Zachary ''Zach'' Wilson- Secret Weapon for Passive Investing: Solo 401K And Self Directed IRA

Wow.

All right. Welcome to our monthly meetup. This evening, it's June 26, 2023. We're going to be talking about the secret weapon for passive investing. Solo 401k and self directed. IRA a little bit about this meetup. We just got done with about a 10 minute breakout session for networking. But really this is the place to come learn, network and build relationships and multifamily investment opportunities. We meet on the fourth Monday of each month at 7pm Central Time. Our networking breakouts happen in the beginning. Really feel like networking and building relationships is important. We can always go back to these type of recordings and listen through the content. But building the relationships are huge for investing whether you're active or passive. We're now into the guest presentation portion of it that typically lasts 35 to 40 minutes and then we will do some Q and A and networking. So one thing I like to do each month is to show how we're growing. We've actually added two people since I did this this morning, this little screenshot, but we are continuing to be the second largest passive investor meetup in the country or actually in the world. But in the country we're ranked number one in the world too. We follow Germany. Hamburg, Germany. They have 1408 nine members. We have as of today 1400 though this slide here shows 1398. So thank you for being a member. Reach out if we can help in any way. And you know, just love for y' all to continue joining whether you're coming physically into the meetings or just listening to these recordings. Hopefully it's adding a lot of content, a lot of value. A little bit about myself. I'm Wayne courageous. I'm with CRI Partners. We have about $33 million assets under management with properties in Texas, Louisiana and Alabama. This has been my whole career is in commercial real estate since I got out of the Marine Corps back in 2007 and have just a huge passion in commercial real estate. And the last few years we've been heavily educating our investors through our meetup. We have a passive investor coaching program that I'll talk about shortly and and then obviously providing great returns to our investors. Other ways to learn more about us is the Untold Stories of Real Estate Investing. It's our podcast and then our website creipartners.com has a lot of content, blogs, has podcasts and just a lot of great information to learn more. Also we launched this a couple months ago. It's going really well. Our Passive Investor coaching dot com. Check it out. Seven day money back guarantee. So if you don't like it or don't think the information is worth the cost, no questions asked, we'll return the money. But what I wanted to do is one give this everybody the ability to learn from A to Z about passive investing. How do you underwrite deals? How do you look at different offering memorandums to see if a particular deal is worth or better than than the other? And then we meet on a monthly basis more as a smaller group to go through any questions or maybe there's a deal that you have on your plate. I'm not able to tell you to invest or not, but we can definitely look at it high level and happy to share my thoughts and you know, we can go through it together. So as passive investor coaching.com all right, enough about me. I'm excited to talk about our IRA specialist with Quest Trust company, Zach Wilson. He is spending his evening with us, so I'm very grateful for his time. But Zach originally is from New Orleans, Louisiana. He began as a chemical engineer at lsu. After a couple of years he realized that he wanted to take his life in a different direction, which led him to packing everything up and moving to Houston to pursue a degree in finance at University of Houston. Even then, the traditional route of a normal finance major didn't seem like the right fit. That's when he found Quest. He started his career career at Quest over four years ago and their internal auditing team. This meant that he led a team that looked over every investment that came to request. He learned in detail how these investments are structured. After that, he joined the IRA specialist team which he is currently on. This allowed him to get a different perspective now that not only does he know how most investment structures are structured at Quest, but he also now gets the take a deep dive into the networking and business development that makes these deals possible. Quest has been a profound impact on his life and the way he views his own personal investments for the future. So with that I'm going to stop my share and Zach will bring up his slides and we'll go further again. You know, put questions in the chat box and then Zach will, you know, pause throughout the presentation to see if there's any questions as well. You know, we want to make this, you know, a pretty laid back, informative session. So thank you Zach for being on and look forward to learning from you.

