How To Buy Real Estate in Your Self-Directed IRA

Welcome everybody to the Directed IRA Podcast. My name is Mark Kohler and I'm here with the CEO of Directed IRA Trust Company, Directed Trust Company, the one and only author of the book, The Self-Directed IRA Handbook, 2nd Edition, Matt Sorenson. Yeah. Ah. Yeah. Thank you.

Thank you. How's that feel?

Do you want me to call you up tomorrow morning at 7:00 AM and do that again?

I would appreciate it. It only happens here and only there was one person clapping. Two, if you count me clapping for myself. Not even Tristan in our studio.

Yeah.

Yeah. Thank you, Tristan.

Thanks for jumping in on that.

But if I can just clarify one, one really important thing, one misstatement in what you said.

Oh, Jesus. Well, don't look a gift horse in the mouth, as they may say.

The third edition of the Self-Directed IRA Handbook is out.

Oh, is it out?

It just went live yesterday.

Well, how was I supposed to know?

This is my masterpiece. Okay.

The first was good.

The second was great. This one is the masterpiece.

What's the COVID look like? Have I seen the COVID yet? Yeah. Yeah.

I mean, are you following at Matt Sorenson?

Well, your own partner doesn't even get a copy.

Yeah. Unbelievable. I don't have the physical ones here yet. Probably today. But you can buy it right now on Amazon. Get over. It's incredible. It's $20. Do I have to go buy it?

Do I? Am I supporting the Matt Sorenson Foundation if I go buy it?

It would help. Every purchase counts. I'm trying to make the bestseller list.

Okay, it is true.

But in all seriousness, this book is the most widely used book in the industry. It's already sold over 50,000 copies. You can look at the reviews on the first and second edition, and the third's even better.

So, ooh, I like that, a black cover. That looks good.

Add to cart. There you go.

Okay, I can't request the signature of the author. Well, I'll have to just track you down.

I'll sign it for you.

Okay, I'll buy— I'm going to buy 2 or 3 just to help the cause.

Okay.

Okay. There we go. I'm going to go to checkout. This is so good. Okay, well, everybody, today is a big show. We are excited about talking about buying real estate inside your IRA, your Roth, your 401(k), your HSA, all the above. If you want to buy real estate inside a tax-preferred account, we know the path. We know the way. We're going to show you how to pack your bags and load up your suitcase and take the happy train to real estate in your IRA.

Yeah.

Woo!

We're not telling you where to go. That's up to you. That's the property you decide. But yeah, we've got all the resources to help you be successful. So Mark and I have done this ourselves. We've bought real estate with our own retirement accounts, our own tax-advantaged accounts. We've helped thousands, tens of thousands of clients and have tens of thousands of clients buying real estate with their IRA at Directed IRA. Now, this is the most popular asset, and I want to make a couple of broad strokes for any of you that are new. You're probably familiar with an IRA that can buy a mutual fund or you can buy stock. You buy $100,000 worth of Facebook stock and you sell it for $150,000. You have a $50,000 profit. When you sell that for $150,000, the whole $150,000 goes back into your IRA, no taxes. That's one of the benefits of traditional or Roth IRA accounts. As you're making money in the account, you don't pay any taxes. Well, the same thing happens with real estate. If I buy a property for $300,000 and it goes up to $400,000 and I've been collecting rent and cash flowing at $1,000 a month, All of that cash flow and gain, all of the appreciation, when I sell for $400,000, goes back into the IRA. So now my account's worth $400,000. So what we've seen is clients who have been frustrated with mutual funds, ETFs, the stock market that they don't understand, and they're not growing their account. They're fed up and they're like, "Wait, I know real estate. I've done well in real estate, or I think it's a better asset class. How can I let my IRA invest in that?" 'cause I want to grow my IRA to be the biggest account possible when I hit 65. And that's what we're talking about here. And we're talking about like the rental property down the street, like the single family property. We're not talking about like some publicly traded real estate company.

You know, I'm sitting right here. You can just one pump the whole podcast. Yeah. I mean, I just bought your book and I don't even get some airtime here. Please.

I was hoping you'd keep buying more. You do have a microphone. Yeah, don't, it's turned on.

