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Aaron Fragnito: All right, ladies and gentlemen, welcome back to the Passive Cash Flow Podcast. This is episode number three, we are going to talk about how to self-direct your IRA into real estate. There is, what is it, 3 trillion with a T, $3 trillion in your IRAs throughout the country. It is a massive amount of wealth and so many people think the only thing you could do with your IRA is invest in stocks and bonds or handed off to Merrill Lynch to move into a stock, but that is not the only thing you do with your IRA.
You could also take control of your IRA, move it into a custodian and completely change the income on your IRA. Completely change the benefits of your retirement and what you could do with your retirement money, your family and that is what it’s all about, create a better wealth for your family so you have more time to enjoy life. Guys, you want to learn more about how you can get invested in our buildings, go to PeoplesCapitalGroup.com, we work with lots of passive investors to buy apartment buildings in New Jersey.
Let’s jump into the topic today, the IRA, how you can self-direct your IRA. You can roll your 401k into your IRA, then you can self-direct your IRA. This podcast is for anyone that has a 401k, has an IRA. Anyone that knows other people that have IRAs and 401k’s because a lot of people don’t understand this and this is an important thing to talk to your friends and family about.
They might get a little bored, who wants to talk about their IRA, but it’s crazy what you can do with your IRA and how many financial advisors say you can’t do this, but you can self-direct your IRA. Here’s how it works. Let’s say your IRA is currently with Merrill Lynch, and they’re moving it through stocks and bonds. Now, you want to diversify into real estate, well, one of your options is to buy a REIT but a REIT is just a stock that’s backed by real estate.
It’s not like actually owning a share of an LLC that owns real estate, which is what we do here Peoples Capital Group. It’s better to own a share of an LLC that owns a building because then you get the tax benefits of it, you get the tax depreciation. When you own a REIT, a stock that’s backed by real estate, you do get dividends from it and that’s great and the stock can grow in value and that’s great.
REITs are actually a good investment, but you wanted to diversify the actual real estate and get actual tax depreciation and keep more your money instead of give more of it to the government and therefore make more ROI. Then you want to self-direct your IRA into real estate and take control of your retirement account. First thing you need to do is hire an IRA custodian.
There’s tons of them out there, they don’t cost much at all. I think it’s more like $50 to start an account. New Direction IRA is one of the IRA custodians we’ve worked with before. In fact, if you go through us to them, I think they wipe the $50 application fee, so that’s a nice thing. Then there’s like Next Generation Trust and Equity-One, there’s tons of IRA self-direct custodians, all right.
Do your shopping, look around, find a company that’s near you that you’re comfortable with and wants to do the things you’re looking to do with your IRA. Once you choose an IRA custodian who can self-direct your IRA, the IRA custodian is going to contact wherever your IRA is being held right now. Let’s say you hire New Direction IRA to self-direct your IRA, so now they’re going to contact Merrill Lynch and Merrill Lynch are going to move the IRA, whatever amount you’ve told them to do into New Direction IRA.
Now, New Direction IRA has your IRA and you can advise what you want to do with it. Now there are rules and regulations on what you can and can’t do with your IRA. You can’t use it to take your spouse out to dinner. You can’t use to put your kids through college. You cannot use it to give a loan to your child or your parents, but you can use it to give a loan to your brother or your sister or your cousin to start a business or flip a house.
You can invest in an LLC property with Peoples Capital Group and get passive cash flow checks. You can invest in certain precious metals and private companies as well, as long as you’re not the manager, the main operator or CEO of that company and your children or your parents are not as well. You can work with lineal family members such as brothers, sisters, cousins, people that are essentially on the lineal, horizontal scale as your family line goes.
You cannot work with vertical integration of your families such as your grandparents and your children. There are rules or regulations as who you can lend to, what types of companies you can invest in but as long as you follow those regulations then your IRA custodian is going to guide you through that, all right. Your IRA custodian takes the capital, your IRA and moves it into their account and then you’re going to say, “Okay, I want to invest in apartment building with Peoples Capital Group. I’m going to own 10% of the building enough to do anything, I get cash flow checks.”