Absolutely. Now thank you guys for having me. I really enjoy coming out and doing these just because this is an avenue that not really many people realize is even there. All right, and so really what we want to focus on is how you can go about investing into the same deals that you're already doing now, except in a Tax Advantage account like a self directed IRA or in case like a solo 401k. All right, so everything you're about to see here. Oh, here we go. So everything you're about to see here is for educational purposes only. Obviously at Quest it's important to understand the role that we play when it comes to your retirement investing. We're really here to facilitate as whatever transactions you're looking for and to provide as much education and much resources to our clients and investors. But with that being said, we don't offer any sort of tax, legal investment advice and we don't endorse any specific investments. So a little bit about us. We are Quest Trust Company. We are the largest self directed IRA custodian in the state of Texas. We have roughly 20,000 active investor clients all across the country. We have over 2.7 billion billion in assets under administration that actually just ticked up past the 2.8 mark. And so we're excited about that. And we have over 100 employees, 34 of which are certified Irish service professionals. And as of right now we have. Oh sorry, we have just over 450 million undirected cash sitting our clients accounts. And so that's where the opportunity lies, whether you're part of that Quest pool or you need capital to make your deals happen. So before we get started really getting into the nitty gritty, I think it's important to build a foundation and understand the types, really the two main types of entities there are in the US all right? And this is going to be your taxable and your non taxable entities. So very first on the list of taxable entities is going to be you and anything else you create, right? Any of your established accounts. Makes sense. You go to work, you're in W2 income, you tax a little income as you make it. Well, let's say you start gathering up, you start gathering up income, you start saving up and you want to start doing your investments, but you want to do it in a structured or maybe something with a little bit more asset protection. And so you establish an llc. Well, the LLC going to be considered a taxable entity as well, or maybe in some cases just a pass through entity. Let's take a step further. If you're going to start running a business or selling products, right, then you establish an S Corp or a C Corp, those are going to be considered taxable entities. As well. And this even extends to things like trusts. So you get your personal property trust, your land trust, all of those are going to be considered taxable entities. Well, on the non taxable side, the first thing that always comes to mind when I say a non taxable entity is, is something like a church, you know, a charity, their nonprofit organization. But your self directed IRA is also a non taxable entity. This also includes the plans that you have through work. So you qualified retirement plans, right? Your 401ks, your 403bs, your tsps, right? This even includes things like the solo 401k that can be self directed, just like the traditional IRA. But that key word self direction, what does that really mean? What is a self directed ira? Believe it or not, that is just a marketing term that is just simply there to illustrate that you are one in that you are the one in the driver's seat, right? You're in control of the investments in the account. There's no legal distinction between your self directed traditional or your self directed Roth IRA at a custodian like Quest versus the traditional Roth IRA you would have at any other custodian like you know, Fidelity or Vanguard. The only difference is that they allow you to take those funds, put them into the public market. We allow you to take those same funds and put them into privately held assets, specifically real estate style investments we specialize in. So with that in mind, what kind of accounts can you self direct? Well, at Quest we hold seven different types of accounts that fall under three different categories. First one's going to be your employer plans. Right? This is the plans that everyone has heard of. That's going to be the traditional and the Roth ira. So by far the most popular account in the United States. And for a while the most popular account at Quest was the traditional ira. Now it's not necessarily because it's better than the Roth ira. I don't really think that's the best way to frame that thought. Right. Each is going to play their own role. But the reason the traditional IRA is so popular is because of its pre tax status. So unless you've specified otherwise, all the contributions that you and your employer have been making to things like the 401k have been made as pre tax contributions. So when you're looking to roll the funds over, most people are looking to avoid any sort of tax implication on that rollover out of that 401k plan. Well, that's where that traditional IRA is going to come into play. It's able to house those pre tax Funds and not cause any sort of tax implication on the movement to that self directed ira. Once the funds are there now, they're growing tax deferred. And then come time for retirement when you're starting to take the funds out as distributions, you'll be taxed on that as income. You'll be adding that amount to your adjusted gross Inc. Income for the year in which you took that distribution. Now on the flip side, the Roth IRA personally, my favorite account, it's going to have a post tax status, right? That post tax status is going to give it two distinct advantages. The first one is that any contributions made to the Roth ira, so funds you took from your personal account, right, Your own pocket and contributed to that Roth ira, those funds can come out tax and penalty free, no matter your age, right? At any time they can come out tax and penalty free. So for example, let's say over the next five years I put in 6,000 a year, right? So at the end of year five, I've got $30,000 sitting in my Roth IRA. Well, at that time I decided, well, man, I really like to purchase a new car, but I don't want to take a loan out or I want to put a sizable down payment. I don't have that much saved up. You've got now $30,000 to pull from before taxation is ever considered. All right? The second advantage is that once the funds are in there, they are now growing tax free. So let's say in that same example you took that 30,000 and you built it into, you know, 50, a hundred, a million dollars, right? As long as when you're taking those funds out, A, you've had a Roth I, you've had a Roth account open and funded for five years and B, you're over the age of 59 and a half the entirety of that account, all the contributions, all the conversions, all the earnings that have happened within that account are all going to come out tax and penalty free. Uncle Sam doesn't get to touch a dime. So it makes the Roth IRA so attractive. The second category is going to be our employer plans. These are going to be things like the SEP IRA, the Simple IRA and the Solo 401K. These are really meant for people who are self employed and are looking to take advantage of the higher contribution limits that come along with these employer plans. So keep in mind, all of them, all of them can be self directed, just like the traditional and Roth ira. So let's take a look at how they're structured, right? First is the Simple IRA I'm sorry, the SEP ira. So for the SEP IRA it is going to be comprised of solely employer contributions, no employee contributions.

All right.

