February 23, 2024

Did you know you can invest in real estate using funds you’ve probably forgotten about? For years, you’ve been socking away money into your IRA or 401(k) to ensure an abundant retirement. The problem? You’ve only been able to invest those funds into passive investments like stocks, bonds, and mutual funds. What about the investors who want a more active income stream with bigger tax benefits, more equity upside, and plenty of cash flow? Can you use your retirement accounts to build wealth with real estate?

If you ask Kaaren Hall, her answer is a resounding yes. Kaaren saw quickly how the real money was being made in real estate, so she began investing herself, later realizing that she could use her retirement funds to build a real estate portfolio faster. She founded uDirect IRA Services to help other investors build wealth a better way, opening up more options for passive income, so your retirement accounts can grow into the millions.

If you want to scale your real estate portfolio but don’t have the cash on hand, this could be your PERFECT option. Kaaren goes over exactly how to use your retirement accounts to invest in real estate, what you can (and definitely can’t) do when investing this way, and how you can start raising capital for your own deal using other people’s retirement funds. This is a $40 trillion untapped opportunity, so don’t miss out!

David:
This is the BiggerPockets Podcast, Show 770.

Kaaren:
Hi, I’m Kaaren Hall. And I’m CEO of uDirect IRA Services. And I’m going to talk to you about how to use self-directed retirement accounts to invest in your next real estate deal.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast in the world, here today with my co-host, Henry Washington.
Today’s episode is going to blow your mind. If you’re someone who has struggled thinking, “I want to invest in real estate, but I just don’t have the funds,” this is when you don’t want to miss. It is just for you.
Henry and I interview Kaaren Hall, a expert in self-directed IRAs who will not only teach you how to use an IRA to fund your deal, but how to create an IRA out of funds that you have in different retirement accounts for everybody who wants to invest in real estate, but feels they also want to keep some money set aside for emergencies in case there’s a recession or protect their family or other reasons. This is a can’t miss episode. Henry, I thought you asked some particularly insightful questions today. What were some of your favorite parts of the show?

Henry:
I mean, the best part about this show to me is because it answers one of the most frequently asked questions that new investors ask which is, “How do I find the funds? How do I get started investing without demolishing my savings? Where does this money come from? How do I grow a portfolio?” And this is a phenomenal episode where you can learn and potentially find a way to find some money that you didn’t even know you had or you could access. So this is a great episode for newbies.

David:
Yeah. So for experienced investors, I’d like you to keep an eye on the fact that not only may you have funds that you’re not thinking about. But when you are raising money from other people, they may not realize that they have the ability to create a self-directed IRA, lend you funds out of it. Now, they can get money back with the money that you pay them, grow their account more than they would have in other ways, and you can fund your deals by teaching them how.

Henry:
Yeah. My second favorite part of this episode was where you learned that and you decided you were going to be my next lender for my deal. So I mean, that was the amazing part of the show.

David:
Yeah. I talked my way right into becoming Henry’s personal lender. You’re talking about JP Greene Bank here, my next business venture. Also, you don’t want to miss this show. Listen all the way to the end because you’re going to hear what kind of Beanie Baby, both Henry and I would be. All that and more in today’s show.
Before we bring in Kaaren, today’s quick tip is don’t be afraid to ask questions when you don’t understand all of a strategy. Find the right person to talk to. Ask questions. Make sure they know their stuff and let them run with the stuff you don’t understand. Your job is to find the deal, analyze the deal, and make the deal not to do all of the little pieces that are involved. Henry, are you ready to do this thing?

Henry:
Let’s do it.

David:
While growing her personal portfolio, slow and steady, Kaaren Hall has taken her business acumen across various industries and turned that knowledge into a business with a massive opportunity to help investors use retirement savings to invest in things like real estate notes, tax liens, private stocks, LLCs, raw land, private lending, and more.
This not-so-common strategy can help you tap into a huge pool of funding. Like any investment strategy, you need to learn the rules to stay in the game, and we will learn about those and more on today’s show. Fun fact, Kaaren was an on-air radio announcer early on in her career. Kaaren, welcome to the show. It sounds like we have a lot to unpack here.

Kaaren:
Hey, David. Thanks so much. I really appreciate being here. Thanks, Henry.

David:
Yeah. So let’s start this thing off. Where did your exposure to real estate really start to open your eyes to the potential that it could provide folks?

Kaaren:
Wow. Probably when I was in mortgage lending. And I was a loan officer and I could see what it was doing for other people. I could take a look at their tax returns and their net worth. Of course, I get to see what everybody made. And it’s like the people that were making it big were in real estate.

David:
There’s so many stories I’ve seen that start that way. You talk to CPAs. You talk to bookkeepers, anyone that’s sort of in the industry. I just got an Instagram message today from a guy that’s a construction person and he said, “I’m watching how much money the investors are making on these deals, and I’m realizing I’m on the wrong end of this. I don’t want to be swinging the hammer. I want to be swinging the pen, signing the papers. How does the construction person make their way into the deal?”
And I’ve just seen so many of the greats that got exposed to it in someone else’s portfolio playing a role, and then the light bulb went off. You’re like, “I need to get on the other side of the table.” Was that a similar experience for you?

Kaaren:
It really, really was. I mean, you mentioned I was in radio, and that’s really when it started. I was thinking, “How do I make some real money?” And then, I just moved on and did a few other things. And finally, it just all came together.

