The Secret Trick All Real Estate Experts Use to Invest Tax-Free! - John Bowens

I lived through the great financial crisis and I saw in 2007, 2008, a lot of Americans, their retirement portfolios completely wiped out. But there were major challenges for those individuals at that time, especially those that were setting themselves up for near retirement or were actually in retirement where they had to take draws from their retirement accounts when those plans were at 60, 70% value of where they were at prior to the great financial crisis. And so the founders of this company that I was working for that were in the real estate business, I started asking them questions about why don't you have IRAs or 401ks or other retirement plans? And they said, well, John, we don't have those types of accounts because we don't believe in the stock market. We believe in real estate as a wealth creation tool. We believe in investing in businesses, starting businesses, and that's all they had ever done.

You're tuned into the Freedom Show. We are in the studio having a conversation we're really excited to share with you today. Today's guest is John Bowen.

We're so excited to have you, John. And before we dive into the Freedom show and your freedom story, we would love to let the audience get to know you a little. So Flip, you want to introduce John?

I got on my, my Santa glasses.

All right.

John Bowens is one of the most sought after and respected educators in the self directed IRA industry. As Director Head of Education and Investor Success at Equity Trust Co. John draws from his 20 years in the real estate industry and his experience as an active real estate investor. In his travels across the U.S. and virtually, he has trained 60,000 investors during the more than 400 workshops and classes, spreading the message about the power of building tax free wealth and leaving a lasting legacy by investing in what other investors know best. In addition to thought leadership in the industry, John has also directed teams in both the front office and back office operations with Equity Trust, focusing on the custody of various alternative assets including but not limited to real estate notes, private equity, precious metals and much more. John contributed to the book Self Directed IRAs Building Retirement wealth through Alternative Investing with Equity Trust Company founder Richard Desic Senior and has appeared on several national real estate and finance related radio shows including the Rich dad radio Show. He received his Bachelor's degree in finance from Ohio University. John holds the Certified IRA Services Professional designation through the American Bankers Association. Welcome to the show, John.

Hey, thank you so much. Flip and Danny really appreciate you having me on today.

We are so grateful to have you here and so for our audience. You guys know that the Freedom show, we love talking about freedom. We love inviting people who are in our network already so that we can introduce you to them. John is somebody who we met personally actually in the power room and we've seen them quite a few times at those events and they are putting on workshops across the country and we are starting to do more things with them ourselves. I was just telling John right before the show that the very first self direction IRA company that we worked with personally with our investors was Equity Trust. And we built our entire process document of how to use self directed IRAs in our investment opportunities based on their model. And so we're super excited to have John here. He has been on, we looked at his media kit, John's been everywhere. So now he's on the Freedom show. And we're super excited to start really off the way that we start off with every guest. John, we want to start this off getting to know you on a personal level and you sharing with us what does freedom mean to you and tell us about your journey and how you feel like you've achieved some type of freedom in your life.