It's an important distinction to keep in mind is solely employer contributions. Now if you were to establish a SEP ira, keep in mind that it sits as a pre tax status. That changed at the beginning of this year with Secure Act 2.0. It opened up the ability for a Roth portion. But most custodians as of right now just simply don't have the infrastructure to do that. So for now let's just talk about it as if it was a solely pre tax account. All right. So what this allows you to do is to put in a contribution up to 66,000 in a single year. But obviously it's not just that cut and simple, not that plain and simple. So look at kind of how that works as the employer. Right. So you're a self employed individual. So you are the only employer and you're the employee.

Right.

You will get to contribute up to 25% of what you pay yourself. It is if it is paying yourself W2 income and then up to 20% of what you pay yourself if it's 1099 or Schedule C income for a maximum of that 66,000 in a given year. Right. Again, self directed, just like traditional and Roth. The next one is going to be the simple IRA. Simple IRAs usually we'll see for when a practice has gathered employees. Anywhere from seven to 10 employees is about that sweet spot that we usually see a Simple IRA in. And the reason is because it's going to be comprised of both employer contributions and employee contributions. So with the employer contributions, the employer is able to contribute what's called either 3% elective or 2% non elective. All that means is that if you're choosing 3% elective, you're going to match dollar for dollar your employees contributions up to 3% of what they pay themselves. If it's a 2% non elective that means it doesn't matter if they contribute or not. You're contribute, you're giving them 2% of their pay across the board. All right. As the employee side it's going to be 17,500 I think is the newer, the new limit that just came out and then an additional catch up contribution on top of that once you reach reach age 50. All right. So that's the simple IRA. And finally let's take a look at the solo 401k. So solo 401k is by far the most powerful account in the United States. The most powerful account for sure, that we offer here at Quest, but can also be the most dangerous, right. For that reason, it's most audited account in the United States. Why? Well, because with the Solo 401K, you are the trustee of the 401K. You are in full and complete charge of that. As a comparison, when we're looking at Quest role, any one of these other accounts, right? Traditional Roth sep, simple, we're the custodian, right? We're going to give you a portal to which you can view all of your transactions. We're going to generate 1099, your 5498s, all right? We're going to, we're going to, you know, we're going to do all the auditing over the investments to be sure they're vested correctly and there are no blatantly permitted transactions, all that stuff. So we're very hands on the Solo 401K, much different. We're just your document plan provider, right? So really we'll help you establish the 401k from there. You apply for the EIN, you're going to do the, to open up the trust bank accounts, you're going to do the bookkeeping for the transactions, right? You're going to generate your 1099, your 5000 500s.

Right?

So it's very hands on. Usually a lot of people have a CPA and a bookkeeper working with them to establish and run that solo 401k. Now what makes it so powerful, right, is its higher contribution limits. Now it's going to match the SEP IRA as far as the maximum. So that's 66,000. However, it's broken down a little bit different. So with the employer and the employee side in the 401, remember, you're wearing two hats here. So on the employer side, think of it identical as a SEP IRA, 25% of W2 or 20% of 1099. Right. That's what the employer can make. But on top of that, the employee, you, as the employee can contribute up to $22,500. Right. Without any sort of like it being a percentage or anything. You just have to at least make that much to make that contribution. And if you're over the age of 50, that gets bumped up to 30,000. All right? So total combined between two of them is where that $66,000 limit is going to come in. So when you're really looking at your comparisons between the Solo 401k versus something like the SEP IRA or the traditional Roth. It's really the role that your custodian is going to be playing right now some people, it makes sense if you're experienced in this, in this field, you know how to do the bookkeeping, the record keeping, you understand what, what transactions you're looking to do. Solo 401k might be your fit, right. We've got clients, we've got tons of clients who have that solo 401k which is something to consider. Right. We can take a deeper dive in the Q and A portion as we kind of move along. Final category is going to be our set, our specialty plans. Really don't want to spend too much time on these. I want to take too much of yalls time. Just know these are the Coverdell ESA and the hsa, right. These aren't retirement accounts. These are accounts meant to help you today. Right. With the education expenses come along with raising children and also with medical expenses that every one of us as Americans are going to run into at some point in our life.

Right.