David:
Henry, I believe it was similar for you. Isn’t that right?

Henry:
Yeah. No for me. So I freaked out and had a panic attack and started Googling and found real estate and was like, “I’m going to do that.”

David:
But didn’t you work at a corporation and do real estate for them?

Henry:
So yeah. I did data analytics for Walmart’s real estate department. And so, okay. I learned a lot about commercial real estate from that aspect and didn’t realize how I could get into it until I found BiggerPockets and was like, “Then, all the dots got connected.”

David:
Yes. So you weren’t working with investors. But I do think that that exposure, you got a comfort level understanding real estate. You were not intimidated by analyzing things. So when all the information came together, you know what, I’ve got an analogy. It reminds me of when a wrestler goes to Jiu-Jitsu because when you’re first learning Jiu-Jitsu, I finally went for the first time in nine months yesterday. So I have to now start talking about it again. It’s like none of it makes sense. You’re just learning a technique here, a technique there, a little snapshot of a piece of what to do. And all you think about is how difficult it is, and it sucks. And then at a certain point, those pieces come out when you’re in the middle of the roll. You’re like, “It’s the wax on, wax off.” Remember the old Karate Kid thing like, oh, that’s why I was learning that thing all the time. The wrestlers put the pieces together so much faster than the people who don’t have any experience with a grappling type of an issue.
Their mind has a framework to understand the information. I strongly believe people like Kaaren, like Henry, the CPAs I talked about, the bookkeepers, they have an element of being familiar with real estate. When they get the information on these podcasts, they run with it versus the person who’s doing something completely different like they’re Al Bundy selling shoes. None of this makes any sense to them.
They really struggle with taking those steps. And that’s one of the reasons that I often advise people. If you’re having a hard time picking up the progress as an investor, get a job in a real estate related environment. Jiu-jitsu scary to you? Go trade wrestling in high school or something you will get used to, which was Henry’s story, which was Kaaren’s story. And I’ve noticed it could get people over the hump. Before we get on with our normal interview, Kaaren, do you have anything like would you support that advice I’m giving or do you see a different angle?

Kaaren:
Oh, 100% because there’s so much jargon. You have to be familiar with what the words are, with what they mean and what employment people have start talking about LTV and what’s your DTI. And you need to know these things.

Henry:
It always because in that same vein, I always wonder why more title agents and closers don’t get into real estate because they get to spend time essentially one-on-one with investors. Every time they close a deal, they get to see the checks that they’re making. I’m like, “How do you not get into it when you see that?”

David:
Oh, and they have the worst job too, because they’re like the offensive line. You’re willing to be the offensive line, but you’re not willing to own the team.

Henry:
Right. Absolutely. Awesome. So Kaaren, thank you. I totally see how that would make you want to jump into it. So once you realize that, hey, I can make great money on the other side of the table here, when did real estate come into play? And what sparked that for you?

Kaaren:
Yeah. Well, I was doing a lot of things at the same time. I was raising children and living in Seattle. I’m kind of mixing things up. But actually, I was living in Seattle. I was on the air. I got a job as a property manager. And then, I became a real estate agent. So this is in my 20s. And I started again, like you talked about, just getting your feet in and learning the basics. Took the 30-clock hour class and learned all the jargon too, and then moved on and got into mortgage loan servicing, got into loan origination.
And so, in origination I was making some pretty good figures, some pretty good bank there. So that was wonderful. But then, you really got to invest. And I did some of that too. And I did lease out a primary residence when I made a move and learned a lot about that as well. But just the more I got into it, the better. And then, that’s really helped our account holders here at uDirect just that comprehension and understanding all the language about real estate investing.

Henry:
Awesome. So it sounds like you took the path. You did the property management. And that gave you even more exposure. Had you owned any of your own property at that point or were you just managing for other people? And then, how did that shape your next steps?

Kaaren:
Yeah, I was managing for other people. And I did things like take people to court because they were being evicted. And I really learned a lot of things too, vacuum the hallways and all that. You just do what you got to do. And I collect the rents and so forth and take care of the property. But again, that was when I was in my 20s. And it was a good start to understand property and how it works.

David:
Now, where did you stop feeling secure working for someone else because it sounds like things were going pretty well? You were making good money. You were doing a good job. They liked you. What changed?

Kaaren:
There was something called a recession. We already know. We all remember. And that made me feel insecure because living in Orange County, I couldn’t get a job in radio. That’s all in Los Angeles. And I wasn’t about to become a loan officer or a realtor or do something like that at that time. So I got a job working with a different company in the self-directed IRA industry. That’s 2007. And that was the start, the self-directed IRAs.

David:
All right. So what emotions did you go through because I remember how the recession affected me? But I was in a different position. I had a relatively secure job in law enforcement. I lost my job temporarily with the sheriff’s office. I got rehired after a couple months. So it wasn’t terrible. But I lost all my seniority. I had to work in court security. So even though financially I was secure, I just emotionally was miserable.
I was a 26, 27-year-old being forced to work at the court instead out on patrol, which led to me shaking things up. I went and took a job at another department. But it was frankly the emotional pain of sitting in commute traffic, not being able to work overtime, not learning anything, just feeling like I was wasting away. A lot of people were in a worse position than me. They had the emotional pain of am I going to lose my house? A lot of people were. What was the situation like for you? What were you thinking every morning when you woke up?