Yeah, well, I appreciate the question. And you know, in terms of, you know, where my journey began. Twenty years ago, I got involved in real estate. And I didn't get involved in real estate, you know, going out on my own and flipping houses. I was very young, I worked for a small real estate company in Cleveland, Ohio. And it was just a small family owned operation. They owned a lot of industrial commercial buildings, some single family properties. That's what got me exposed to real estate. And even before then, growing up, you know, I always had sort of my own little landscaping business. I always had sort of this entrepreneurial type sort of drive to me. And I was working for a small mom and pop hardware store. So I got exposure to what it means to run a small business and work very closely with the owners. And then working for this real estate company that got me exposure to how to create wealth and leave wealth to other family members through real estate investing and small business ownership. And so I decided to pursue higher education. That was just something my father said. Hey, that wasn't something that I ever had an opportunity to do. I don't want you to have to work like I do, so I want you to pursue this. So I went ahead and did that. Very grateful that I did that. Studied finance, real estate finance. And then out of school I had this thought of becoming a financial advisor because I spent a lot of time on that. And through school all I learned about as a lot of people that have gone through this same journey as I've gone through, I thought that all I could use my retirement money for my IRAs, 401ks and other retirement accounts is to invest in traditional stock, bonds and mutual funds. And as you did, I lived through the great financial crisis and I saw in 2007, 2008, a lot of Americans, their retirement portfolios, I'm not going to say were completely wiped out. But there were major challenges for those individuals at that time, especially those that were setting themselves up for near retirement or were actually in retirement, where they had to take draws from their retirement accounts when those plans were at 60, 70% value of where they were at prior to the great financial crisis. And so the founders of this company that I was working for that were in the real estate business, I started asking them questions about, you know, why don't you have IRAs or 401ks or other retirement plans? And they said, well John, we don't have those types of accounts because we don't believe in the stock market. We believe in real estate as a wealth creation tool. We believe in investing in businesses, starting businesses, that's all they had ever done. And so through that exposure I then stumbled across equity trust and our company founder, his name is Dick desicc and he's widely known as the pioneer of the self directed IRA industry. He put together one of the very first real estate transactions with self directed IRA investors back in the early 80s. And it was 22 IRA investors and a commercial real estate syndication. And each of those 22 IRA investors made nearly $200,000 tax deferred in their self directed IRAs over 19 years on the triple net lease. And so it was just a really great success story. And so this started to, this started to gain momentum in the 80s and 90s. And then in the 2000s with the Internet it really started to take off. And So I met Mr. Desic about nearly two decades ago. He became my mentor, taught me a lot about the ability to be able to use a retirement account to invest in real estate, private equity cryptocurrency. Now at that time it didn't exist, but now it does. Gold and silver, but, but very much concentrated around real estate. And I was absolutely fascinated with the concept of being able to own a single family rental property or invest in an apartment building or a commercial shopping strip or whatever type of asset class or private money lending and be able to do that in a tax deferred or tax free environment. I like to Say, compounding interest in the absence of taxation. You know, my journey was really, I was down this path of becoming a financial advisor and advising people on moving all their money to me and investing solely in the traditional stock market. And nearly two decades ago, I met our company founder and I thought, there's gotta be a better way to do this. And I don't necessarily think I want to continue on that trajectory. In disclosure, I don't give financial advice, I don't provide recommendations. What I do is I educate and inform the public on how they can take control of their IRAs for one case and other retirement plans, how they can unlock them from the current structure they're in now, and how they can actually self direct those funds into what I call private market investments. So real estate, single family rental properties, whether they're buying them turnkey or they're investing in a real estate fund, or they're lending money secured by real estate, or maybe they're investing in a private credit fund, like a hard money loan fund. Those are all the types of investments that our clients, they'll move their monies to us and then ultimately they'll use us as the conduit, their custodian, to be able to direct their funds into those types of opportunities. And they're doing it because they have more confidence over those types of investments. They have more trust in those types of investments which they consider to be more hard assets compared to the traditional financial markets.

Wow. Yes. You unpacked a ton right there. There was about three or four times. I was like, oh, we could go off on that tangent and that tangent and that tangent. So let's start from the beginning. John, talk about a self directed ira. Explain the difference between self directed IRA and a retirement account. So for those where this is, they've heard us talk about it a few times, but not nearly to the extent of which we're going to talk about it today. So can you unpack it very simply for those who have retirement accounts and they're not exactly sure the difference between what they have now and a self directed account?

