Bill Neville (02:57):
If you do it in the same year, if you contribute to a pre-tax account and then immediately convert it all, and you have no money left inside previously you got a tax deduction on, then you don’t have to pay any taxes because you did deduct it on your taxes. But if there’s any portion of what’s in your IRA that you took a tax deduction on then you’re going to have to pay taxes when you do the conversion because you’re moving it from a post-tax account or pre-tax account.

Robert Leonard (03:24):
The only caveat that I would make, and what you said is absolutely right, but the caveat or change that I would make is what I see sometimes from entrepreneurs or even side hustlers is they’ll take that tax distribution or deduction I should say that deduction in the year in which they make the contribution to the traditional. And then in the future years, when they roll it over to our Roth, they do have to pay tax but you do that in a year in which you have a paper loss from your business and therefore it offsets that. And now you’re essentially getting the double benefit of the tax deduction in the year that you made a contribution. And then you’re also getting the tax benefit of getting into the ROTH IRA without having any tax.

Bill Neville (04:02):
That’s a really smart strategy. And that’s not technically considered a Backdoor Roth, right? A Backdoor Roth is technically when you do the conversion in the same year that you made the contribution and you didn’t take the deduction, right? So that’s where sort of differentiating that, otherwise you’re right. It’s just a conversion. You can make a pre-tax contribution. You’re free to convert that to a Roth anytime you want, you’re just going to have to pay taxes on whatever you convert. But if you do a conversion in a year that you’ve got a loss, then maybe ultimately you don’t have to pay taxes because all it did was offset the loss. I mean, that’s my point.

Robert Leonard (04:36):
And this is totally not a tax-specific episode that we don’t have to go down this rabbit hole too much longer, but is the benefit of a Backdoor Roth is that to get around the income limitations that are set?

Bill Neville (04:47):
That’s exactly the purpose or the thought process behind that. Is that if you make a certain income over a certain income, you can’t make a direct contribution to a Roth. So if you want to get money into a Roth, the only way to do it is to put it into a pre-tax account and then convert it.

Robert Leonard (05:03):
Does it make sense to have an SDIRA if you only plan on buying traditional stocks, bonds, ETFs, or mutual funds?

Bill Neville (05:11):
No, it doesn’t.

Robert Leonard (05:13):
What if you do that in the short term? So let’s just say you plan on doing that for a couple of years, but you think in the future, you might want to make a private placement on a real estate or something?

Bill Neville (05:21):
So at that point, you can transfer the money over to a self-directed custodian. I mean, we provide a trading platform, right? So we’re not a brokerage firm, so we don’t have our own platform, but we do provide through our own with the online portal access to a trading platform that we use an outside company for. I mean you can open an account with us, you can throw money in stocks and mutual funds if you want, but we’re not going to have a list of funds for you to choose from that you might get from one of the brokerage firms where they’ll have a list of funds and they’ll have detailed information and you can go and they may even have suggestions based on your age and stuff like that. We don’t provide all that, right? All is we have as a platform, you have to go and do your own due diligence, come up with the CUSIP, find the fund that you want to invest in and come back to our trading platform and enter the CUSIP in and then place the trade.

Bill Neville (06:08):
So we do have the trading platform and the ability to do that. But if you’re looking to invest in stocks bonds, mutual funds, you might’ve as well avail yourself of the advisory surfaces that a brokerage firm provides. I mean, that’s part of what you get from them is you do get advisory services. If you’re looking to just get some NovoEd funds and maybe some index funds where you’re not going to have to pay any fee, and maybe some of those brokerage firms, aren’t really encouraging you to do that, again, all you have to do is come find a CUSIP and come back to our trading platform and enter it in. And by the way, our trading platform doesn’t… We have a completely different fee structure. We basically don’t charge a fee for the trading platform and it’s like a dollar per trade. So essentially, if you wanted to use our trading platform, like our typical fees that we have on our fee disposure. Those are for the alternative assets. Those are for the private placements in the real estate and the notes and things like that.

Bill Neville (06:56):
The trading platform is just something we provide for people who are looking to park their money somewhere, while they’re trying to like maybe they getting rental income in and they were waiting for it to build up, or they’re out there looking for a property, or they’re looking for something to invest in, they don’t want to have the money just sit in cash.

Robert Leonard (07:11):
One of the most fascinating stories that I’ve ever heard about IRAs was from a recent story that broke about Peter Thiel having a ROTH IRA that is worth $5 billion. And I’ll put a link to a specific article that I really liked for anyone that’s listening that’s interested in reading a little bit more about this in the show notes. But the news article wrote that over the last 20 years, Thiel has quietly turned his ROTH IRA into a gargantuan tax-exempt piggy bank, confidential IRS data shows. Using stock deals unavailable to most people, Teal has taken a retirement account worth less than $2,000 in 1999 and spun it into a $5 billion windfall.

Robert Leonard (07:53):
And put that into perspective, the average ROTH IRA was worth just under $40,000 at the end of 2018. The reason that this is relevant to our conversation today is because he didn’t use a normal ROTH IRA that most people probably have. What he did wouldn’t be possible with that type of IRA. He had to use a self-directed IRA. And that’s exactly what we’re talking about today. So give us a bit more detail on what Teal did exactly to amass his fortune using an SDIRA.

Bill Neville (08:23):
I haven’t read the article. After it came out I’ve had a handful of people that called me and wanted to ask questions. And they said, “You probably read the article, blah, blah, blah.” It’s like, “Actually I haven’t,” but I don’t need to, to know what he did, which is essentially invested in companies that were pre IPO. And he invested in those companies inside his ROTH IRA. So the investment and you’re right, not accessible to others because until the JOBS Act passed that allows for people to invest in startup companies and things like that, typically investments to start-up companies were only available to people who were maybe family members of the company, people who were starting up the company and then largely institutional investors or people that have certain access the regular population doesn’t have. And also you typically have to be an accredited investor, which means you have to have a certain level of income, $200,000 for two years and or certain assets worth a million dollars not including your home.