Okay, I didn't want to cut you off. You know, I didn't want to cut you off. No, that was an awesome summary. And I'm glad you summarized it seriously right out of the gate because I think everybody needs to know what the hell are you talking about? And yeah, so buying, and I'd like your example too of that little rental property down the street could be owned by your IRA, but you did drop the S-word, syndication. Yeah, yeah, you could, you know, a lot of private funds out there doing multifamily, bigger deals, commercial. Those fall in the category. I think I'm going to take another perspective here at the moment and say what this doesn't mean you can do, just for a moment, just to give you some context. So Matt kind of summarized what you can do. I'll say what you can't do is you can't buy a rental property like a commercial building in your IRA and rent it to your business. So you may be like, oh, this is awesome. I'll use my big old 401(k) from my prior job, buy a a building or a little unit and then rent it back to my business? No, that would be prohibited transaction. Get back to our last podcast. Number 2, oh, I'll take my IRA and I'm going to buy a cool rental property down by the university and my kid can stay there while they're going to college. No, your family members can't stay in that rental property. You can rent it to someone else. There's a lot of other students in town. Run away, run away. But your kid can't stay there. And then you may even think, oh, I'm going to buy a rental and I'm going to go fix it up. Oh, this is awesome. I love doing fixer-uppers. I'm going to go put my tool belt on and do this fixer-upper and my IRA can buy it and I'll fix it up. No, you can't work on it yourself. Now you can manage it and you can hire handymen and subcontractors to do it and still make a great return. But you're not going to have that sweat equity opportunity. So there's boundaries. Yeah, but I think looking at it from both angles gives you— there's a clear path and there's a highway. I mean, it's not a little road here. There's a lot of options.

Are you going to yield the balance of your time, or—

Tristan, did you record? You know, do we have a timer? Do we have to have like a little— what's going on today?

We are both so like feisty. Mark's probably on his third Rockstar. I did an energy drink and a latte this morning. Not recommended, apparently.

I was like, do you have Parkinson's? You're a little jittery over there. Yeah, a little early. Yeah, early onset. I'm just so excited about this. I know, we both could just—

no, but talk about, um, we want to keep this fun. We like doing this show. Love being with you, Mark. But Um, but, but I want you to think about it this way. Why would you do this? And Mark gave all the reasons what you can't do, which are kind of reasons why you shouldn't do it. We're not talking about personal use and a place where you can stay or your business is benefiting. What the goal here is, is how do I build my retirement account fast, get a better ROI, return on investment, than you— that's what you're doing.

Can you know what, I'm going to just hijack it here and I want you to tell us your example of your first real estate deal. I love that example. Was it Minneapolis?

Indianapolis. Close.

Same place, same thing.

It's all the same Midwest.

I just offended, you know, 3 million people, but that's okay. Okay.

All right, so which, which group did you offend? The group in Indianapolis or Minneapolis? Probably both. They're both like, we don't want to be—

yeah, you're an idiot. Okay.

Okay. All right, so I bought this property in Indianapolis. This was a 3-bedroom 1.5-bath rental property. I bought it for $84,000.

You had $84,000 in your IRA.

Took me time. Okay. This is building up, right? You're contributing and saving.

$84,000 rental property in Indianapolis. So you bought a little meth lab.

Yeah. And it was renting for $900 a month when I bought it. All right. Okay. I went— by the time I sold it, I owned it for about 4 to 5 years. My rent was $1,200 a month. Okay. Rents have gone up. Which is great. And but I sold the property for $185,000. Okay. I bought this in 2017. I sold in about '22, '23. That was a good period of real estate, right? Real estate can be cyclical. And that was— I bought at the right time. And so—

and you had all the rental income along the way, less management fees, maybe a little repair here and there.

I had a property manager. So, okay. All right. Here's what I did. I had a real estate broker friend of mine. He's a client of ours, Steve. Great dude. He spoke at our Self-Directed IRA, Steve Olson. He's still in the real estate game. But he was buying rentals for himself in Indianapolis. And whenever I know like a professional that does something for theirself, themselves, you know, you're like, let's get on that train.

Yeah.

I'm like, all right, this is what you're doing with your money. You know, what are you buying? He's going to— I'm like, dude, give me one of those. Okay, so I did it. So I set up an Indiana, Indiana LLC. Now I had my self-directed account, my self-directed retirement account, and it owned an LLC 100%. That LLC went and bought the property. Now we have other shows on the IRA You could buy the property directly in your IRA, but I use the LLC structure. And so, but I acquire the property and the lease, the property's in the name of the LLC. The rental income's going to the LLC bank account and it's building up. Now I have other money in the market, of course, not doing as well. I mean, it was still decent stock market returns, but not like this. So, so—

How long did you own it about?

About 4 and a half years, I'd say.

Okay, and so you had rental income of about $800 a month, let's say on average after management fees over the 4 years.