The esa just think of it as like a Roth ira. Money goes in post tax. As long as it's coming out towards qualified education expenses, it comes out tax and penalty free. The HSA on the other hand, I truly believe it's one of the most underrated accounts that are available because it has best of both worlds. You can make contributions to it as if it were a traditional ira. So you get the tax deduction up front. And as long as the funds are coming out going towards qualified medical expenses, they're coming out tax and penalty free as well. So you kind of get the best of both worlds. You want more have more questions Again we could take a look at that a little bit later. So those are the accounts that we can self direct. But truly the question is why? Why would you want a self directed account? I mean there's a lot of advantages but we like to focus really on three main advantages. First one's diversification. It allows you to get that arm's length distance away from the public market. Right. If you talk to a financial advisor and he wants, you know he's going to tell you let's diversify, let's get you into some, some low yield, low risk mutual funds maybe let's have a little bit of a riskier side and some high yield stocks that we think and let's purchase some bonds in a down market. Well you're kind of putting your eggs in just different parts of what is overall the same basket. Right. So what a true with a self Directed IRA and a custodian like Quest allows so that true arm's length diversification outside of the public market to get into privately held assets. Second is going to be the tax savings, right? So let's say you were to do an investment on your own. You purchase a property, you do a fix and flip and you want to defer that taxation to later, so you put it into a 1031. Well, you're going to be restricted on the timeline of the next investment. You're going to be restricted on the value and of the asset class of your next investment with an account like A self directed IRA negates the need for a 1031 at all. By its very nature, these accounts are growing tax deferred and in some cases, like the Roth ira, they're growing entirely tax free. The second one, or in the final, is going to be investing in what you know best. Every single one of you is on this chat because either A, you have a foundation in real estate or B, you're looking to build that foundation now. So why not utilize that foundation or the found that you've already built or that you're building to help build that retirement that you envision rather than just putting in the market and really trusting that it's going to grow. So Uncle Sam's not going to give you all these advantages without giving you some disadvantages. So let's take a look at those. When it comes to an ira, there are three types of restrictions that the IRS is going to put on it. The first one is going to be your people restrictions, right? These are the people and entities that you can and that you cannot deal with. Second one is going to be the transaction restrictions, what you can't do. And the third one is the investment restrictions, what you can't invest in. I'm going to skip over this next slide real quick and just jump into who you cannot invest with. Believe it or not, the very top of that list of disqualified parties to an IRA is you as an individual. I know it seems counterintuitive at first, but really think about it and it makes sense. If you were able to benefit now from these accounts, if you're able to make money now from these accounts, everyone will do it. It's a tax advantage account. Why wouldn't I benefit now from it? Right? It'd be the smartest move. So the IRS is going to put a restriction on you, right? Not only you when it comes to disqualified parties, it's you, your spouse, your lineal ascendants. So parents, grandparents, Your lineal descendants. So children, grandchildren, their spouses, any companies that those people own, control, manage or highly compensated by. Really, you just think blanket. If they're affiliated with it, more than likely you're not going to be able to do it. But there's always exceptions, right? That's who you can't deal with. Now, what can't you do with them? That's where the prohibited transactions come into play. So you cannot buy, sell, loan, trade, extend a service to or receive a benefit from the ira, whether direct or indirect. So just plain and simple, essentially what this looks like. I can't purchase a property in my IRA and then sell it to myself, because what would stop me from selling it to myself at pennies on the dollar, right? And vice versa. Can't lend to myself. I can't trade and exchange things with myself or any of those other disqualified parties. I didn't even make a slide for the investment restrictions because it's super simple. You can't invest in the life insurance policies and you can't invest into collectibles. Those are things like vintage art, those are our cars, vintage art, alcohol, right? All that stuff. Because it's hard to get a true appraisal and it can be somewhat subjective. The IRS doesn't really allow those types of investments within the ira. So what can you invest in? Just about anything. You really can, right? If you want to take direct title to a property, you can do that within your ira. You want to do private money lending out of your ira, you want to be the bank, by all means, be a private money lender. And if you want to invest into funds, things like syndication notes, funds, things like that, you can all do that within an IRA at a custodian like West. So how do you fund it? How do you get money in that ira? There's three main ways. I won't go over too much of these, right? I won't spend too much time on these. First one is just going to be your contributions, right? Every account has its own contribution limits, as we talked about a little bit earlier. The second one is going to be transferring from another ira. So if you've got a current IRA that you've had since you were younger because you were told to. First of all, very good job. Not too many people get started early with this. But if you have that IRA saved up, you by all means you can transfer it from that current IRA to a custodian like Quest. And then finally, the most common way that people will fund their IRA is going to be rolling over from an old employer plan. So if you've got an old W2 or I know you got an old job that you left and you have the 401k just sitting there, by all means you have that separation of service and you can roll those funds over to a custodian like Quest or really to any, any IRA at all. Right now, can you do it from an active 401k or an active retirement account potentially? The reason we don't like to stress too much on this because it really plans, it really depends on the plan documents themselves, right? You have to ask if they allow for in service withdrawals and if they say no, that's really nothing you can do. If they say yes, then you have to ask me under what circumstances. Sometimes when you're fully vested, sometimes when you're 59 and a half, it really does depend from plan to plan. So we always just like to stress it's a lot easier if it's from a past employer. Now how do you fund it or how do you actually make the investment? Well, I want to speak on Quest and our process right here. It's pretty simple. The first thing you're going to do is you're going to reach out to Quest and let us know you're ready to purchase an investment from there. What we're going to do is we're going to assign a specialist to you that's going to focus on whatever type of investment you're looking to make. So they're going to work with you as well as with any syndicator, borrower, title company to help gather the documentation. Once we've got it, we audited everything to be sure. One, it's vested correctly in the name of the ira. And two, there are none of those pesky prohibited transactions that could be putting your account at risk. All right? We do that within 24 to 48 hours after which you can fund that investment as long as those documents are in good order. All right. But talking about investments, let's specifically look at syndication investments within a self directed ira. So the first thing we always like to address at the very beginning is that UBIT and udfi, right? So UBIT is unrelated business income tax. It is a taxation that the IRA pays as an entity, not you as an individual IRA pays and it is triggered by udfi, that is unrelated debt financed income. Now let's take a look at what that means in practice. So let's look at this investment you have. You and your IRA both looking to purchase separate properties. 12 if you make the purchase, right. You will send the funds over to title company, you'll get it titled under your name. Your name's not listed on the warranty deed.