Bill Neville (09:19):
Not a lot of people are accredited investors. And so simply he invested in pre IPO companies inside his IRA. So it was held in the name of his ROTH IRA. And then when the companies went public, it went public and he made a ton of money. But most of the time privately held companies when they go public, all of a sudden those stocks or those options that you held, all of a sudden became worth a ton of money. And he took it and he bought more privately held companies. And he clearly has the knowledge and also the access to be able to invest in pre IPO companies that the majority of the population just doesn’t know about and also probably doesn’t have the expertise and knowledge to be able to pick out which one’s going to be an Uber versus which one’s going to be some no-name company that none of us had ever heard about because it started up and failed and people lost money on it. He probably invested in the Lyfts and the Ubers and who knows? One time Google was a startup.

Robert Leonard (10:11):
Yeah. One of the most popular investments and successful that he had in that IRA was Facebook. He was one of the early investors. I think he might’ve been the first investor outside in Facebook. And so he got very, very, very low valuation in terms of what it’s worth today.

Bill Neville (10:24):
He probably made a billion dollars on Facebook alone.

Robert Leonard (10:27):
I wouldn’t be surprised if it was even more than that, yeah.

Bill Neville (10:31):
I mean, all it takes is one, right? I mean, you throw… I don’t know, you have $10,000 and throw $1,000 into 10 different startup companies. You only need one of them to be successful.

Robert Leonard (10:40):
Yeah. And you mentioned earlier too, that you can technically invest in businesses that you’re a part of. And so part of what I read was that Thiel did this. He was part of some companies. He didn’t necessarily maybe on the board or he’s a part of the management team. And he didn’t necessarily own 10% because these are really big companies. So you can own 5% and that’s still a massive amount. And so that’s partially what he did with this IRA.

Bill Neville (11:04):
And they were held in the name of his IRA. That’s the key thing to recognize here is that those investments, he took his money, he put it in a ROTH IRA and he instructed his custodian to go purchase those shares, right? And so the companies created a purchase agreement or subscription agreement in the name of the investor on those agreements was Peter Thiel’s ROTH IRA, right? It was the custodian name for the benefit of Peter Thiel and his account number. If they’re using a similar naming convention as The Entrust Group. Unfortunately, it wasn’t with The Entrust Group. Whoever it was, the custodian then whenever it paid out and eventually it probably went public, and then he liquidated went sold the shares on the open market that cash got paid directly to his Roth. Then he just kept doing that over and over and over again. And he kept growing and growing it and growing it and everything was done within his ROTH IRA.

Bill Neville (11:55):
He wasn’t withdrawing the money. He was instructing his custodians to go make the investment. So he was working directly with the companies to draw up the agreements in the name of his IRA, and then submitting those agreements to his custodian saying, “Okay, custodian send my money to this company.” And then for the period of time that the IRA held that he could log into his account and on those statements, it would show that company name at whatever value he purchased that. And so eventually it increased in value and went public. And now all of a sudden it increased by 100 times each time he did it.

Robert Leonard (12:27):
Just for more perspective, you work for Entrust, and we’re talking a little bit about Entrust and you guys have been in business for a while and you’re not small by any means, but you have about $4 billion, maybe a little more in investor assets. Thiel had 5 billion in just his account. I mean, that is just absolutely incredible.

Bill Neville (12:46):
We hold a ROTH IRA, that’s worth a few million. We have somebody that has a Roth worth, a few million, and then some that are in that have some pretty big dollar amounts. But I think that’s the biggest one that we have.

Robert Leonard (12:56):
Have you ever been able to see what types of investments they were making and you don’t have to give specifics like, “Oh, it was this company or that company,” but was it private or?

Bill Neville (13:05):
I just know that I have seen we got… I’ve seen reports and stuff. And it’s like, particularly when I was in Compliance, right? When my role with the company was in Compliance and I used to have to put together certain custodial reports and things like that. I used to see kind of that information, but now I never went and looked at the details of it. I never really thought about it, but now that you’re putting it in my head, I might go do that just to go see how they went and pulled that off.

Robert Leonard (13:29):
If I had to make them educated guesses, my guess would be probably private companies, maybe they made a piece from real estate, but probably a lot from private companies.

Bill Neville (13:37):
Yeah. There are some interesting things you can do in real estate where you can instead of buying real estate, you buy an option to purchase the real estate. And then you can sell that. I forget what that’s called exactly. But I’ve seen people take a very small amount of money and turn it into a very big amount of money in a really, really short period of time that I don’t really understand it. I’ve seen it.

Robert Leonard (13:58):
It was interesting too, in the article, Thiel is I guess the pinnacle. Reports say that it’s the largest IRA in the US. So Thiel is kind of put on this pedestal there or some people thought it was not right for him to do, but that aside what’s interesting is he’s not the only one. And I don’t have the exact dollar amounts in front of me, but Ted Weschler who works for Berkshire Hathaway. There’s a lot of people. Berkshire Hathaway, Buffett has one, that’s worth a couple of millions.

Bill Neville (14:23):
When he was running for president Mitt Romney, there was a lot of press associated with the fact that he had a ROTH IRA that he turned into a ton of money and it was a self-directed retirement account. I mean, you do have some of the wealth management companies and some of those brokerage firms, they will do some non-traditional assets for their really high net worth clients. So Peter Thiel, for example, I doubt that he has his account with like an Entrust or one of our sort of main competitors. My guess is he probably has an account with one of the big firms and they give him white-glove treatment so that he wants to invest in a private company, they’re like, “Yeah, we’ll process that for you only.” Right?