Kaaren:
I’ve got two kids. I’ve got to take care of them, got to feed them and send them through school and all this. How am I going to do that? So really , they were my motivation 110%, was just making sure that they were completely taken care of. And that’s the thing real estate can do. It’s just so amazing.
So that’s when I just had to take a deep dive into this. And so, I got into real estate really as a way to, I don’t know, I mean not just make a living and I guess what I’m trying to say, getting into real estate gave me the base that I needed to be good at self-directed IRAs. I already had all the administrative experience from mortgage loan servicing. But when I got into self-directed IRAs, then, I could take my expertise and use it to help other people invest and help them build their retirement.

David:
Do you think if it wasn’t for that level of concern, you would’ve made the jump later or do you think you maybe never would’ve made it if it wasn’t for that pain and that fear?

Kaaren:
Yeah. It was the pain. What do they say when they burn off the ships and you’re on the island and you can only go forward? And that was my life at that moment. It was pretty terrifying to tell you the truth. And it’s like, “All right, going forward.”And ever since then, my motto has just been, “Just keep swimming.”

David:
Yeah. It’s either go forward or drown in the ocean once you burn the boats, right?

Kaaren:
Yeah. And I made it through, I definitely had some battles.

David:
And you were a top performer at your company, and you were still let go.

Kaaren:
Yeah. They had some issues, some legal issues. And other top earners, highly compensated people got let go at that time. And where it was terrifying, there’s just a part of me that was joyful and so happy, like something really great’s going to come out of this. And it really, really did.

Henry:
It’s funny, you hear lots of stories of where something that seems like it or actually could have been very tragic or traumatizing happening to you where you think it’s this bad thing. But really it’s this moment where a door opens. And that door when you walk through, it just kind of changes your life. So it sounds like that actually turned out to be a blessing for you, which is a phenomenal story. So tell us a little bit about what does that overall portfolio look like today versus when you had to make that transition?

Kaaren:
When I talk about my personal real estate portfolio, I mean that’s not the main story here because what I’ve been doing is helping other people develop theirs. So my real estate portfolio, I think, started off with renting out a previous home I owned. And then, I purchased a home from my son when he was going to college. That’s a good story and later on.
And now recently, I’ve purchased two properties in Columbia, Missouri because I get them at a low price. They’re really cool hardwood floors, refinished them. And so now, I’ve got a couple of rentals in Columbia, Missouri. So my personal real estate portfolio the portfolio isn’t what made me a millionaire. What did was helping other people invest in real estate using this self-directed vehicle.

David:
Okay. Well that’s pretty exciting. I mean if it got you into real estate and it helped a lot of other people make money, that’s capitalism at its best. Nobody loses.
I was just reading in the Richest Man in Babylon doing some work for the book I’m working on for BiggerPockets. It’s going to be called Pillars of Wealth. And one of the mentors was teaching the young person about how when labor’s done correctly, money is spent on a property, but it’s not lost. You spend money on the laborers. You spend money on the materials. But then, you are left with a property that’s worth more than what you spent. And then, the people who did the work for you, their life is better off because they received the wages for the work they did.
They also built skills so they can get more wages later. When we work at the way we’re supposed to, there is not a winner or a loser. It is all winners. That’s something I really like about the strategy that you put together here, is people can tap into funds they may not have known that they had and get a higher return than what they were getting. So let’s get into that. What is a self-directed IRA? And why do you equate it to a game?

Kaaren:
A self-directed IRA, so an IRA is a individual retirement arrangement. It was created in 1975. The president then was Gerald Ford when he signed the ERISA Act into effect creating an IRA. And ever since that moment, you’ve been able to use that to invest in anything except life insurance contracts and collectibles. So it was always self-directable.
But Wall Street sort of got ahold of this vehicle, this IRA. And it became something that was associated with mutual funds and the stock market, and you didn’t really associate it straight away with alternative assets. But it’s always been one thing. So the self-directed IRA is exactly like any other IRA except it can invest outside of Wall Street into primarily real estate and real estate related assets.

David:
All right. Now, what about the rules, is how responsible is the account holder for what goes on?

Kaaren:
Yeah. That’s why this is a game. If I tell you, guys, “Hey, we’re going to play a game,” I mean I know you’re thinking in your head, “I already won this game. I already won.” But you got to know the rules to win, and you got to know the players. So that’s what it is. And so these rules are called prohibited transactions. And so, self-directed IRAs are a game of keep away from these prohibited transactions.

David:
Now, you mentioned no collectibles. Does that mean that if I have one of these I can’t go buy Beanie Babies?

Kaaren:
I hate to break your heart. But that’s exactly what it means.

David:
That is a bummer because I was considering trying to convince the company that makes them to make a Henry Washington collectible Beanie Baby actually. I figured it would be worth millions, and I would just get the first round of them. And my whole plan is now gone.

Kaaren:
Oh, man. Well there’s always plan B.

Henry:
I’m very concerned at what your iteration of a Henry Beanie Baby would look like versus mine.

David:
What would yours look like if you made your own Beanie Baby?

Henry:
Well, mine would look like me. It’s always interesting to see what other people think you look like.