Yeah. So the best way to think about it for the audience is self directed is an industry term. It just tells the investor that they have the ability to self direct their retirement funds into any type of asset that they deem as a best fit for their portfolio. Now, it is important to caveat that with the notion that there are assets that you cannot invest in with your self directed ira. So no artwork, no collectibles, no Beanie babies or pogs. You can't invest in alcoholic beverages and be a member of an S corporation with your Iraq, there are certain individuals that you cannot transact with. These are called prohibited transactions. Ultimately, the tax code going back to 1974, the ERISA act, was exclusive rather than being inclusive. So there's a lot more that you can do than you can't do. So the idea is, is investors are only limited by their own creativity. So self directed is just an industry term. The best way to think about it is let's say you have an Iraq 401K, 403B Thrift Savings Plan 457. So you have an existing retirement account and it's with a custodian. Now, some people don't know who their custodian is. They're not sure. That's okay. It's easy to figure out who that is. But it's with a custodian. It has to be with a custodian. And assuming that you've left that employer, or if it's just an ira, like a traditional IRA or Roth IRA or sep, SEP IRA or simple Iraq, ultimately you move that into an equity trust self directed ira. And by moving that money from one financial institution to another, there's no taxes or penalties. And I say that because a lot of people get caught up in thinking that if they move their money from one financial institution to another, that there's no taxes or penalties. What I'll say, and I'll be pretty candid about this, financial institutions have gotten very creative at figuring out ways to get people's money into their ecosystem. And then it never leaves. Right? The reality is, is that's what financial services does. And it's not good, bad or indifferent. Right? Everybody's got to make money. Everybody's got a business model. And I will say there's nothing wrong with that. But you just have to understand as a consumer investor that you have choices. You have the ability to empower yourself to make your own decisions. You don't have to put all of your money with this particular institution and leave it in a traditional stock based portfolio or fixed income based portfolio. You have the ability to take control and there's not going to be any type of onerous taxes or penalties. You simply just move your money over from one financial institution into the equity trust self directed ira. Once you're there, you then have the ability to direct your funds out to private market investments. Specifically, we're talking about real estate here. I'm passionate about real estate. I invest in real estate with my self Directed accounts. I make private money loans with my self directed accounts. That's what I've been doing for a lot of years. That's what I've been teaching other people how to do. And so let's say somebody moves their $150,000 from their 401k over into a self directed IRA and then they want to buy a house for 110,000, put $10,000 worth of rehab into it and rent it out for fourteen hundred dollars a month. They move their money over, they move their money out for that investment and then all their rental income comes back into their self directed account. And the beauty of it is that they eliminate taxation on those returns. As long as they follow the rules and guidelines, there's no taxes on the rental income. And then when they sell that rental property, there's no long term capital gains tax, there's no recaptured depreciation, there's no schedule ease, there's no reporting on a 1040. So what's nice about the self directed IRA is it allows an individual to be able to, A, like we've been talking about, invest in hard assets like real estate, and B, there's some pretty powerful tax advantages, like I always say, compounding interest in the absence of taxation.

Yeah. So why don't we just go down that rabbit hole, talk about the tax advantages and what you mean by the compounding interest and absence of taxation.