Boom.

You own that property. IRA does the same exact thing, all the same steps, except you know, you're including the IRA's information on things like the contract, the settlement statement, the warranty deed. All of that is showing the IRA's information. So the IRA takes title to the property. Well, you flip it, you sell it. Taxation is going to be taken out of that income as you make it. All right, makes sense. With the ira, the IRA has purchased property and has purchased it outright. So there is no debt leverage on it. The IRA is able to sell that property and take the full return back to be either tax deferred or tax free and then redeployed as you see fit. So where do you, where does UDFI come into play? Well, that middle, that D and F, right. That debt, that debt leveraged financing, that's really where it's going to come in. So let's take a look at what that looks like. So you have your ira, right? Your IRA makes an investment that is using debt, using debt to purchase it. Right. Whether it's the IRA directly borrowing funds in the form of a non recourse note or the IRA is making an investment into a syndication that has borrowed funds from an institution.

Right.

Doesn't matter. They're both to be treated the same way. So the bonds are borrowed, the property is purchased. Right. It is fixed up. Whatever it is, it's acquired, developed, you know, and then sold for a profit. Well, when it's sold for a profit, because the IRA made an investment that is debt leveraged and the IRA itself is a tax exempt entity, the IRS says it's too much of an advantage. So it's going to slap it and trigger, it's going to give it. First of all, udfi, which is unrelated debt financed income, that triggers unrelated business income tax. So the taxation is cut out of it and gone back to the ira. But let's kind of clear that up and put some numbers to it. Let's just say for ease of Numbers, you made $100,000 investment into a syndication that was 70% debt leverage from an institution. All right, so it's a five year deal. Let's say the first three years you get your K1s back and it's showing that cost segregation, that forced depreciation. So you're getting that lower value on those syndications or I'm sorry, on those K1s.

Right.

So the first three years you show negative values.

Right.

But because the IRA doesn't have any taxable income just yet, there's nothing to apply it to. Right. If you had made the investment yourself personally, and you are a full time real estate investor, you get to take the depreciation, apply against your taxable income. IRA doesn't have any taxable income, so there's nothing to utilize it against. That's fine, hold on to them. All right, so first three years you get those negative K1s, you're putting them in your pocket. Fourth year, let's say you break even, in the fifth year, you make your profit back. Unless you say again, for ease of numbers, you make $50,000 of profit. Well, because the IRA invested into a debt leveraged property that was 70% debt leveraged, 70% of the income that it made is going to be considered taxable. Right, because it's going to be considered that UDFI. So of the 50,000, 35,000 of it is taxable. Well, now the IRA has taxable income because that is taxable income. It now gets to utilize those K1s from the first three years. It's a knock down a substantial portion of that taxable income. All right, this is why, even though most syndications will bring on udfi, it is still the most common investment we see here at Quest. Because that those negative K1s, that forced depreciation is going to knock that down, where it's going to be either a negligible amount in some examples, it cancels it up completely. Right. And so that's where the IRA comes into play because it's still a very viable option for you to get tax advantage returns, even though it does trigger that UBIT and UDFI. All right, so that 35,000, you probably knocked down a substantial portion of it. You pay maybe a couple thousand in taxation and for the rest you get to pocketed into a tax advantaged account to be deployed as you see fit. That's really the strength that a self directed IRA can have when it comes to these syndication investments. And that's really it. Guys, I really didn't want to take too much of your time. I know, I know. We were kind of wanting to fit it all in at once, but I really wanted to leave a lot of time for questions and answers. So there's my contact information if you wanted to reach out to me directly. But let's go ahead and do the Q and A.

Zach, a lot of great information. Thank you so much. You really broke it down really easy to understand too. So nice job with that. One of the questions I had is if you went about investing in real estate via solo 401k, would that get rid of that UBIT? Like from a tax standpoint, you know, that 50,000 that you know as your example, 50,000 returns goes back into your solo 401k. Are you taxed at that, at that time, or just when you take it out, you know, in your retirement years?

Yeah, that's actually one of the strengths of that solo for 1K.

Right.