David:
Yes. That’s a very good point. I did this game with Brandon Turner the other day in his car. I was like, “If I was an animal, what would I be?” And instead of answering it, he asked ChatGPT, of course. And it came back and said, “David Greene would be an owl based on his knowledge of real estate and his observing personality. And I was like, “There’s not a dude alive that would ever say I want to be known as an owl.” So I wasn’t a huge fan of ChatGPT. And since then, I’ve sworn it as an enemy and I will not use it because it piss me off. It had a lot of things it could have used. Henry, I would make you a lion with a mane, especially for the beard at a big W between the ears. That’s how I would see your Beanie Baby.

Henry:
I’m with it. I’m in for that.

David:
Kaaren, If you were a Beanie Baby, what would you be?

Kaaren:
I was going to say lion. And I was going to say you look like a bear.

David:
Me?

Kaaren:
Yeah.

David:
Like a polar bear, right, because I’m pale. I Don’t get enough sun.

Kaaren:
Oh, no. I didn’t set a polar bear. You got this big old beard going on. You got your headphones on.

David:
As long as it’s a vicious grizzly bear with sharp talons, I could live with that. Not if it’s like a Teddy bear. I get called out. You’re not the first person to call me a bear. And I always wonder if they mean like does that mean I’m cute and fat and cuddly, or does that mean that I’m vicious and nothing would take me on because it could really go both ways.

Kaaren:
If I had to answer that, I would ask your wife.

David:
No, I don’t have a wife. And then, maybe that’s why. There’s not a whole lot of women looking for a bear on the market or an owl. I got to figure something out here. But thank you for that. For assuming that somebody would marry me, Kaaren, that means a lot. What are some things that people should know about self-directed IRAs that are just not commonly understood?

Kaaren:
Well, one, yeah, a great question. I think one of the things is that it’s not like you’re regular cash, and there are special rules. So you can’t just go do what you want. Again, back to the rules, you have to follow the rules. So you don’t use that money to pay your own bills. It’s for later. Self-directed IRAs are 100% about investing for the future.

David:
All right. And then, if I’m understanding this correctly, do I need to have an IRA set up with my company? Is this the same as a 401(k) or is this different?

Kaaren:
It’s different. Those kinds of plans that are for companies and employees, those are typically referred to as ERISA plans, E-R-I-S-A, ERISA. But the IRA is for the individual, and it’s a traditional, a Roth. It could also be a SEP or a SIMPLE or even a inherited IRA, if somebody passes away and gives you their IRA. So those are some of the individual retirement arrangements, IRA.

David:
So if I have a retirement account set up with my work and I don’t understand much about it because I’m assuming that’s most people, at least that’s me, I never really understood a ton about what was going on with my pension, can I move those funds into a self-directed IRA to then use for real estate investing?

Kaaren:
Absolutely. People do it every day.

David:
Okay. That’s good to know. Let’s get into a deal deep dive on a self-directed IRA funded property that you did, if you don’t mind. Are you ready for that?

Kaaren:
All right.

David:
All right. In this section, Henry and I are going to fire questions back and forth. I will start. What kind of property was it that you bought?

Kaaren:
I’m going to do the single family home for a hundred jack.

David:
How did you find this property?

Kaaren:
A realtor. I’ve got a realtor who calls me when he finds a good property. And so, that’s so valuable.

David:
Okay. I like that. And how much was it?

Kaaren:
It was 230. It was obviously in the Midwest. And I got it down to 205.

David:
Which is actually, it sounds like it’s not a lot, 25 grand. But percentage wise, that’s like 10% of the property are close to it. That’s a pretty big significant negotiation there. And then, how did you fund it?

Kaaren:
I funded it obviously with self-directed IRA funds. And I took on a non-recourse loan for about 10% so that I had a good cushion in my IRA to cover any expenses.

David:
Okay. I like that. What did you do with it once you bought it?

Kaaren:
Well, that’s the thing, the expenses. Things had to happen. And that’s why I got a discount on it because it had been a hoarder home. And so, it needed some love. And so, I took some money from my IRA and used it to improve the property and just needed new flooring, put in some of that vinyl plank flooring, and needed some appliances and so forth. And then, there you go.

David:
So you were able to use down payment money to buy it from your IRA. And then, you were also able to use the rehab money from an IRA as well, right?

Kaaren:
Right. And I think it’s important because you said something, and it brings up a frequently asked question sort of. It’s not really a down payment in an IRA, and that is the most misunderstood thing about investing in real estate with an IRA.
The IRA comes in with a bulk of the funds. It’s not like borrowing 95% or 90%, and then you come in with 10. It’s you come with 90, and you borrow 10. So it’s like flip that because it’s an IRA and a non-recourse lender. What they’re looking for when they are lending money to an IRA is what kind of cash flow is this thing going to have? So if I’ve got a big loan, that’s going to really eat into my cash flow, and it’s going to make it even more difficult for me to get a non-recourse loan.

David:
So it’s not putting 20% down on the property and then borrowing 80% from the bank. You said you have to put 90% down on the property. Where does the other 10% come from?

Kaaren:
That would be the loan in that scenario. 80, 90, whatever it is, you could have 73% and 23, whatever the ratio is, but the LTV is flip-flopped for non-recourse lending in an IRA.

David:
But are you getting the loan from a traditional lender, or are you borrowing it from the IRA?

Kaaren:
Well, neither actually. So a non-recourse lender, it’s like a commercial loan. And so, with their underwriting looks like this. I mean they care about the location and the condition of the property, but they mostly care about its cash flow. So a lot of times before you can close on a non-recourse loan for your IRA, you need to have a written lease agreement in place already so that you can prove you’ve got cash flow. And then, they’re like, “Okay, we’ll fund the deal.”