Bill Neville (15:03):
That’s when I think of Mitt Romney and some of those guys, they don’t need to come to an Entrust Group because it just exists. That’s just the world that we live in, is that the higher net worth those major firms are still going to open their accounts. And although they typically are going to only hold publicly-traded stock bonds, mutual funds if Peter Thiel says, “Hey, I want to invest in this prepaid pre IPO company,” That company is going to be like, “Sure, we’ll process this for you.”

Robert Leonard (15:27):
He might even have his own SDIRA company. Who knows?

Bill Neville (15:31):
He might. I haven’t read the article. So I definitely was… I don’t know when it came out whether it was last week or two weeks ago, but very shortly after that, I got a call from somebody who was like, “Oh, I’m sure you read the article about Peter Thiel,” I was like, “No, actually I’m in my own little bubble. I’m too busy watching sports.”

Robert Leonard (15:48):
Yeah. But there’s a lot of people that do it. I mean, you mentioned Mitt Romney, Buffet has one that’s worth 20 million. One of Buffett’s proteges has one that’s worth over 200 million. I’m not saying it’s easy. It’s not like you’re going to turn yours into that necessarily. I mean, it’s possible, but it’s not necessarily the truth, but…

Bill Neville (16:02):
I mean, Mitt Romney did his with bank capital. He made a lot of money by investing his ROTH IRA through transactions that were occurring with bank capital, where he obviously sat on the board. That was where he made all his money. So they all have access to knowledge in…

Robert Leonard (16:17):
Investments that we don’t.

Bill Neville (16:20):
Honestly, I mean, the SEC probably should be taking a little closer look at the guy, whether there’s insider trading going on in some of this stuff, but that’s none of my business.

Robert Leonard (16:28):
Let’s go to the complete other end of the spectrum. Is there a minimum account amount that’s required to open an SDIRA?

Bill Neville (16:36):
No, it does. I mean, some custodians, some in our space have that now. Bear in mind, we do have a minimum annual fee of $199. So you probably don’t want to open an account and invest $1,000 unless you expect it to turn into 100,000 or 200,000 because $199 annual fee at above a $1,000 account is going to be 20%. So you need to be sure that your investment is really going to turn into something if you’re willing to pay 20% per year of whatever you are paying, right? So we don’t require a minimum, but just from a fee standpoint, you want to look at what your expected return on investment is and then calculate like, “My fee is a percentage of what I’m investing. How much is that reducing my overall expected return on investment?”

Robert Leonard (17:21):
Does the fee have to be paid out of the IRA or can you pay it out of pocket?

Bill Neville (17:25):
It can be paid out of pocket. Yeah. You can put it on a credit card and pay it. And it used to be tax-deductible up until a couple of years ago when they changed some of the tax rules, they removed miscellaneous fees as a tax deduction that used to fall under miscellaneous fees that you can deduct on your taxes, but not anymore.

Robert Leonard (17:41):
I know there’s not necessarily a specific minimum you just mentioned that, but is there an amount that you as SDIRA expert that says, “If you’re over this amount, it probably makes sense for an SDIRA. If you’re under this amount, it probably doesn’t really make a lot of sense.” Is there kind of a threshold there that you start to think like, “Yeah. Alright. Maybe this makes a little bit of sense?”

Bill Neville (18:01):
I mean, I honestly had a conversation with someone today who is looking to invest in something that it’s a transaction that could potentially turn into a lot of money that’s looking at investing $50. So his fee is going to be 200 to $199 a year for $50 investment. Right? For however long it takes. But as he said, it could potentially turn into a million dollars. So my default would be maybe like 20 grand. For me when I look at it and go because we have an annual fee of a minimum, 199, and 199 divided by 20 grand is 1%. And that’s a kind of a fee that a lot of mutual funds. So I have that in my head, but there really isn’t. It does not come down to what you expect the investment to happen to. And if it’s worth like you have potentially to take a $100 or $1,000 and turn it into hundreds of thousands of dollars in let’s say five years, it might be worth it to throw a flyer at that and pay us $200 a year at the chance that that might happen.

Bill Neville (18:58):
And if in five years it doesn’t happen. You’re out of grant, right? You’re basically out $1,000 dollars and the investment didn’t turn out and $1,000 over five years in New York might not be all that big. It might’ve been worth the chance that something could really turn into significant. But if you’re looking at something and you’re saying, “Okay, the expected return on investment is 8%.” You don’t want to take and put $10,000 in it. Now we’re taking 2%. We’re charged paying $199 a year. 2% of that 8% is now going towards us. Your return on investment is now 6%.

Bill Neville (19:29):
The 6% worth it to you? I don’t know, that’s up to you to determine whether you’re better off putting it somewhere else you can get greater than 6%. But the key is you need to be aware of that, right? If you’re getting an expected return on investment, know that our fees, if you’re investing $100,000 again our fee of 299 a year is 0.3%. So if your expected return on investment is 8%, our 0.3 is right to reduce net to 0.7%. That’s a nominal fee. It really depends upon the return on investment that you’re expecting to get out.

Robert Leonard (20:00):
I want to make two points about the fee and I’m not incentivized by interest or anybody else to say this, but, and one of them is kind of opinion, one of them is more fact. But the first one is when I think of this fee, $200, $300, whatever it might be since it could be paid out of pocket, it’s not necessarily coming out of my investment. I just personally don’t really think of that as like a fee of my investment really. I think of it more like a credit card annual fee, right? People pay $99 credit card, annual fees, and you get no investment on that. Right? So you go out to dinner and it could cost $100 or $200.

Bill Neville (20:34):
Hopefully, you get miles or points or something like that. Right. I mean, that’s kind of what you paying for.

