently, he teaches continuing education classes for CPAs, CFPs, and real estate professionals as well as presenting informational sessions for retirement investors looking to acquire precious metals, real estate, private equity, and more. Clay received his Bachelor of Science degree in communications from Northwestern University.