David:
Okay. So I was mistaken on that. So you get a loan. It has to be non-recourse as a term of using money from the IRA. Is that correct?

Kaaren:
Precisely, yes.

David:
You can’t get a recourse loan so that if there is a default, they can’t come back and take the rest of the money out of the IRA.

Kaaren:
Yeah. They can’t come against you either, just the subject property.

Henry:
Awesome. Yeah. So what was the outcome of this?

Kaaren:
Well, that’s TBD because I’m still rehabbing it and still getting ready. But the nice thing is that my son and his wife live in that neighborhood. And so, every other day, I get a text from them about which friends of theirs want to rent the house. So now, it’s about finishing it up and getting the renter in there. Yeah. It’s super cool.

Henry:
And so it sounds like it’s still ongoing. But so far, talk a little bit about what lessons have you learned from this deal?

Kaaren:
I think that the lesson we all learn with real estate is that it’s going to cost more than you think. Something’s going to happen. The GC got up into the attic, and he found some beams up there that weren’t what you would consider whole. They’re kind of split in half.
So we had to fix that. And there was a drain pipe we had to scope and sneak out into the sewer. And so, there were some fun stuff like that. So I think what I learned is to budget even more than I think I need to budget for the next rehab.

Henry:
It doesn’t matter how experienced of an investor you are. It doesn’t matter how many times you’ve been through a rehab. You are always going to run into the issue where something, A, either unknown is going to come up, or in my… I literally got off the phone with a contractor right before this call where he basically said to me, “Do you need me to send you a new quote for all of the things that you’ve added since we’ve started?”
It’s just like I get in there and I just want to do things differently. I had a bathroom all designed out. And my plumber basically met with me today and said, “Yeah, this is great, except we can’t do any of it.” And so, we had to redesign it all. So you say it’s a lesson learned, and it’s like it’s one that,, yes, I learn, I get better at it, but it still gets me every time.

David:
Yeah. Real estate is like a toddler. You love it, but it takes way more energy than you ever would’ve expected, and you’re probably going to run out of it if you’re not extra prepared. So it’s one of the reasons I tell a lot of people, especially in this market, you don’t have to quit your job to become a real estate investor. You’re better to have a job that gives you the flexibility to work around it as a real estate investor. So like Henry and I, we still work. Kaaren, are you doing work in addition to doing real… yeah, because you’re helping people to do the same thing that you’re doing, right?

Kaaren:
I’m CEO of you uDirect IRA Services. It’s my day job. Yeah.

David:
There you go. right? We still have jobs while investing in real estate. It makes it a lot easier to do. You also have my brain thinking. I think I need to do a revised version of the BRRRR book, and include this as one of the ways to fund a deal. So my question would be if you put 80, 90% of the money to the deal from your IRA, you borrow the rest or you put 100% of it in there from your IRA. Then, you rehab it. You make it worth more. Can you refinance into a traditional deal and pay your IRA back?

Kaaren:
Okay. This is where we have a conflict between thinking of IRA money is your personal money versus these protected dollars. And so, yeah, you can have a property that you bought 100% with your IRA funds. You fixed it up. And now, you want to refi it and use the equity for your next deal. So you can do that. You go back to the non-recourse lender and see if they’ll give you the equity out of your property and they may.
And then, can you use that equity to go out and acquire a new property? Sure you can. Long story short, it’s possible. But there is just a catch, man. This is when you call Keystone CPA. You call Amanda Han, my bud. And she will tell you that that what’s going to happen then is that you’re going to owe tax. It’s called UDFI, unrelated debt financed income tax. So anytime your IRA borrows that non-recourse money, the amount of proceeds that you earned because of leverage are taxable.
So say you borrowed 30% for this real estate deal. And here comes your rent check. Well, 30% of that rent check your IRA earned because of leverage, and that means that that 30% is subject to this UDFI tax. So it’s definitely not investing with your private cash.

David:
Next question for you. How do you look at the layers of retirement, and how are you investing in them for your retirement?

Kaaren:
Right. So I’m in the retirement industry. I sit on the board of directors for the Retirement Industry Trust Association. I feel like I better know something about retirement. So I took a deep dive personally.
I think the first layer that we all have for retirement is Social Security. That’s kind of a given. If you’ve had a job, there’s that. Then, what you want to have just like you want to have in investing is multiple streams of income.
So I think on top of that would be your personal savings, the dollars in your savings account. And then, I’d layer on top of that, this is a capital stack. Am I right? The next thing would be your retirement dollars, your 401(k). Maybe you’ve got a 403(b), a 457. You’ve got IRAs, whatever that is. Your retirement savings come in. And there are other products like whole life insurance that has cash value. That can be one of your streams of income. Maybe, an annuity, I mean people love, people hate them, but it could be a stream of income. And I think on top, the frosting on our retirement cake is alternative assets like investing in real estate because you know what a good rental is going to do for you for your mailbox money and for your cash flow.

Henry:
This is super interesting because there’s always been this like I’ve understood that this is an option for people, but it’s always been this cloud around how do you actually do this? What’s really out there? So how large of a pool of funds are we talking about that can help investors fund their deals?