Robert Leonard (20:40):
If you’re not paying interest, then you’re negative.

Bill Neville (20:42):
If you’re not paying interest, yeah. But your return is that you get nourished, right? I mean, there’s always going to be a cost-benefit associated with things. And my point, ultimately, associate, I agree with you. It’s not coming out of the asset, the investment itself, but anytime you’re making investment and you want to get an expected return on investment, you should figure out what the net return on investment is going to be, not just the growth, right? And so when you figure out a net return on investment, part of that is going to be netted out by whatever fees you have to pay in order to hold that investment. And that includes our fees. So yeah, it’s separate, it’s being paid somewhere else because we have a flat process fee. And by the way, not all custodians have that, right?

Bill Neville (21:22):
So I don’t want to give them whatever self-directed IRA custodian you have. If anybody who’s listening, talk to your custodian, find out how their fee structure is because there are some that only have a fee based on the value of the account, right? And the more you hold the account, the lower that fee becomes as a percentage, but it’s still a percentage. In our case, we do happen to have a flat process fee. So the more you invest sort of the lower that percentage is going to be just because the fact that it’s flat per asset fee. So we got people are investing half a million dollars sometimes. $300 a year on a half a million-dollar investment what is even that? Like 0.0 something percent. So marginally I agree with you. But I do think that people should at least, again, when they’re thinking about… When you’re making investments in your retirement account, you have a lot of options on what you can invest in.

Bill Neville (22:09):
And the whole point of a retirement account is to grow it. We make investments because we want to grow our retirement accounts. At some point, whenever we retire we don’t want to just necessarily rely on social security. We have a lot of money to be able to travel and do all the things that we want to do. You have a world of options, right? Self-directed IRAs open you up to a world of options or stocks and mutual funds. There’s a world of stocks and mutual funds that are out there to invest in. When you are trying to figure out what to invest in, you want to diversify and you want to invest in ways that are going to grow the retirement account. And so fees that you pay impact how much you’re going to grow that retirement account.

Bill Neville (22:45):
And so, including with mutual funds, don’t discount that when you’re investing in some fund, they’re taking a fee just because you’re not seeing it just because it’s not an upfront fee, like interest charges of self-directed custodians charge don’t take there isn’t a fee. There’s going to be a fee. And so just know that and then invest accordingly.

Robert Leonard (23:04):
Yeah, you’re absolutely right about the net return. And considering that not the gross return. The last thing I want to touch on for the fees before we move on is that the 1% doesn’t scale. And what I mean by that is it’s 1% at a small balance. But like you said, on a 500,000, half a million-dollar account, it’s not 1% anymore. And so a lot of times people listening to this show might hear 1%, know that the math, if you look at the math of how a 1% annual fee impacts your returns, it can actually be pretty significant. The disconnect there is that 1% scales with the balance. So if your balance starts at 10,000, goes to a million, now your 1% is on the million in those future years. So the 1% is really detrimental as your balance scales, whereas in this case, the fee is fixed.

Robert Leonard (23:47):
So the 1% fee doesn’t always stay 1%. It goes to half a percent or lower and so on and so forth. So I want people to be very aware of that in that you’re not… There’s a lot of information out there that says, “Don’t pay a 1% or 2% fee. It’s massively detrimental to your returns.” And that’s true, but in this case, it doesn’t scale. So it’s not necessarily quite like that. I want to dive deeper into real estate. You’ve touched on it a couple of times so far throughout the conversation. But starting at a high level, what are all the different ways that someone can invest in real estate using their SDIRA?

Bill Neville (24:17):
You name it, commercial, residential, multifamily, offshore, undeveloped land. Have I missed anything? You can invest in all written notes that are collateralized by real estate, trust tax lanes that are ultimately a real estate they’re pulling up mean if they default and you can foreclose on the property, like those are all fall under real estate. You can then invest it, you just can’t use it for personal use, right? It has to be for investment purposes only.

Robert Leonard (24:45):
If an SDIRA has enough money to buy a property in cash, what is the process for the actual acquisition? Do the purchase and sale just go in the name of the SDIRA and pretty much everything else is the same?

Bill Neville (24:57):
In all the paperwork has to be submitted to the custodian for review and signature. So yeah, all the closing paperwork, the purchase contract, all the closing documents, the title company is involved, the escrow people are involved. It’s all works the same, except that it’s not an individual that’s making the investment, it’s a retirement account. So everything’s done in the name of the IRA and all the paperwork has to go to this custodian for review and signature, and then we send the money out. So we don’t send the money, if you’re using your retirement account, we don’t send the money to you and then you go buy the property. You come to us and say, “Okay, here’s the property I want to buy. Here’s the contract, here’s all the paperwork.” And then we send the money directly to the seller to escrow or wherever you instruct us to send the money.

Bill Neville (25:39):
So, from a closing standpoint, the IRA being involved typically shouldn’t really add any time to it. I mean, most closes take a few weeks to a month, month and a half, or so. You’re probably not going to close it within a week or two, right? Like that’s going to be a little more challenging just because of the back and forth with the paperwork. But if you’re going through a typical, let’s say 30-day close, the IRA shouldn’t add any time to it because it’s just a third party that has to be the reviewer and signature of the paperwork instead of the individual account holder signing everything themselves.

Robert Leonard (26:11):
Have you seen any situations where a seller is turned off by the idea of an SDIRA purchasing the property just because of the preconceived notions that it might be difficult or complex?

Bill Neville (26:22):
Yeah definitely. No question we’ve had that happen with account holders, but I think most sellers want to sell. And in particular with an IRA, a lot of times it becomes a CAPS transaction, as opposed to having to go through obtaining a mortgage. Now, an IRA can obtain a mortgage, right? There are financial institutions that will lend money to the IRA. The IRA can borrow the money. The IRA can buy the property, the IRA pay the mortgage back, but you do see probably a lot more cash transactions when it’s an IRA involved than you do sort of most times whenever people are buying residential homes.