I had a property manager charging me 10%. I had a little bit of tenant turnover where I missed a month of rent. I probably had that twice over that period. And I had, 'cause I had 3 different tenants over that 4 to 5 year period, sadly.

[Speaker:MARK KOHLER] And your rent went up, but I'm just going to say a lower average of $800 a month for 12 months times 4, that's $38,000 in rent. Plus it went up about $100,000. So you had a $138,000 return over, um, 4 years.

Um, and I probably had about a couple— I had a couple thousand in repairs that I had to do on the property when one of the tenants trashed it and I had to chase him down.

That's a 70% return, but over 4 years. Yeah. So if we take 70% and divide it by 4, you averaged a 17.5% return.

Okay, well, it was a little better than that. I ran the math on it, but yeah, so around 20.

Yeah. Okay.

I think that's about a 30% annual rate of return when I ran the numbers.

Oh, when you ran the actual numbers, what I got on rent, cash flow. But that's awesome.

I sold it for—

I'm getting 25% in my mutual fund.

Now, I left out an important—

that was a joke, by the way.

Oh, yeah. I left out an important detail because you started running the math. Okay. So I was trying to keep it simple.

Yeah.

I got a non-recourse loan when I bought this property. I actually only put in $40,000.

Oh, okay.

There you go.

Now I double this because now that $17,500 goes over $30,000. Yeah. There you go.

So I had the bank lend me the other $45K, okay? And, um, but now that affected my cash flow a little bit, but my mortgage payment was like $320 a month or something.

Yes. Now I see.

There you go. And, but I was still cash flowing right out of the gate. So, but I went and did that and I decided I'm going to do this with my own account because I've always done better in real estate. I've made money at real estate. I feel like I have a competitive advantage. I have more control and more say. I just enjoy it more. And so that's what my retirement account did. It bought a boring 3-bedroom, 1.5-bath rental property. It cash flowed. It took some work. It was more than just typing in a ticker, but I used other professionals, an agent to help me buy and sell it. I used a property manager to manage the property. I never even went to the property.

Now, I— and some of you may have been like, well, Mark, you threw me off. You were jumping into the math real quick. Matt was trying to keep it simple. But let me point out why I did that. Because all of us should be looking at what is the opportunity cost or what is my next best alternative or what is my other option? Those are thoughts you should be having when you're trying to build a retirement account. You're going to say, okay, I challenge all of you, go open that envelope you haven't opened in months that shows up every whenever, where maybe it's in your email of how your 401(k) is doing, your old 401(k) from your prior job or IRA. Open it up and look at how much you invested in there and how much you've been making. What's the overall return? If it's less than 10%, you're in 80% of what most Americans get. If you're getting anywhere between 5 to 10%, you are in the far, far majority. And that's not terrible. That's okay. Yeah, but we would love you to do better than that. And so you want to compare it against the alternative. So you may go, well, I don't want to pay a property manager and I don't want to pay a handyman and all that. Look at Matt, paid a property manager. He used leverage and he did over 30%.

Okay.

Compare that against what you could get. That's what we're asking you to do. Think about— I don't know what you want to invest in. What are you good at? You know, we got— there's a hundred things. Today we're talking about real estate. But if you know real estate, holy crap. Compare it against your next best choice.

Yeah, perfectly said. And, and sometimes it's just also some people want a little diversification. They want to do something a little different. They're sick of seeing their entire investment portfolio go all up or down together because it's all in the stock market, you know. And so having a little bit of variety in there can be good for you.

Um, so do you want to do my example now? Yes, let's do mine. Yeah, okay, I'd love to.

I know yours, but the audience does not.

They do not. They may not. So, uh, so I had a health savings— I did not have $40,000, $50,000, $80,000, $100,000 like Matt Sorenson. He's saver than me. That's a whole other podcast where we've talked about where do you take your business profits. That's a whole other topic. But I hand it to my partner here. He was saving while I was reinvesting in different business projects. So whatever. I did not have that nest egg. Some of you may, some of you may not. So what did I do? Well, I had a health savings account. This was like 14 years ago. Oh my gosh. Though the health savings accounts were just the hottest, coolest thing. I, and I still think they are. But I could put $4,500. This year you can put in almost $9,000 as a family, but back then it was around $4,500. And I funded my health savings account. And I was like, darn it, I wanna buy a rental property like Matt, but who's gonna loan me enough money with $4,000 down to buy a freaking rental property? Well, at the time, and I just texted him this morning, Chris Alban, he's a real estate educator, he's just an awesome dude. He's out in Chicago and he has been in real estate his whole career. And a high school math teacher.