Yeah. So inherently a self directed ira, and really any ira, just remember, self directed is an industry term. The growth in that account will either be what's called tax deferred or tax free. So the difference between the two are the account types. And I think it is important for viewers to understand that there are two different types or styles of accounts. You have a traditional Iraq and you have a Roth ira. So a traditional ira, which is where most of the retirement wealth is in this country by the way, because people have been conditioned to put money into an account to get a tax deduction, grow it tax deferred, and then when they take the money out after the qualified retirement age of 59 and a half, that's when they pay taxes. The analogy we like to use in the industry is you either pay taxes on the seed or you pay taxes on the crop. So most people have put money into tax deferred accounts. 401ks, 403bs thrift savings plans. These are all employer plans. Or maybe someone just has a traditional IRA or SEP IRA or simple ira. The monies are going in, they're getting deductions for that it grows tax deferred again, when they take the money out, they pay taxes. Now, tax deferred growth is still pretty powerful. If we actually put some numbers behind this. If we put $6,000 away into an account for 25 years and we apply a 12% compounding return, taxes of 30% during our working years at 25 years and taxes at 20% when we take the money out. If we compare a traditional IRA to just taxable, meaning every year you got to pay taxes compared to tax deferred, you'd have over $300,000 in tax savings. If you punch that into your financial calculator, you got $300,000 in tax savings. So economically, financially, you can argue that a traditional IRA can be powerful in contrast to just saving taxable. Right? Then you go to the Roth ira, which is the second, call it style of account. The Roth IRA didn't come about until 1997, 1998, William Roth Jr. He was the senator from Delaware that really pushed this legislation. It took him about nine times, got it passed 1998. Americans now have access to a Roth IRA. Now you will learn that high net worth individuals, or rather I should say higher income earners in 1998 weren't allowed to have a Roth IRA. And so the way the Roth IRA works is the money that goes in is after tax, it grows tax free. And then when you take the money out, you pay 0% tax. So as long as you follow the rules, the guidelines, you're 59. After older, you pay 0% tax. So if we apply that same compounding interest formula that I mentioned, in a Roth IRA, you would have $1.117 million. So if you compare the Roth to the traditional, you get over $200,000 in savings. If you compare the Roth to the taxable environment, it's over $500,000 in savings. So the Roth IRA is, is really, really powerful. Now I mentioned that high income earners in 1998 didn't qualify. But fast forward to 2010, they changed the legislation and they said, okay, all income earners can convert from a traditional to a Roth. We like to call this a backdoor Roth. So what you do is you take your pre tax money or you just make a contribution to a traditional and then convert over to a Roth. Now I'll button this up with a quick sort of example or case study that I think might help some folks comprehend how this works. I have a husband and wife couple I've known for a lot of years, Kevin and Cynthia. In fact, you Guys may have come across them at one point or another at a real estate event. It's a small world, right? It seems like everybody knows everybody. And so Kevin and Cynthia, they're from Collinsville, Illinois area and they have, they had, I should say, 401ks and they left their jobs like most people, they leave their jobs eventually. And they rolled their 401ks, which were all pre taxed into traditional IRAs. And they knew that they were, this is back in 2011, 2012, they called themselves stock market refugees. That was their words, not mine. So they took losses in the market, they recovered a bit, they rolled their money over into traditional ira. Self directed, of course. Again, don't get caught up with the confusion of self directed. It's just an industry term. And so at that time they said, hey, we got about 117,000 to start with. And we, we feel strongly through our real estate investment strategies because they're, they're value add investors, right? They find properties, they add value, they sell them on owner financing, lease option to purchase, rent to own, they have rentals, they do private money lending. And so over the course of the last 10 years, 10 to 11 years, they've grown that 117,000 to over 2 million in properties in cash flow. They've done well over 30 real estate transactions. They still have 14 cash flowing properties in their Roth IRAs. And they have $200,000, roughly 200,000 in net cash flow coming in every year into the Roth IRAs. And they pay 0% tax, no long term capital gains tax, no recaptured appreciation, no taxes on the distributions because they're over 59 and a half. They're doing private money lending as well in that account. Rewind the tape back to 2011, 2012. Their monies were in pre tax accounts, but I just said Roth in 2011, 2012, over the course of two years they converted, it's called a Roth conversion. They converted their pre tax money into Roth. They paid taxes on the 117,000 so they don't have to pay it on the much larger nest egg of over 2 million in properties in cash flow. And when I asked Kevin and Cynthia, I interviewed them just like we're kind of doing an interview here. And I said, what do you plan on doing with your Roth IRAs? And I figured they were going to buy a secondary residence. They're up north like I am here in Cleveland, they're in Collinsville. So the winners are pretty brutal. And I figured they were going to buy a secondary residence somewhere else, you know, In a warmer climate, Florida somewhere, Texas, wherever. And they said no, we, we plan on leaving this Roth IRA, these Roth IRAs because they both have Roth husband and wife, both of them. They said we plan on leaving these accounts to our children and if our children have children, we'll leave it to our grandchildren. Because when they leave those accounts with those cash flowing assets to their children or grandchildren, the children and grandchildren will pay 0% tax. So what you start to pick up on is that this Roth IRA can be also a very effective legacy planning or estate planning tool. Now if all they have is traditional money, there's nothing wrong with that tax. Deferred growth and investing could still be better than taxable investing. Maybe Roth IRA investing is even better. You can make the argument but to each is it really depends on the individual situation. And so I say that because I don't want anybody to walk away from this podcast thinking that the only way to self direct is with a Roth ira. I've had so many people that think that way. The concept of this is if you have a 401k or traditional IRA and you don't want all of your money invested in the traditional financial markets and you feel you can make a better rate of return investing in real estate, private equity, private placement deals, private money lending, private credit funds, whatever you want to invest in, if you think you can make a better rate of return, then you might want to consider the self directed IRA option. Now like I said, I can't advise and tell someone that just by opening a self directed IRA you're going to make a better rate of return. Ultimately the rate of return is going to be dictated by you as the investor. And that's really what's so powerful here, is that you get to take control and also ultimately chart your own destiny and you're not beholden or reliant upon the traditional financial markets.

Yes, I love that. Chart your own destiny. We talk about that a lot. That's why we vertically integrated our companies. Because at some point everything came down to how much control do we have over the decisions we're making, where we're investing our time, where we are investing our money.

Nothing on the show should be considered considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, financial or business professional for individualized advice. Opinions and information on the show are not guaranteed. All investment strategies have the potential for profit or loss.