Robert Leonard (26:52):
I think that cash piece probably helps offset some of the concerns that the seller has. They might be worried, not familiar with the transaction, or it might be complex, whatever, but seeing that they’re buying it in cash probably helps relieve some of those nerves.

Bill Neville (27:06):
No, or also just call and have a conversation. I’ve had those conversations where the account holder said, “Hey, I’m going to have the seller give you a call. And so you can explain what it’s all about.” And then usually by the end of the conversation, they understand that it’s been around for a long time. I mean, it’s just a lack of familiarity.

Robert Leonard (27:21):
You mentioned that you can actually get a loan or mortgage or leverage real estate property with an SDRA. And I think that’s important to note because real estate assets, at least historically, aren’t great investments if you don’t have leverage when you compare the returns to other asset classes. So it’s a similar question that I had with sellers, but for lenders. Do lenders often have a hard time lending to SDIRAs. And does it take a specialty lender or can you walk into any normal bank like Bank of America?

Bill Neville (27:51):
No, definitely not. There are very specific lenders that are willing to do what’s called a non-recourse loan. So by definition, the loan has to be a non-recourse loan. What that means is that one, as I mentioned already, the borrower is going to be the IRA. It’s an entity that’s a borrower, not a person. So the qualification is different because the lender isn’t necessarily looking at the account holder’s FICO score or their income or any of those things because the individual is not the borrower. It’s the retirement account, that’s the borrower. So what they’re going to be looking at is first of all, how much is the IRA putting down? And they typically do require more upfront money. Usually at least 30%, if not 40%. So you’re not going to get like 10, 20%. Then they’re going to be looking at the finances of the deal, how much additional cash is contained in the IRA.

Bill Neville (28:36):
Again, how much is it putting down? What’s the expected rental income, what’s the value of the property, as opposed to what they’re paying for it. They’re going to be looking at it from the finances of the deal. And so the definition of a non-recourse loan means that the only recourse the lender has in the event of default is to foreclose on the property. So they can’t go after the person individually because the person isn’t the owner of the property, it’s a retirement account. They also can’t go after any other assets in the IRA. So they can’t go and take any other assets. They can only foreclose on the property. So there’s a pretty limited number of financial institutions that are willing to do non-recourse loans to IRA. We have a little list of, I think, six or seven on our website that I think probably all of us in this space, the self-directed space probably have most of the same banks that are listed on or give out in a PDF or something like that.

Bill Neville (29:26):
This isn’t to say that you can’t go to others. If you can find… I mean, there are certainly private money lenders, hard money lenders that are willing to do non-recourse loans. But if you want to go into a bank or a typical, like a loanDepot or Rocket Mortgage or something like that, they’re not doing non-recourse loans nor is Wells Fargo, Bank of America, companies like that. They’re not. Their compliance isn’t going to allow that. The other thing is, I think that makes it challenging for those types of lenders is that I don’t think that they can sell the loans. So these become portfolio loans for the lenders, right? They aren’t something where they’re going to package it and sell it as part of a group of loans to other lenders, right? It becomes a portfolio loan for the lender. So I think that’s another limitation that you’re going to get with a lot of lenders, the reason why they don’t do it.

Robert Leonard (30:09):
Yeah, I was just going to say, you probably have to find a portfolio lender. And I invest in real estate, myself, I own rental properties. And some of the recent deals that I purchased were lent to an entity. They were lent to my LLC from the credit union. So I wonder if maybe they could do it to an IRA, but then, and this was recourse. It wasn’t non-recourse either, even though they were a portfolio lender.

Bill Neville (30:30):
No, if an IRA is the owner of the LLC, then it has to be a non-recourse loan even if it’s still an LLC because the IRA is a member of the LLC.

Robert Leonard (30:39):
Yeah. So that was the key piece right there. I know my loans are recourse. So I wonder just using… Because I know it as an example, I wonder if they would be able to offer non-recourse or not?

Bill Neville (30:48):
Maybe to an LLC. Probably not to an IRA, but I mean, honestly, if they’re not willing to do it to an IRA, I don’t know why they would do it to an LLC that’s owned by an IRA because it’s just a person, right? That LLC just becomes a person.

Robert Leonard (31:00):
We talked earlier about some of the restrictions on the types of assets you can buy, et cetera, but drilling down specifically into real estate, are there types of limits on the properties you can buy? Does it have to be single-family? Can you buy multifamily, commercial, et cetera, or even anything?

Bill Neville (31:16):
Anything. Yeah. The only limitation is the personal use. Can’t be used by a disqualified person. This includes companies, right? So we sometimes get people who own a company and then they want to buy like a commercial property. And then they want to have that company occupy space in that commercial property that would be considered prohibited, right? That company that’s owned by the account holder or in any other disqualified persons, the account holder would be considered a prohibited transaction. So there are no limitations on the type of real estate, but there are potential limitations on how you use the real estate from a standpoint of being a disqualified person where a company that you own being disqualified…, when it comes down to commercial [inaudible 00:31:54].

Robert Leonard (31:55):
Let’s just take Airbnb as an example, because it’s probably the most probable, I don’t think this would necessarily happen with a rental or something like that. But let’s just take an Airbnb. Say somebody has an SDRA. They want to buy an Airbnb property mostly as an investment, but they want to use it. Now I know that’s prohibited. So how does somebody in that situation get caught? And I’m not saying we should or shouldn’t do this. I know it’s illegal, but I’m thinking like, “Hey, I go and spend a weekend at this property that my IRA owns, how does anybody know?