Former high school teacher turned real estate investor.

Yep. And so he built up over 300 rental properties while he was a high school teacher during his early career. It was just phenomenal. Now, these were all low-income housing properties. The average purchase price was $30,000 to $40,000. Section 8 properties, federal subsidized rent areas, kind of scary places you don't want to walk around and hang out in with and say hi to your tenants sometimes. But he had— Cracked the code. So I called Chris and I go, hey, I got $4,500. Is that an option? Can I get into something? He's like, yeah. He goes, I got this little property in Elgin. I think I can get you for— to get you into it for under $30,000. 10% down's around $3,000. The seller's carrying the note. I'll put it on my property management pool. Let's go. I'm like, I opened an LLC like Matt did. My HSA owned it 100%. I dropped in the $4,500 and I literally had enough, $3,000 to buy this little rental property. And rent was back then about $450. And then it went up and then $700, $800. Now it's around $900,000. But this little rental property I've had for over 10 years, but it was in my health savings account. Now, here's the cool part for me. When that rent came in, I could take the rent from the LLC and send it back to Directed IRA, to my health savings account. And then request a distribution to pay for my kids' braces. And that's what I did. I used it for dental for the most part because I had regular healthcare, but I never had dental insurance. So I used my HSA rental income to pay for kids' dental stuff, you know, over the years. And that's how I used it. I didn't have to wait till I was 59 and a half or whatever. I could just take that profit and put it in there. So I called Chris this last week and said, hey, I'm ready to sell that sucker. I want to go buy more cows with my HSA. And he goes, yeah, I think I can get about $45,000 for it. I mean, it's still a low-income housing area. But he goes, you paid down the mortgage a little bit. And he goes, because we had to fix that, you know, roof and this and that. And I mean, it's a little low-income property. Yeah, it's older, you know. You know what I found out? I've had the same tenant the whole time.

That's cool.

This little old lady, Section 8 housing. Federal subsidized, and he's like, she just won't move. She's going to live there forever. And he goes, what do you want to do? I'm like, let's sell it, you know. So another buyer that's buying a bundle of these little low-income projects, uh, is interested. So he's sending me some paperwork. We're hoping to close the deal, but I'm going to take the profit from that, put it back in the LLC, and redeploy it, I think, in some livestock or some ranch type stuff.

Yeah, that's been awesome. See, there you go. So two quick examples of what you can do. Your IRA or HSA, whatever this tax-advantaged account is, can buy property. Now, we did holds. We both held those as rental properties. You could flip it. We have lots of clients whose IRAs will go and buy a property. They'll pay a contractor to rehab it and they'll flip it. Your IRA could just wholesale contracts and you generally use the IRA LLC. It's getting property under contract and you're wholesaling the contract, making a small little profit too. As you go. You could be doing options on real estate, you could be buying land.

Um, I've got another good one. Yeah, so some of you might have an influencer you're following that's doing a syndication. They're like, hey, we're raising money for this multi-unit. In fact, I'm on Real Wealth tomorrow with Kathy Fetke. They've always got a new project going on in a multi-family scenario. And if you're an accredited investor and you're like, hey, I'd like to invest in this little syndication real estate deal. You can't call Merrill Lynch and do that. You can't call Fidelity and say, hey, I want to invest in Kathy Feky's project. They're not going to go for that. So that's not— they don't make a commission on that. They don't sell that stuff. So for any of you that want to get into some private real estate projects, you just roll that money over to directed IRA, open the type of account that you're using. Could be a Roth, a 401(k), IRA, whatever. Bring that money over and say, hey, I'm going to send over those syndication documents. I want to be in that real estate project. And you're probably going to do better than a REIT or something that Wall Street can manufacture for you. And so that's an option.

Yeah. Yeah. So, I mean, you know, we don't have any advice here. What's our purpose is not to give you investment advice about what to invest in or who to invest with. This is what you're doing with your self-directed IRA. It's the meth lab rental in Illinois. It's the property in Apolis somewhere.

You're talking about my rental or your rental?

That's personally offensive.

You know, I mean, I just, you know, I don't, I don't know.

I don't know what was happening there. So it doesn't, you know, the rent was paid in cash, whatever.

Yeah, a little bag of cash every week. Those guys were great. Lots of bling. Loved them. Her son was— their grandsons were great. Yeah, really helped out.