The tax write-offs are washed through, but they do help you avoid any tax on asset and also, of course, a big lump sum of REIT finance. “I like the building, I like the management company, I like what they’re doing over there, a great track record. I’m going to invest to Peoples Capital Group.” You’re going to direct your IRA custodian to then review the operating agreement.
Our operating agreement for the LLC that we buy the buildings with is an operating agreement that allows people to self-direct their IRA into. We make the investment non-recourse. It’s very important the investment is non-recourse. Because let’s say you want to self-direct your IRA, you want to go buy a two-family home and you’re going to own 100% of it, but the loan is going to be recourse.
You can’t do that, the IRA cannot be on the hook for a mortgage, the IRA cannot be on a recourse loan. When you go and invest your IRA into an LLC, the IRA cannot be personally guaranteeing a loan. Now, we make sure our investors don’t personally guarantee the loan when they invest with us in the building and because of that, we structure our LLC operating agreement to allow people to self-directed their IRA into our investment opportunities.
Our business is specifically set up for IRAs, people can self-direct their IRAs about a third of our investor’s self-directed IRAs. Once you self-direct your IRA from where it’s at to the custodian, at that point, you can advise them to do one of two things. You can say, “Here’s an asset that I want to invest in”, they’re going to review the operating agreement, if everything looks good, they’re going to have you sign off on the operating agreement and then the capital, the IRA is wired to the title company to do the closing of the real estate. That LLC is going to own the real estate and it’s going to pay cash flow back to the IRA custodian every quarter.
Now, let’s say the investor wanting to go a step further, and they wanted to diversify their money and they wanted to buy a property with half of their IRA and own 100% of it and get a feeling for management. Then they want to take the other half their IRA and invest passively in a building with Peoples Capital Group which allows Peoples capital Group to do all the work and get passive cash flow to the investor.
In this case, the person’s going to need access to their money more regularly because they’re buying a two-family property. When you own a piece of real estate and you’re the operating account for that real estate, you need access to the money. You need to pay your landscaper and the plumber and the contractors and things break, you need to pay your service providers quickly.
Because of that, it doesn’t make sense to keep your money in the IRA custodian because every time you want a check, they’re going to charge you a couple of dollars for the check, it’s going to take you a few days to get that checks. No one wants to wait for the money that way, you’re going to need a checkbook to write checks out to contractors if you’re actively using that account to manage or flip real estate or actually own a building, which is different than what we do.
We start LLC that’s completely passive and we do all the work so then the cash flow checks are paid right back to the IRA custodian. In this scenario, I’m talking about investor that wants to do two things, they want to buy a two-family and they want to invest in Peoples Capital Group passively. They’re going to start an LLC, and this LLC is going to be owned by their IRA, but it’s going to be managed by them.
If you are an owner of an IRA and you hired IRA custodian and you want to do multiple things with the IRA, and you’re going to need access to the money very quickly and readily and you don’t want to bother the IRA custodian every time you need a check, and you’re going to pay them $5 for a check and wait to three to four business days, that’s not going to really fly when you’re a plumber saying, “Hey, I just ran over here to fix your leaking pipe, you got to pay me right now.”
It’s really better than to start an LLC that you’re going to self-direct your IRA into. In this case, the funds are now sitting with your IRA custodian and you’ve said “Since I want to do multiple things with my IRA and I’m going to need to access the money quickly, I’m going to start an LLC”, and the IRA custodian is going to wire the money into that LLC. Now, this LLC is going to be structured properly, so that it’s owned by your IRA but it’s managed by you.
Now, you can’t take a management fee. You can’t pay yourself early. This is not a loophole to pay yourself early. If it was, [laughs] I probably won’t have to work anymore because I would have cracked the code for all of the IRA owners, but it is a great solution to build your IRA a heck of a lot faster, so that’s the goal here. In this scenario, this individual says “I want to own a two-family and I want to invest passively to Peoples Capital Group, so I’m going to start an LLC, this LLC is going to be called John Doe IRA LLC.”