Bill Neville (32:25):
If you were subject to an audit and the IRS really went into your personal records pretty dramatically and saw that you traveled to wherever the Airbnb is and saw that it was inside your retirement account, I mean, That’s one way. I’m not saying it’s likely, but it’s a way. But I’ve done presentations, right? Where I’ve talked about like, “You can’t do physical labor on a property owned by your IRA. You can’t cut the grass, you can’t paint it. You can’t do anything.” People are like, “How would they know how to cut the grass?” Right? “How would anybody know?” All right. You want an example? Let’s say you got a house it’s owned by your retirement account and you go over there and cut the grass. You have a neighbor who happens to know about self-directed IRAs and know you own it, and you’re a self-directed IRA and for whatever reason, they don’t like you and they report you.

Bill Neville (33:09):
I mean, I’m not saying it’s likely or even probable, but I mean, you want a scenario? That’s the scenario. As I’ve told many people, when I’m having these conversations, “I’m telling you the rules, it’s up to you whether you’re going to abide.” You’re like, “Do we have people who have properties with us that they occasionally go and maybe clean it, which is technically considered prohibited transaction, right? Or maybe go and they stay in it for a couple of days on vacation?” I mean, it’s almost certain that we have account holders that do that and are probably getting away with it, right? I mean, it’s almost like exaggerating your certain deductions that you take on your taxes, right? As long as you don’t get audited, but the rules state that you’re not allowed to avail of a personal use or for any other disqualified person and can’t put any physical labor. That’s what the rules say.

Bill Neville (33:50):
Now here’s the downside. What I will point out is that here’s the risk. If you were to get caught, like if something you were to get audited and it was to be found out and the IRS determined that you committed a prohibited transaction inside your retirement account, your retirement account ceases to be a retirement account at the point that transaction occurred, that prohibited transaction occurred. So let’s say it happened three years ago, and you’ve been making contributions to your retirement account in this ensuing three years, or you took $100,000 account and you turned it into a million dollars in that three years. Well, they go back at that and they say that retirement account no longer existed, which means any contributions you made were not valid contributions. You don’t have to restate your taxes. That million dollars that you’ve made in those three years, that’s not tax-sheltered. You now have to pay taxes on that.

Bill Neville (34:36):
And if you’re under 59 and a half, you have to pay a 10% penalty on that. Your whole entire retirement account becomes disqualified. All the assets inside the retirement account you had mentioned earlier, do you have to have multiple different retirement accounts for all different assets? No, you don’t. But if you have one property worth $50,000 and a million dollars worth of stock, that whole entire retirement account became disqualified because of the proven transaction that one asks. So the chances of something happening are probably not very high, the consequences of it could potentially.

Robert Leonard (35:08):
Yeah, those consequences are massive. It is only for that account, if you have two separate accounts, so if you have a million bucks in a different retirement account?

Bill Neville (35:14):
It’s only for that account.

Robert Leonard (35:17):
And again, I’m a very ethical person and I’m not saying to do it, but it’s these comments. I know people are thinking that.

Bill Neville (35:23):
I heard somebody at a presentation. One time I was doing a real estate investing meetup group and I was doing a presentation. And I was talking about that. And somebody sitting upfront who is [inaudible 00:35:34] said, “So if I held five different properties, I could open five different retirement accounts to hold an account at each different property. And if I do something prohibited in that one, it doesn’t affect the other four?” And my answer is, “That’s correct. It only is the one retirement account that it affects.”

Robert Leonard (35:49):
Interesting. Now, technically doing certain things isn’t supposed to increase your risk of audit, when it comes to taxes. There’s some debate on whether that’s actually true or not. But my question is, do SDIRAs lead to a higher risk of audit, or is there a concern of that?

Bill Neville (36:05):
I haven’t seen no indication that that’s the case. I’ve also heard investing in LLCs, like investing in single-member LLCs so that you can then use them for checkbook control. That increases the risk. As far as I’m concerned, that’s apocryphal. I think that that’s a scare tactic that people who, as we talked about earlier, who don’t get a benefit from self-directed IRAs, because they don’t get compensated in a way are telling their people that to scare them away from doing it. But I’ve seen no indication that there’s anything like that.

Robert Leonard (36:36):
And of course, we’re speculating. There’s no way to know for sure whether there is, or there isn’t.

Bill Neville (36:42):
There’s no way to know for sure. We’re not getting a ton of documentation requests because they’re subject to a non. When I was in Compliance, I hardly ever saw it. I saw it, I think twice in the whole entire time that a few years I was in that position. I have a lot of account holders that I’m their point of contact. I’ve 2000 or so that just sort of I’m their point of contact, they would be contacting me for help with the paperwork. I’m not getting those calls. So I’ve seen no indication of it.

Robert Leonard (37:08):
Can you buy real estate internationally?

Bill Neville (37:11):
Sure. Yeah. But the unique thing about it is that most countries aren’t going to recognize an IRA as an entity that can hold real estate. So what you typically have to do, because you have to establish some kind of an entity in that country, like a bank trust, or maybe like a corporation, like the equivalent of an LLC, not maybe specifically an LLC, but the equivalent of in that country and then your IRA invest in that entity and then that entity invest in the property. And the reason for that is because most countries just don’t recognize an IRA as an entity that can hold property, right? They’ll look at that and go, “No, you have to establish…” So you’ll need some kind of lawyer, somebody in that country to help you establish some kind of entity. Again, whether you want to call it a corporation or a trust or the equivalent of an LLC.

Bill Neville (37:55):
Maybe some of them will allow American LLCs to invest, but not an IRA direct. There are some countries that allow it, right? I mean, the Philippines is one example. I only know this because we’ve had some people invest. You can invest in a condo directly in your IRA, but you can’t invest in a palace that has land. You have to set up an entity, just sort of a quirk with the Philippines. But that’s one example.