Kaaren:
Right. Well, self-directed IRAs, I mean it’s a big pool because it’s not just IRAs. It’s 401(k)s, defined benefit plans, all these different kinds of retirement accounts. So altogether, it’s about $40 trillion in American retirement. And that money can be used and can be accessed through self-directed IRAs for your deals.

David:
And are you accessing them from your own funds or are you saying that there’s ways to access other people’s income? Could I do a deal borrowing money from your self-directed IRA?

Kaaren:
You could. But you have to keep everything arm’s length. So you’re not going to have your own IRA. Your own IRA can be in your own deal. But if it’s a single family, but say for example, you’ve got a fund and you’re the fund manager, you pretty much want to keep arm’s length, and you pretty much want to keep out of that with your retirement money. Keep it arm’s length because, again, we want to win this game, the game of keep away. Keep it away from prohibited transactions, so you can’t have personal benefit and you can’t offer services to the plan.
So when it comes to your own money, there’s that. But with other people’s money, I mean that’s the thing, OPM. So if you’ve got a deal and you’re raising capital for it, or maybe it’s just a single family house that you’re working on, you’re starting. And you’re like, “Wow, I’m almost done here, but I need 20 grand left to finish this kitchen. Where am I going to find that?”
So you can go to a real estate investment club or go to the BiggerPockets conference, whatever you want to do. And you can find somebody that says, “Hey, look. I will lend you 20K out of my IRA and maybe secure it against the property, like have a lien against it.” And that’s how we do things on a grassroots level.

David:
So if you find a deal or you need some money to rehab the deal and I have an IRA, I can lend you money out of my IRA that you can use. And the interest and the principle when it’s paid back just goes back, it’s my IRA, so I can grow my own retirement account faster.

Kaaren:
That’s exactly right. Yeah. Exactly right. And so when you’re on the other side and you’re the IRA owner, you can invest in deals as a debt partner where your IRA is lending money, or you can invest as an equity partner where your IRA has an ownership interest.

David:
Awesome. What’s a benefit for new investors when they’re borrowing from a self-directed IRA?

Kaaren:
Wow. Number one, liquidity. I mean, tell me what people ask you about the most. Where do I find access to funds? And this is access to funds, and it’s not going to a bank and putting on your suit and sitting down in front of a banker. This is talking to the people at your real estate investment club, at your local REIA, and saying, “Look, this is what I’m doing and raising capital for it, and define people.” We network, right?

Henry:
So what I’m hearing is that David is going to fund my next few fix and flips through his IRA. I appreciate this episode. Thank you so much, David. That’s super kind of you.

David:
All I have to do is actually get a retirement account. I don’t know that I even have a retirement plan other than the real estate I’ve already bought.

Henry:
Great.

Kaaren:
In fact, when you were a policeman, do you have any kind of pension from that?

David:
We do. But I don’t know how that works.

Kaaren:
So what you would do, that’s called a rollover. And so, if you’re no longer on the force, you can roll over that pension into a self-directed IRA. And there you go. Then, invest those assets probably in real estate. You probably heard of it.

David:
Henry, it’s almost like you originated this entire thing to set yourself up to make me your banker.

Henry:
You heard it here, folks.

David:
The thumbnail looking like the monopoly man or something.

Henry:
You heard it here, folks. David is now my new financial backer. So send me those deals. Let’s make some money folks. Oh, great. Kaaren, talk to us a little bit about what are some of the pitfalls to avoid when dealing with self-directed IRAs.

Kaaren:
I think the number one pitfall is just to make sure you do your due diligence. If you’re going to buy a house with an IRA, make sure that the person selling it to you owns it. If you are investing in, say, private equity, Google that person with the word fraud after their name and make sure they haven’t been incarcerated. Just saying because it happens. Do your due diligence. I think that is the biggest pitfall.

David:
What are some examples of prohibited transactions that people cannot get involved in?

Kaaren:
Yeah. If you’re a rule book kind of guy and you might be David, since you’re like the law.

David:
You would think that, and I probably should be that. But I’m actually not that on all the personality tests. I’m the person that finds out where is the line and how can I morally step past that line as far as possible without going into doing something wrong. So I need help with this stuff because I have a proclivity to break rules, although I would still enforce them on other people, which is why everybody gets upset with people like me. And I’m well aware of that. But still, I want to hear from you. Where is that line so I know how not to cross it?

Kaaren:
That line is in the Internal Revenue Code and it’s 4975. That’s for our rule book people who love the rules. So they’re called prohibited transactions, essentially no personal benefit, keep things arm’s length. Don’t take any action in a deal. You’ll never live in a property that your IRA owns. You’re technically not even supposed to stay there one night. You don’t paint the walls in the property your IRA owns. You hire third-party vendors.
But when your IRA does own a house, for example, or a condo, whatever, you can still sort of act as a property manager. I mean, you can go in there and screen your tenants. You can go in and collect the rent check made payable to the IRA. And you can hire those vendors that are going to fix your windows or your garbage disposal or whatever, but you just can’t do that sweat equity yourself.

Henry:
Yeah. I think, and correct me if I’m wrong, so the way I’m thinking about this, is this is a long-term wealth building strategy. And so, I think when people think about investing in real estate, especially if they’re talking about fixing and flipping is they do a project. They get the funds. They make a big check. But with self-directed IRAs, that profit has to stay in the IRA, right? So it’s a way that you’re growing your wealth. It’s not one that you’re going to take a big flip and pull money out.