It’s going to be owned by his IRA, it’s going to be managed by him, so now he can manage what to do with that money. Now, once your IRA custodian self-directs the money from their account into this LLC account, it’s up to you to make the right decisions. You can’t go make a loan to your child. You can’t take your wife out to dinner. You can’t pay for college education for your kids.
You can make a loan to your brother to start a business that you’re not the manager of and you don’t own the majority of. You can give a loan to another friend of yours to start a small business. You can invest in an LLC with Peoples Capital Group and get passive cash flow checks back to the LLC you created. You can go and buy a two-family property with a non-recourse loan.
Now, there are lenders out there that do non-recourse loans and that means, say you’re a $100,00 down to buy a $300,000 two-family, okay, and you’re going to get a loan for 200,000, you’re going to put down 100. Well, that loan cannot be recourse because as I said earlier in the podcast, you cannot have a recourse loan for your IRA, your IRA cannot be on the hook for debt. That’s one of the rules, okay? Because it’s actually a government entity in a way.
Essentially, you’re going to get a non recourse loan to buy a two-family home. Let’s say you have $200,000 in your IRA, you self directed to an IRA custodian, you start an LLC that’s owned by your IRA managed by you, and now your IRA custodian has self deduct that money into that LLC. Okay, so now John Doe IRA LLC has $200,000 of your IRA money, okay?
At this point, John Doe, he’s going to want to go and buy a two families. He’s going to take 100,000 of that 200,000, he’s going to put that down. He’s going to buy a $300,000 two families. He’s going to get a mortgage. He’s going to leverage that IRA cash, he’s going to get a $300,000 two-family home, John’s going to manage that building. He can’t pay himself a management fee, he can’t pocket cash on the side, he has to follow the IRA regulations, the monies go back into the LLC operating account that his IRA owned and he manages.
All right, John gets tired of managing the building. Okay? That’s a whole different scenario that he says he wants to invest in people’s capital. The other $100,000 that is in his LLC operating account, he’s going to invest in People’s Capital Group. We’re going to buy a building 123 Main Street, John’s going to own 10% of the building, it’s going to be a completely passive position.
He doesn’t do anything, he doesn’t file the tax the tax time. He doesn’t have to chase tenants around or execute a 15 year reposition strategy to get max cash flow. That’s our job. We are the management, we have the track record we have to know how to find the buildings, analyze them, take them down and reposition them, but John’s going to bring in the capital, he’s going to get a piece of the cash flow and benefits the real estate he’s going to get a huge lump sum of cash at the refinance, and that’s going to be a passive investment for him.
Those checks can go back to his John Doe IRA LLC account and that’s where the money will go as cash flow and profits from the investment comes back to him. All right, from his other building, the two-family that he bought, and he’s managing those checks will also go back to John Doe, IRA LLC. All right, and this way he’ll build his IRA account.
Again, you can’t pull from it early, it’s not any loophole here, but you can build your IRA much more aggressively by taking control of it. In this scenario, we’ve had this scenario before where the individual self directs his IRA into a custodian then creates the LLC, self directs then into the LLC that’s owned by his IRA managed by him, he’s then going to diversify into a two family where he’s going to need the cash regularly, he’s going to be managing it.
Then often the investors find, “Wait a minute, I’m making the same return on investment with the two family, I’m running around, managing, answering the tenant phone calls, I lose a tenant, I lose 50% of my income. My LLC accounts writing a check every month to cover the mortgage,” and they say, “Wait a minute, why don’t I just invest with People’s Capital Group, the other $100,000 because we’re doing pretty well in the building. It’s 30 units, I have 30 tenants paying us every month,” he’s getting passive cash flow checks, he doesn’t have to do a thing. All right.
It’s really tough when you work a nine to five, and you got to manage your real estate on the weekends or something like that. Your weekends are meant to be enjoyed the friends and family so you can regenerate your strength, regenerate your rest and get out there on Monday and crush it. By working side businesses and managing real estate on the side, people struggle, a lot of our investors tried to self-direct through IRA, whatever they put together $100,000 they bought an income property, they’re struggling with the management of it.