Robert Leonard (38:18):
If someone raises money from SDIRA owners to fund their real estate deal, maybe they have a little bit of money in the deal themselves that is not retirement money. Maybe they didn’t put any money in and they’re getting 20% of the deal for finding the deal, being the sponsor, et cetera, maybe 30%, whatever it is. Can the sponsor of the deal get paid their distributions outside of a retirement account or does it all have to be retirement-related?

Bill Neville (38:45):
Sure. As long as you’re not a disqualified person to any of the IRAs, as long as you’re not using your IRA, nor do you have a spouse or a parent or a child who is using their IRA, otherwise you would be a disqualified person as well, as long as you’re not a disqualified person to any of the investors.

Robert Leonard (39:02):
We talked earlier about how even some of the most well-educated financial professionals don’t know of self-directed IRAs or don’t fully understand them. So what is the best way for someone who’s looking to raise capital specifically for real estate deal to easily and effectively educate someone, a third party person who’s interested in investing in their deal, how they can convert their retirement accounts into a self-directed IRA to then invest in their deal?

Bill Neville (39:32):
I would say, give them the contact information of somebody like me, who can explain how everything works. I mentioned earlier, The Entrust Connect, which is the investment sponsor platform that also has the marketplace that we make available. We’ve created some ways through that, where if you’re an investment sponsor and you’re looking to raise capital, you can establish an offering. And then it has an email to where you can enter in a bunch of email addresses and names and it’ll send out this template email that says, “Hey, welcome to the world of self-directed retirement account investing, where you can invest in privately held securities.” And that’s one way to do it with us specifically. But I think the best way if somebody is interested in is have them have a conversation because most people are going to want to have a conversation, they’re going to want to. Unless they’re watching a podcast like this, and they’re getting a lot of education, particularly if they stay for the full extent of both hours associated with it.

Bill Neville (40:25):
But most of the people, I get calls daily of people saying, “Hey, I heard about this and I just want to understand it a little better. Here’s what I’m thinking about doing. Or like, I’m not thinking about.” I get sometimes get people who are really young. They’re saying like, “I don’t even have retirement account money, but I heard about this and I want to understand a little better.” We’ll have the conversation. That’s the best way to do it. I think, I mean, we all have websites. We have the learning center on our website, which has a ton of information. We do monthly webinars, our competitors have a similar type of stuff. So there’s a lot of information out there. There’s a lot of resources to be able to go out to. If you’re into bigger pockets, right? Which a lot of real estate investors are there are threads on there that are about Self-direct IRAs, where people come on and ask questions.

Bill Neville (41:09):
There’s a lot of resources and knowledge out there. It’s just, it’s not necessarily an everyday meeting, right? I mean, there have been articles in Fortune and Forbes and Wall Street Journal and some of that stuff, but people have to be reading them. I mentioned this way back when we started people who are particularly real estate investors tend to know, they tend to have an awareness of self-direct IRAs, even if they don’t know all the rules and fully understand what’s prohibited and what disqualified person is. They’ve at least to have the general concept that “Yes, I can invest in real estate inside my IRA. I don’t know exactly how it works, but I know I can.” Right? Which separates themselves from 97% of the population just by knowing that at all. So there’s a lot of information out there, but if you ask me the best way is to put them in contact with somebody who’s in a position that I’m in to answer their questions that they have.

Robert Leonard (42:03):
The last concept I want to talk about in today’s episode is one of I think the most important to me at least. And so I guess we’re saving the best for last and that’s this concept of Unrelated Business Income Tax. It’s also referred to as UBIT, explain to us what UBIT is and how it impacts investors using an SDIRA to buy real estate.

Bill Neville (42:26):
Yeah. So there are two sides of the same point. There’s UBIT, which stands for Unrelated Business Income Tax or Unrelated Business Taxable Income, UBTI it’s UBIT switched around. And then there’s, UDFI, Unrelated Debt-Financed Income. They’re kind of opposite sides of the same coin, but they sort of apply for different reasons, but they’re calculated the same way. And so essentially for UBIT, what that specifically means is that you’re not using your account for the intended use of the account, which is just for retirement investing. An example of that would be, let’s say you bought a franchise. So like, let’s say you bought… I don’t know, a Merry Maids franchise inside your retirement account. So the retirement account owns the franchise, the retirement account pays the salaries, the retirement account receives the revenue. Essentially your retirement account is running a business. Then the IRS looks at that and says, “The investment that you’re holding inside the retirement account is not what’s considered the intended use of the retirement account, which is to make investments. You’re using it to run your business.”

Bill Neville (43:28):
So in order to sort of level the playing field with people who are using their personal funds to own that franchise and they have to pay tax, the IRA is going to have to pay UBIT it’s going to have to pay Unrelated Business Income Tax, unrelated to the intended use of the retirement. It’s largely coming into place when you’re using your retirement account, not just to make an investment, but to run a business right? To own and run a business. The other side of the coin, which is going to be much more applicable to people who are like, I think primarily real estate investors on here is unrelated debt financing components. The tax rates are the same. So the UBIT and the UDFI are both at trust tax rates. So there’s a table. Like we have our income tax, there’s a table that says, “When you make from this to this, your taxes is this amount from this to this. It’s this amount from this to this amount.” Right? The trust tax rates work the same in that when your IRA earns from this amount to this dollar amount, that’s subject to this rate, and then it graduates higher, the more it works.

Bill Neville (44:27):
Unrelated Debt-Financed Income taxes is related to, if you’re using leverage. If your IRA is borrowing the money. And so I’m going to explain how it works, or the thought process behind it, and how it would work. So to give you some numbers, let’s say you buy a property worth $100,000 and you put up 50, the IRA puts up $50,000 and borrows the other 50,000. So the IRS looks at that and says, “Okay, any revenue generated from that, 50% of that revenue was generated by retirement account funds. So it’s tax-sheltered, but 50% of that came from outside the retirement account. It came from outside of leverage. So potentially 50% of your earnings is not tax-sheltered.