Kaaren:
Yeah. You’ve got a point. You just really nailed it. You’re thinking about the future. But the other thing is, so your IRA gets this house. And you do what you do with it. You rent it, whatever. And you think, “Hey, I’m going to sell it.” So your IRA, you sell it, and you make so many dollars. So here comes all that money back in your IRA, I mean your initial capital and any proceeds. And it’s not diminished by tax. Yay. So now, all that money can go back out into your next deal. And then, that means you’re compounding faster because the tax didn’t strip away all your profit.

David:
Okay. Can I ask you a couple of those gray area questions that are incredibly annoying, but this will highlight what my brain needs to understand because I’m always looking to push things as far as I can?

Kaaren:
Okay. Now you’re a gray bear, okay?

David:
Yes, a gray bear. That’s funny. I’m sorry to turn into that gray owl here. Can I buy a short-term rental with self-directed IRA funds, stay in it, but pay for my stay just like somebody else would?

Kaaren:
I mean the answer’s no on so many levels. Where do I start? No, because you can’t have any personal use of an asset your IRA owns. Also a short-term rental where they are just awesome, they’re great, but it’s running a business.
And when you run a business in your IRA, there’s another tax. There are two taxes. They’re twin taxes. That’s called EBIT, unrelated business income tax. So back to our rule book, if you want to find that, it’s on the IRS’s website. It’s I-R-S.G-O-V. And It’s publication 598. So that’s where that rule is written. But that’s a tax. So I wish I could say yes, but it’s no.

David:
Well, you can manage it, but you’re going to be taxed on the income. Is that what you’re saying?

Kaaren:
You’re not taxed. No. I mean retirement accounts are tax free like a Roth or tax deferred in a different kind of account. So you don’t pay tax until you take the money out.

David:
So you can’t stay in it and pay. You also cannot manage it yourself. Is that what you’re saying, and pay yourself a management fee?

Kaaren:
Definitely. There was actually a court case that you can’t pay yourself the management fee, but you can sort of manage it yourself by screening tenants, collecting the rent and hiring the third-party vendors. So you can do that.

David:
Okay. Now, my next question would be, my guess is the answer’s no, but could I buy a short-term rental with IRA funds, self-directed IRA funds, and then manage it myself and make that my short-term rental loophole property where I now qualify as a full-time real estate professional?

Kaaren:
Well, the real estate professional is how many hours that you spend.

David:
Assuming I meet the requirement of how many hours that I spend.

Kaaren:
Yeah. I’m not the tax person, but I would say yes, it would qualify. But again, the short-term rental, you can do it. But it’s going to lead to a pretty steep tax. So you want to definitely check everything out before you do that, do your due diligence.

David:
Yeah. We’d have to combine the CPA with the IRA person. So if anyone’s thinking that, because I’m sure people were, because everyone’s looking for ways to shelter that W2 income while we still have bonus depreciation,. That’s when you got to combine the Amanda Hans with the Kaaren Halls and get the information. But if there is a way to make that work and you don’t have a lot of cash in the bank, might not be a bad plan. Okay. What are some of the common mistakes that people make when utilizing these?

Kaaren:
It’s kind of funny. It’s funny to see this because we had actually… It happened twice in the same week where we had people take their rent money from an IRA and put it in a different IRA. So instead of putting it in their self-directed IRA, they went and put it in their Charles Schwab IRA. And that’s called taking constructive use of your IRA funds. And that’s a way to have game over. It’s taking personal use of your funds, so you just don’t do it. That’s a fairly common mistake.
And again, the other common mistake is thinking that an IRA is a down payment on a house, and it’s not like that as we covered. So when your IRA is investing, you have to keep in mind back to the prohibited transaction thing, who is qualified and who’s disqualified to your IRA?
So the qualified people are the people out to the sides on your family tree. But the disqualified people are up and down your family tree, like your parents and grandparents and their spouses, you and your spouse. And if you don’t have one, then, boom. Then, that’s nice. Then you don’t have to worry about that.
But your children and grandchildren and their spouse is disallowed, plus a 50/50 business partner is disallowed, and a fiduciary like somebody who’s got a legal interest or has to legally have your best interest like a realtor or CPA or attorney or something like that. Those people are disallowed people. So what that means is it would say your IRA has this property. Your uncle can go in there and do the drywall for you, but not your dad. Your aunt can stay there with your niece and nephew. But your mom can’t. So you need to know who’s allowed and who’s disallowed, prohibited, not prohibited.

David:
All right. Kaaren, this has been fantastic. This is more information that I’ve received about self-directed IRAs in the last 45 minutes than I’ve had in my entire life. And I know we’re just scratching the surface because as you mentioned, you need a rule follower. You need to be a rule follower, and you need a person that knows those rules so they can tell you where the line is so you don’t accidentally step over it. So for people that want to learn more about this and do things the right way, as we have BiggerPockets, believe everyone should, where can they find out more about you?

Kaaren:
At our website. It’s the letter U, udirectira.com.

David:
And if you’re watching this on YouTube, you can see exactly how to spell that because it’s right behind Kaaren’s lovely head. Henry, if people want to see what you look like, what type of a lion you would be as a Beanie Baby and what your background looks like, where can they go to find out more about you?

Henry:
Yes, you can reach me on Instagram. I am @thehenrywashington on Instagram. You can send me a DM with your ideas for what the Henry Washington Beanie Baby should look like.