All of the other accounts here at Quest, no matter the type of IRA is going to run into that UDFI in this given situation. But one of the exemptions that a solo for 1K has is that for any long term investments, Right. So any investment held longer than a year today, it's going to be exempt from, from UDFI. So if you're doing this investment, a solo 401k, none of that, you don't even have to concern yourself with that. You invest into a syndication. You, all you got to do is sit back, wait, you won't get to utilize those K1s, but that's okay. You don't have any, you don't have any taxation. Right. I'll take not being able to utilize the K once if it just means I don't have to pay a dime in taxes. And that's what the Solo 401K offers. Uniquely, that is only that Solo 401K when it comes to the self directed accounts that we have here.

Yeah, but I also like what you said too, Zach, about those negative K1s, because if you're not a qualified real estate professional, meaning you're not full time in this, then you're truly a passive investor. You've got your other work that you're doing. And passive losses offset passive income. Right. And so if you don't have that passive income, or maybe your passive losses are larger than your passive income, those accrue to future years. So to your point, when that sells, you know, taking that depreciation then lowers that taxable ubit. So, you know, I think it's a really great point. Yeah.

And you know, there, there are some people you hear that are going to be entirely against investing into something that's debt leveraged. Right. And there's, there's obviously pros and cons to each one of them, but I think those are more geared towards people borrowing funds to do things like a fix and flip, right. Where there's not going to be too much Depreciation, there's not really going to be too much deductions to take. Right. Obviously you'll be able to claim your interest payments, but outside of that you're really going to have to work with your CPA to get the deductions and maximize those deductions. Right. With a, with a syndication investment, it's pretty much built in.

Right.

It's built into that investment that you're going to experience that depreciation. And so I think, you know, I don't know, I, like I said they're, they all, they're almost always are going to bring on UDFI or it's pretty rare that a syndication won't at least bring on some udfi. And they're still the most common investment we have at Quest. And I think that speaks a lot to the utility that a self directed IRA or you know, in cases like a solo 401k can offer with these types of investments.

It's a great point. Anybody want to put questions in the chat box? I'm happy to read. Or if anybody wants to get off mute, you should be able to unmute yourself and ask a question.

So I guess on, on the kind of the note of these syndication investments, people usually usually will come, come to us and utilize us in two real, two day, two ways. Right. Obviously if you have an account that you're looking to invest with, by all means we can do that transaction. It's the more common reason people will come over to us. But some people come to us because they've got investors. Right. If you're a syndicator and you're looking to raise capital, I mean check out your, your self direct IRA custodian, reach out to those different custodians. Right. We're not the only ones in the game and I don't want to pretend that we are. There are other ones that do it, but don't, don't, don't ignore the opportunity, I guess is what I'm saying. A lot of people when they're looking to invest, they don't realize that the largest pool of funds that they have is their retirement savings.

Right.

Even, even the people who aren't good at saving their income usually have a 401k that they kind of half hazardly just signed up for and didn't really think about. Right. So they've automatically been saving up. Like I said, usually that's the largest pool of funds that they have. So don't ignore that opportunity for sure.

And then the Solo 401k does that if you have employees, whether they're part time or full time, are you eligible for the solo 401k? When do you.

Not if you, if you have an employee and I'm trying to think of the exact terms I know, so if you have an employee that's at. Works over a thousand hours within a year, you absolutely won't. There's a little bit of an in between of like 500 to 1000. I can't remember the exact metric on this is where CPA would come in, but I know there's somewhere in there that's like, yes, they can work for you part time. Right. We usually ask, whenever we're looking to kind of qualify people just have that conversation. We'll ask if they have any full time employees, part time employees. If you have just a part time employee, you could still be eligible for the Solo 401K. But there's a lot of other factors that come into play that kind of get into, like I said, that CPA realm for sure.

All right. We did have a question from the meetup if you want to go.

Yeah, absolutely.

I can read it here. Can any custodian of a self directed IRA allow investments in real estate such as Fidelity, Vanguard, etc.

So it's not that they can't. Right. It's that they simply choose not to. Which is fine. You know, that they are in. It's just not administratively feasible. That's really the term that you'll see. It's just administrative infeasible for them. All right. And it's because of the time it takes for as a custodian for us to process these investments. Could you imagine with Fidelity's base, right. Their, their base clientele, if those people were also allowed to do real estate investments that inquired. That required someone. Right. To actually go through those and look for them. They're gonna. We need to check for prohibited transactions, we need to check for proper vesting that the ein is correct. All of that. It just takes manpower. It's not administratively feasible for them. Right. Which is why they offer strictly private. And we're the flip side. It's not administratively feasible for us to hold public assets. Right. It's expensive to do so. We need to have a broker dealer in house or we need to go through a third party service. Right. So we strictly focus on privately held assets where we can put that customer service and manpower to work. Because that's really our strength. So that's kind of the, the long winded answer of just saying no. The public custodians usually if you're allowed, you know, your Vanguard, your Charles Schwab's TD Ameritrades, Fidel Utilities, they won't allow for this type of investment. You have to go to a specifically private asset custodian for these.