It is not making as much money as they thought it would. It’s a lot more work than they thought it would be and their passive investments with us are actually making them better return on investment, and they don’t have to do anything. That’s a no brainer. If you don’t do anything, you make better ROI, you’re going to go with that investment opportunity.
By working with People’s Capital Group, a lot of these active investors find that they make better returns with us and don’t do any of the work, but when you self direct your IRA, you can figure out those things at your own time, at your own rate. You can go and buy buildings. Maybe you have a knack for, maybe you enjoy managing real estate and that’s something you can do, and you can diversify into a couple different things.
Maybe you want to make a loan to your brother who’s always been talking about that startup idea he’s had and we wouldn’t loan too much too quickly, but definitely you could do that with your IRA. When you self direct your IRA, you take control of your retirement account, our investors make double-digit cash on cash returns, they do much better than they did in the stock market.
When the market goes down, our tenants keep paying the rent. When the markets up our tenants keep paying the rent, we buy middle of the road real estate, middle of the road families, hard working families, these people pay their rent, whether the stocks are up or down. Whether there’s a recession or not. We don’t buy bottom of the rung people in poverty that get hit very hard.
In recessions, we don’t buy top tier of real estate either which gets hit again very hard at recessions, the fancy condos in Manhattan, whatnot. We don’t do that stuff. We buy nice small apartment buildings here in New Jersey. We manage them all ourselves. We have our management company in-house and we’ve been doing this for about 10 years. About a third of our investors self direct through IRA.
Now, if you want to create that John Doe IRA LLC we were talking about, all right? This is when you have your IRA with an IRA custodian, and then you’re going to create an LLC, it’s going to be owned by your IRA, it’s going to be managed by you. Again, you can’t take a management fee or anything like that’s. It’s not a way to pay yourself early, but it is a way to take more control of your IRA and then you can diversify into a number of things. Okay?
Once you create that IRA account, you need an operating agreement, this operating agreement can cost thousands and thousands of dollars. We give that operating agreement to investors that are looking at self-direct through IRA in real estate. If you want to start that Check book IRA LLC account, email us at peoplescapitalgroup.com, go to peoplescapitalgroup.com put in your information, shoot us an email [email protected], or just go to our website, of course.
There once we connect with you, if you do invest in people’s capital, we’re going to give you that operating agreement to allow you to start an IRA LLC account that you can self direct your IRA into. Now this operating group is going to outline what you can and can’t do with the money and that’s a very important part of an operating agreement, and that allows you to start and structure this LLC.
All right, this operating agreement cost us thousands of dollars, we give it to you for free. If you’re investing with People’s Capital Group and you want to learn more about self-directing your IRA, go to peoplescapitalgroup.com, put your information in, we can send you that LLC operating agreement that allows you to self direct your IRA into an LLC that your IRA owns and you manage that’s called a checkbook IRA LLC account.
You don’t have to do that that’s an extra step, you can just leave your IRA with an IRA custodian. Okay, again, you don’t have to take the extra step of John Doe IRA LLC. In fact, if you’re investing in a building with PCG, and we’re sending you passive cash flow checks, then it really doesn’t make sense to take that extra step and start that LLC account because you’re just not going to need access to the money all that regularly.
In that case, many people just self-direct to their IRA custodian and then the IRA custodian invests in the building with People’s Capital Group and the cash flow takes me back to the IRA custodian to build your IRA quarter over quarter year over year.
Guys, you want to learn more peoplescapitalgroup.com is our website. Get in contact with us. We’ll send you that operating agreement if you’re investing with us. Then subscribe for a new podcast every single week. This is Aaron Fragnito of People’s Capital Group. Hope to hear from you soon. Have a great day.
Aaron has been helping people invest in Real Estate for over 10 years. He is a Co-Founder of Peoples Capital Group (PCG) a real estate investment and holding company. He is a full time real estate investor, as well as, the host of the New Jersey Real Estate Network and host of the Passive Cash Flow Podcast. Aaron has previously completed over 100 real estate transactions as a realtor and another 150 transactions in his current role as a real estate investor.