David:
And if you’re not going to do that, please do us a favor, and comment on this YouTube video saying what you think Henry would be if he was a Beanie Baby, as well as what you think I and Kaaren would be. I am very curious to hear how popular bear ends up being.
Kaaren, thank you so much for doing the show and for sharing your knowledge with us. I really hope people do reach out to learn more about this, especially if you’re someone who thinks you have no cash, you might actually have some funds that you didn’t even realize. This is the equivalent of finding the $20 in your coat pocket, but it might be like $300,000 in your bank pocket that you didn’t know about.

Kaaren:
Thanks, David so much.

David:
And that was our show with Kaaren Hall. Henry, what are you thinking?

Henry:
I am glad we talked about this because this is a strategy that almost all real estate investors know is a thing, but very few know how to, A, get signed up to do it. B, how to execute it properly. There’s so many intricacies and rules, and I’m glad we got to have somebody who’s an expert come on and kind of highlight those for beginners.

David:
I remember I felt the same way about 1031s at one point. I knew the concept that I can sell a property and defer taxes on it, but I didn’t know the execution of it. And then, as I learned different rules, well, you have a 45-day window, 180-day window, you can’t have a qualified or constructive receipt. You have to keep them out of debt or more. It starts to get intimidating. And I just would say, I don’t even want to think about it. My first house I sold, I didn’t do a 1031 because I thought it was too much.
And then, I talked to someone who did, and I asked them all these questions. And they’re like, “I don’t know, man. I just got a qualified intermediary and they told me what to do.” I felt like a moron because I was a moron.
The same thing happens with people that ask a million questions about lending, and I’m like, “Why are you asking me all this? Just talk to loan officer. It’s their job to know it all. They’re the one that are going to do it. Let them figure that part out.” I really think this fits in the same box. It can be intimidating stuff, even as an experienced real estate investor.I was listening to a lot of this interview and thinking, “I don’t quite grasp exactly what she’s getting at. I had to ask more questions.”
And that’s how these things are when there’s a lot of intricate rules. It’s like a game of chess. When you’re first learning it, you can forget what the pieces do, much less how the strategy works. Just go to the chess master. If you guys were thinking the same thing as me, call Kaaren. Go to uDirect. Reach out to someone else who does this and say, “Here is my goal. Here’s what I want to achieve. Give me a plan to do it.”
You don’t have to understand all of it. You just have to understand enough of it to gain the confidence to move forward. Do you have any advice people for, Henry, that are in a similar situation that want to get into real estate investing? Maybe they think they don’t have enough cash, or they’re worried about a recession company. They want to keep some money set aside to just protect their family, but they still want to invest in real estate. What would you tell them?

Henry:
Yeah. I would tell them that I think you hit the nail on the head with you have to educate yourself to a point to where you can take some action and not be afraid to bring in an expert where it makes sense for you. And you’re right. You don’t have to be the expert in all things. But you do need to be able to hire or work with the experts in the areas where you’re not comfortable.
And so, I think with the market the way that it is right now, I think education is more important than ever because the market’s not as forgiving as it was if you make mistakes. And so, education to a point, take action where you’re comfortable, bring in experts where you’re not.

David:
That’s such a good point. Can I make another Jiu-Jitsu analogy or am I officially banned?

Henry:
I feel like Jiu-Jitsu is like if you don’t make a Jiu-Jitsu analogy, then you’ll probably be red-faced the next episode because you just have to get it out. So let’s hear it.

David:
Wanting to fly at them. I definitely am the worst Jiu-Jitsu practitioner per Jiu-Jitsu reference of anyone in the world. I have the worst… My turnover to assist ratio is the absolute worst in the entire league when it comes to this.
But it just works so nicely. I often hear people that are really good. I look at them and they’re like a brown belt or even a black belt. They’re super good. In my eyes, they just could not be better. And I’ll ask them about a person they rolled with, like the guy that owns the academy. He’s a Gracie, Crosley Gracie. And they’re like, “Oh yeah. When you go with him, you can’t make a mistake. You cannot make a mistake. If you make a mistake, you’re done.”
And I thought, “Well, that’s interesting because I didn’t know that you made mistakes first off.” And what you’re really saying is against someone who’s not as good as you, you can make a lot of mistakes and you’ll be okay. That is a great way of describing this market.
The last eight years with all the stimulus, with the low interest rates, with the money that was coming all over the place, with money flooding into real estate and boosting the asset prices up, with you bought the property wrong as a long-term rental, make it a short-term rental. There were so many things you could do. The market was forgiving. It was like rolling with the white belt. You didn’t have to be perfect. We are definitely moving into a market that is much more like a black belt. You cannot make mistakes. So getting this information, being careful, and then relying on experts.
The last little analogy that I’ll leave everyone with is no one goes their contractor and asks a million questions about the floor joist or what type of structure that they’re going to use to bear the weight. You just say, “I want it to look like this. How much is that going to cost?” And you might have a couple questions back and forth.
For some reason, when we get around the real estate agent, the loan officer, the qualified intermediary, the CPA, we want to know everything about everything, and you don’t need to. You just need the right person. And so, don’t stress yourselves out asking the wrong questions. Be like Henry here, and focus on finding the deal and landing the deal. Let everybody else do what they do. All right, Henry, I will see you on the next one.

 

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected].

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

About Author