Bill Neville (45:05):
It’s subject to UDFI, Unrelated Debt Finance Income tax. So let’s say you bought a property for $100,000. At the end of the year, you are in $10,000 in income. So you have $10,000 that came back to the retirement account. The IRS will look at it and say, “Okay, you had 50% leverage. So 5,000 of that is tax-sheltered. You don’t have to pay taxes, but the other 5,000 came from outside the IRA, you have to pay tax on that. You have to pay UDFI.” That UDFI is the same thing as property tax or maintenance or insurance.

Bill Neville (45:33):
It’s simply an expense that your IRA has to pay for the privilege of being able to use borrowed money. Now each year that you pay the loan down. So let’s say the first year, it’s 50%. And then at the end of the next year, you’ve paid it down and it’s now 40%. So if you are in the same $10,000 at the end of the second year, now they’re going to say, “60% of that $10,000 is tax shelter, but your IRA has to pay tax on the 40% because that’s how much your leverage is left owning on that property.” Does that make sense?

Robert Leonard (46:02):
Yeah, absolutely. And I think it’s easy to follow when you’re buying your own deals, but what I think I’ve heard at least a little bit of horror stories is when you’re investing in syndications or somebody else’s deal that they’re using debt, I’ve heard some horror stories that way.

Bill Neville (46:17):
Yeah. The account holder has to file a Form 990-T or at least has to complete a Form 990-T that then sends to Entrust that we then send to the IRS. We paid that from the IRS. So essentially you have to get some information from the syndicator on how much debt was used. And then if there was profit that came from that year, that occurred, then you have to calculate what percentage. So let’s say you’re a 1% owner in a syndication, and that syndication made $100,000 profit. So your 1% comes out to $1,000 and they use 30% leverage let’s say or 50% leverage, then technically that $500 you should pay UDFI on that. But here’s the thing. You only have to pay UDFI of over a thousand dollars.

Bill Neville (47:06):
So in my example, you wouldn’t have to actually pay it because of the $100,000 that was earned, you owned 1%, you only actually $1,000. Even if that might’ve been paid your IRA, even if it stayed inside the syndication, your IRA technically earned a thousand dollars. Let’s say you own 10% of the syndication or your IRA on 10%, now you made 10,000, you are in $10,000 of the $100,000 the LLC earned that year. Then you have to pay and then they have 50% leverage again to make the math easy. Then there’s $5,000 worth of earnings that you hatched via syndication that’s why IRA has to tell you [inaudible 00:47:40].

Robert Leonard (47:41):
Bill, this has been an awesome conversation. Back at the very beginning of part one, the episode in part one, I said that I wanted these to be the best and most comprehensive podcast episodes that there are about self-directed IRAs. That’s a lofty goal, but I think we did a good job. We attempted it, and I think we’re definitely up in the consideration for that. So as we wrap up this two-part series, I want to give you a chance to tell the audience where they can go to connect with you, your company, learn more about SDIRAs.

Bill Neville (48:12):
Sure. Yeah. The Entrust Group we’ve been in business for a little over 40 years, we’re privately held by the same owner that started the company. We have our own trust company, The Entrust Trust Company, and then The Entrust Group provides all the record-keeping services. One of the big differentiators we have from our competitors is that we do provide you a single point of contact. So I’m one of four Business Development Managers with Entrust, we each have associates. And so if you have an account with us, you get assigned to one of the BDMs. And if you have any questions, need assistance, you don’t just call an 800 number, call whoever happens to answer the phone, you have a single point of contact or single being me and my associate, Jacob, you have two of us. you have our direct contact, our direct email or a direct phone number if you have any assistance or need any questions.

Bill Neville (48:55):
And so from that standpoint, I’m not necessarily saying we have the best service in our industry, but I don’t know that anybody has better service than us. So I think we provide excellent service. And obviously, we’ve been in business for a long time. We know what we’re doing, but educate yourself. There’s a lot of information out there. We have a website, theentrustgroup.com. We have a learning center that has a lot of information. We do monthly webinars on different topics. Oftentimes we bring in subject matter experts to talk about those. There’s a ton of educational information on there. So please avail yourself of that. And then if you have any questions or need assistance, my phone number, our phone number here at the office is 510-587-0950. My extension is 237. My email is my first initial and my last name@theenterestgroup.com.

Bill Neville (49:41):
So bneville@theenterestgroup.com and I really appreciate being on here. Great questions. You obviously [inaudible 00:49:48] stuff too, and it was great being on here. I’m happy to talk about self-directed IRAs. I really mentioned at the beginning, I think people should know about it. I’m not saying they should do it, but I think that everybody should know about it. And so anytime I have the opportunity to reach an audience like you have, I really value it and appreciate you having me on.

Robert Leonard (50:06):
I really appreciate the kind words and your time. And it’s almost certain that I’m going to open an SDIRA myself at some point. I’m not sure if it’ll be today, tomorrow, next week, next year. But at some point, I plan on opening one and utilizing one myself. I hope you’re my point of contact. I hope you’re my BDM, Bill, when the time comes. But anybody that’s interested in learning more, I’ll put a link to Bill’s information, The Entrust Group’s information, all the stuff he just mentioned in the show notes below, some of my favorite resources that they have. So if you guys want to learn a little bit more, please feel free to check those out. Again, Bill, thanks so much for your time.

Bill Neville (50:40):
Thanks for having me.

Robert Leonard (50:41):
All right, guys. That’s all I had for this week’s episode of Real Estate Investing, I’ll see you again next week.

Outro (50:46):
Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.