Yeah. And I can vouch for quests. They one going through all these conferences and all they're, they seem to be like if not the number one player, very close to it of doing these type of syndication. And then I've had several investors that have invested through, through quests and it's been really successful. I think the one thing that I do like about the self directed and so there's many things I like about it. But if you're not looking from a standpoint of cash flow. Right. This is truly a retirement type investment, then you could in essence invest in deals that aren't as cash flow heavy. For example, a development play something like, you know, it's a five year hold. We're going to be developing in 18, 24 months. If you look at the whole five year period as you know you could be looking at a 20% average annual return. Well, that money that compounds, I mean where else can you get an investment out there in today's environment at 20% annual return? And so I like it from a standpoint from a retirement, all the benefits you talked about. But also if you're not needing the cash flow, the passive income, which is a benefit of real estate investing and this is a truly retirement, you know, it's, it's that push to have that money grow tax free other than this ubit, you know, piece of. But exactly that'll continue growing. And also if you're not very good at savings, meaning it's easy for you to take out a 401k loan or you're, you know, you're taking money out.

Right.

That money, you can't take it out once it's in real estate investing, you know, on an investment on syndication. So I think it also helps those people to force invest and you know, since they can't, they don't have the temptation to take money out.

Right? Yeah, it's definitely something, you know, you're, you said it and you're able to really just forget it because it's not even an option for you to take it out.

You know.

And you know, on that note of cash flow, it's kind of the conversation I always like to have with my, you know, with clients, especially newer investors who are looking to move over and utilize a self directed IRA is that you're right, it's not designed for cash flow. It's designed to help build that real estate, or, I'm sorry, build that retirement. All right, now, the moment you hit 59 and a half, right, what we've seen, so I think, you know, it's kind of the, the strongest appeal of the Roth IRA as we've had clients who, you know, early on they did the Roth conversion. So they moved funds from their 401k, they converted it to the Roth immediately. They took that tax hit right then and there and then they built it within the Roth, right? And from there what they did is once they reach 59 and a half, right, they've already had that account open for more than five years. They stopped doing investments outside of the Roth ira. Why though? Because now that they've met those two requirements, they can take distributions out of the Roth ira, tax and penalty free. And so now they just have all their cash flow coming. They'll like, for example, they'll lend out of their IRA and any of the interest payments that come in, they have a monthly distribution set up, they'll just distribute it to themselves. That's tax free income. Just straight. That is tax free income. No one's touching it. It's coming directly to you. And Uncle Sam doesn't get a piece of it. Which I think is, you know, kind of the last bastion of Uncle Sam being not being able to touch it that you can find for sure.

All right, we got a new question here. Can funds from self directed IRAs be used towards down payment of an investment property? Will there be any problem in getting a loan from bank for rest of the amount?

So let me answer that kind of in two ways, right? Whenever we're looking to utilize the IRA funds, the IRA has to have title to the property, right? So you can't take the funds out of the IRA to go towards a down payment for you to take a loan and purchase the property yourselves, right? That's the only real, only real way to do that is simply distribute the funds out of the ira, then you're looking at tax and penalty on top of that, right? Now, on the flip side, let's say you do want to invest within the ira, but you don't have enough to purchase the property outright. The IRA can absolutely borrow funds, all right? It can borrow the funds via a non recourse loan. Now this loan is going to function exactly the same way as any traditional mortgage would, right? Obviously, you know, the timing is up to you whether it wants to be a short term note or a long term loan. But the only difference is that it contains non recourse language that states in the case of default, the lender cannot go after any other assets either held by the IRA or held by you personally. They can only go after the property directly tied to that note. So because of that they usually require a little bit of a higher down payment. It could affect the interest rates, but you know, it's possible. It's definitely possible. We see people do it, you know, when, when they're looking to purchase property. Again, it just turns out, you know, if the deal makes sense. Because when you're doing that, right, not only does that be in that non recourse note, but now we're getting into the udfi, right, where depending upon how much it's debt leveraged, it's going to affect the income for the ira, the IRA having to pay tax on that income. So if it makes sense, you know, by all means, by all means, you can definitely do it.

Yeah, it's really great. Question. Any other questions? Feel free to unmute or type in the chat box.

I was just gonna say just from personal experience. I looked at my emails and it was three years ago, but my husband and I had a call with Quest and it was just super comfortable and very friendly and we're question oriented people. So I was kind of giggling going back through the emails that were, you know, going back and forth. But I think that, you know, our personal experience has just been very friendly and very approachable and I would just encourage anybody that isn't comfortable asking questions or maybe we get off the call and you think of another question or you share this video with somebody once it's on YouTube and they have questions. Really everybody that we have dealt with at Quest was super easygoing and super friendly and willing to answer questions and helpful. So I just thought I'd share our personal experience.