Yeah. So anyways, I was trying to keep it light, um, but these could be big projects, this could be small projects, syndications. It could be a little partnership of 5 or 6 people coming together, some people with IRAs and individual cash to take down a real estate deal. Probably in an LLC type structure. You can do private lending. We'll have separate episodes on that where your IRA is the lender on other people's real estate deals, getting interest and points back. The key thing here is there's really two key points and takeaways we want to leave. One, you need a self-directed IRA to do this. You're not doing this at Merrill Lynch or Fidelity like Mark said, okay? They, they're broker-dealers. They let you invest your account with them in what they happen to sell, publicly traded securities. The second point is you would do this, or this is a good idea if you believe in real estate as an asset class or even a particular class within real estate and you think you have a right deal opportunity better than, as Mark said, the next alternative, or, or think about what you're currently invested in with your retirement account. If that speaks to you, you should take action. Get going on this. Take control. Open up a self-directed IRA. Book a call with our team at Directed IRA. We can help answer all the questions. We have tons of educational resources, summits, sets, webinars, newsletters. We have it all to get you set on the straight path and, uh, be just part of the journey here. Yeah, you're taking control of your retirement.

I wish we could go into more detail on the IRA LLC or some of the action.

We have other podcasts.

Yeah, we have other podcasts to do that. Yeah, so don't worry about that. I want to bring up one last topic, and I love it when you talk about it. I'm going to hijack it. Is the rule of 72. So Matt was averaging over 30% on his deal. God bless him. That was amazing. And I love Steve Olson too. I need to say hello to him. My daughter used to babysit for him when she lived near him. And my little project probably averaged around 20% when it was all said and done. So let's just say you're getting 8% on your mutual fund or ETF. If you've never heard of the Rule of 72, what it means is it helps you figure out how quickly that money is going to double. So let's say you've had $100,000. You know, I hope that's the case. Some of you out there, $100,000 and you put it in an ETF and make 8%. You take 72 and divide it by 8. That $100,000 will double in 9 years. So 72 divided by 8 tells you how many years until that $100,000 turns into $200,000. Well, let's say I'm going to just throw it out. You have some insider knowledge. You've got some insider skills on real estate. You take that $100,000 and buy some real estate and let's say you average 22%. I know that maybe some of you are— that's, that's heresy. You're going to put, you know, you're going to put comments out there that Mark Kohler's crazy. We see it all the time. Some of you can do it with your own money. Doesn't mean you can't do it with your IRA. But let's just say it's 22%. 72 divided by 22 is approximately 3 years. So that $100,000 is going to double in 3 years and turn into $200,000. Then in 3 more years, it's going to double and turn to $400,000. And then in 3 more years, the same time period, that 9 years, you have $800,000. The Rule of 72 would tell you that that 22% in 9 years is going to turn to $800,000. Or you can get an 8% return and it'll turn into $200,000. That is the magic here. You get to choose what you invest in. I don't know if you're going to get 22% return, but probably more than 8%.

Yeah. So, and this is up to you. And I'd say self-directing is not for everyone, but it's for sure as hell more for more people that aren't doing it. And don't even know it's possible.

Yeah.

And that's who we're here for. So, uh, we've got a lot of other educational resources you can get direct at IRA.com. Again, book a call with our team. Tons of resources there. The third edition of my book that we mentioned.

Oh my gosh, you plugged it again. You know what I found out? Yours is $19.99. My book is $20.25. I don't know what's going— yeah, I don't know what that says.

Yours worth more, or is it people overpaying?

I can get mine overnight. Yours is not going to come for a couple more days, so I don't know, maybe that's what you're for it.

That's because no one's buying yours, so it's just sitting on the shelf.

So, right, unbelievable. You know, I just bought 3 copies, you know, you know, it hurts, it hurts.

Mine's just flying off the shelf.

Yeah, yeah, yeah. Anyway, oh, whatever. Well, everybody, thanks so much for listening today, and I will endorse the Matt Sorenson 3rd edition without even reading it. I will endorse it. I just bought 3 copies myself. Get to Amazon, buy a copy, uh, give it to your best friend, your neighbor, your parents, and dive into the, the beautiful world of self-directing. We'll be here every week. Make sure you give us a like, two thumbs up, 5 stars, and be here to continue learning about how to self-direct your retirement account. Thanks everybody, and thank you everyone for listening. A quick disclaimer and reminder: this presentation does not constitute an attorney or CPA client relationship, and it is always in your best interest to consult competent legal and tax professionals when conducting your own personal transactions.

We also want to make sure you know this is not investment advice or financial advice. We're just trying to give you education, ideas, and strategies you can take to your professionals or conduct your own research on. We'll see you next time.