Well, I appreciate the kind words and we really do, we try to stress that. Right. Because you know, at the end of the day, this is your retirement account. This is, this is the money you're gonna rely on when you reach retirement age. I would hope you would know where every dollar. Yeah. All right. So yeah, we always, you know, I've sat on the phone with clients, I've jumped on zoom calls with them and their CPAs. You know, I've even had some people who weren't Quest clients but just wanted to call and ask questions. We don't put up, we don't gatekeep the information or we don't put up a blockade. If you look at our YouTube channel, hundreds of videos accessible to the public.

Well, thank you for that, Courtney. We did get another question in. And, and then after this question, Zach, if you can tell us how we can contact you for anyone who's listening after this video, those are on this call. That'd be appreciated. Are there any negative implications on a developer team for taking on investors using these type of SEP IRA funds? Any additional disclosures the deal team needs to make when taking on this type of investor?

No, no. If you're on the investment side, Right. You're the one who's either syndicating or you're raising funds. Not that I'm aware of. Obviously I'm not a syndicator. Right. So if there is the nitty gritty stuff that I've just simply never come across for the past five years, you know, maybe. But from my experience, no, there wasn't anything that was additionally required. It's still someone doing a private investment. Which is why we stress due diligence.

Right.

We teach classes on that kind of stuff. So we really try to empower our investors to make the most informed decisions that they can. Right. And we always, with that comes, you know, looking out for people who are ill intentioned. We are very upfront about that. You know, you have to do your due diligence if you have questions on it that you call and ask us. Right. We have videos going over this kind of stuff. But there wouldn't be at least that. Not that I'm aware of anything that additionally you would have to do as the development team. Just because someone with an IRA is making the investment.

Yeah. During the PPM signature stage, they usually will. Well, they, if they're investing as an IRA or an entity, they'll put their entity name. They're investing in their entity name, not their personal name. Yeah, that. I don't know if that helps answer the question, but that's the entities investing in the syndication. And so they would put their ein and the, the entity on there, right?

Yeah, that's exactly right. And that's something that usually will, will help the clients get corrected if it's wrong. But, but that's, that's actually a good point. I didn't think about that. Right. Is it. Is the ira, while it's filled with that person's money, it is an entirely separate entity than them. So it's got its own name, its own address, its own, you know, Social Security number in the form of an ein. So the IRA's information. Right. The exact vesting has to show up. That's something we provide all of our clients and we send directly to syndicators whenever they're, you know, looking to fill in those documentation. But yeah, that's, that was actually a really good point. That's exactly, you know, it needs to be pretty exact as far as the vesting goes. Yeah.

And you made a good point there, too. It's every year I, at least those requests, I see them asking what the current valuation is of the property. It seems like, you know, that's more of an annual check in with the syndicator on that as well. That the. I don't know if it's an IRA requirement or what, but seems like we get those questions at least annually on our deals.

Yeah. So that is something. At the end of every year, we do have to report both to the Texas Department of Banking and the irs, the value of every asset held under administration. Obviously, for public custodians, the value is pretty, pretty objective. You know, it's going to be that value at that time. But with it being private assets, that is something we do request from our clients and which will usually in turn, they'll reach out to the syndicators or they'll reach out to the fund manager, the borrower, whatever type of investment is just to get that value.

You.

Nothing's too complex, really. We just need something from you guys. Right. So whoever the syndicator is, we just need to say client's name, client's account number, initial investment, current value of that investment. That's really it.

Well, Zach, thank you again for joining us this evening. How can people reach out to you? And I'm sure there's going to be people that are going to be wanting to learn more directly from you.

Yeah, absolutely. So I'll go ahead and share my screen right here. All right. So you can contact Me, Zachary Wilson, questtrust.com By all means, you can give us a call. 855-Fund IRAs. You can also reach us at 281-492-3434. And you can specifically ask for me or if I'm not available, any one of our IRA specialists will be able to help you out. We have a full team of IRA specialists that's just as knowledgeable as me on these types of investments and with IRAs, so they can answer just about any question you have. If they don't know the answ, they'll get you connected with someone who does. All right. Yeah. You know, find me, find us on Facebook LinkedIn. You can check out our YouTube channel. I will say if you're, especially if you're getting, just getting into real estate Investing, utilize our YouTube channel. We have hundreds of videos going over everything from introducing you to the concept of self direction all the way to things like we talked about the ins and outs of syndication investments, ubit, udfi.

Right.

All of that stuff. We have interviews with people across the industry. All of our webinars that we host on Tuesdays and Saturdays are all recorded immediately uploaded to that channel. All for free for everyone to see.

Love it. All right, well thanks everybody for joining and we'll send out an email after this. So if there's any follow up questions. Also have Zachary's information as well. But great content Zachary and appreciate you being with us tonight.

No, really, I really appreciate you guys having me out here. Like I said, anytime, anytime I get to come out to this. I really enjoy these kind of classes and these kind of webinars. So I'd be happy to be back anytime you'll have me.

Cool. Thank you so much.

Thank you.