Real Estate is the largest section of the economy, which is why it is best to have some assets tied to it in your portfolio. Quest IRA CEO Nathan Long has been helping companies grow with self-direction through diversification, tax savings and being able to make investments on things that you know best. Nathan explains that self-directed IRAs only difference with traditional IRAs is that you control your retirement account.
Listen to the podcast here:
Taking Control of Your Retirement with Nathan Long from Quest IRA Inc
We’re here with Nathan Long of Quest IRA. Aaron from Laughlin Associates, they teach you how to protect everything that you’re going to set up. Nathan will come in and teach you how to purchase those things and grow those things in your self-directed IRA. Nathan, I’m going to go ahead and turn that over to you and we’ll get started.
Thank you for having me. I appreciate it. If you have any questions or comments or anything that you think you can add, let me know. I’m going to open up with some basic material. Most of your students have heard probably the stuff I’m going to talk about in the beginning, but it’ll be good refresher. For the people who haven’t had it the first time, it’s a necessary part of it. I’m going to get into what I call issues of self-directed IRAs and buying it on notes.
My name is Nathan Long. I’m the CEO of Quest IRA. For those of you that don’t understand, Quest IRA doesn’t sell anything or do anything else. What we do is we administrate private assets inside or retirement accounts or other type of tax leveraged accounts. People can use Quest to buy real estate or buy notes, that’s our largest class actually, but it’s important to understand we don’t sell anything. We don’t give any tax or legal advice. You’ll find plenty of educated people at Quest. A lot of certified IRA specialists, attorneys, professionals from all types, but they’re all there to help you to understand and provide educational assistance to you as you go through your different investments and such. Also if you have any questions or things that can’t get answered or you see a topic that I happened to broach on or bring up that we didn’t quite delve into enough, always pop online. Quest IRA has tons of educational things that if we’ve touched on something, there’s probably a full educational course on it somewhere that you can pick up and watch for free that’s available for all your students.
I always start out with the basic, which is what is a self-directed IRA. A lot of people call me up all the time and say, “I want a self-directed IRA.” One of the things that you need to understand is that a self-directed IRA isn’t a type of IRA at all. As a matter of fact, that’s a marketing term. A lot of people get mixed view. They’ll call me up and say, “I have this old 401(k) and I want to use it to buy a rental property next door or buy a note.” I’m like, “We’re going to open you up a traditional IRA,” then they’re like, “No way. I don’t want a traditional IRA. I want one of those self-directed IRA’s.” I’m like, “That’s not what it is.”
A self-directed IRA is like any other IRA. The difference is Quest will hold private assets and we’re not licensed securities agent. When you bring your money over we don’t go, “Here’s all these investments you get to choose from, tell us what you want.” You got to be like, “I’m bringing your money over and I want to invest in these notes,” then we can go through with that. That’s how that works. I would say one of the mistakes I find people make is when they open a self-directed IRA, they may move all of their money over to Quest and they don’t have an investment picked for all of it, maybe part of it or they did, and then that investment is maybe like a note that is paying back payments as it goes over time and as those payments are coming back, it’s building up a cash value and it’s sitting there with Quest. It doesn’t earn any interest if it sits there.
What I always encourage people do is always make payments on account with your normal brokerage firm, Charles Schwab or Fidelity or something like that, and move the money back and forth as needed instead of large amounts of money sit with Quest. That’s unnecessary. We will talk about using other people’s IRAs to fund some of your transactions, doing the $100 option type of thing. You’d also want to think maybe someone doesn’t want to put all of their money over here at Quest. They want to move a small piece of that retirement. It’s important to understand this, you could have any type of account and we can move back and forth. One more caution I would throw out is that different custodians have different procedures for moving the money.
My number one complaint I always get all the time from our clients is, “It took so long,” or, “It did this.” 99.9% of the time the problem isn’t occurring at Quest, it’s occurring at the other custodians. Some custodians move money very quickly and very easily. On the top of my head, Charles Schwab, Fidelity, they seem to do well and quick. There’s a lot more that do that. Some of the bigger banks sometimes tend to be a little bit slower and make it a little bit more difficult. I’m not here to mention any names or anything, Wells Fargo, so it’s important to understand that the timeline difference and the requirements for moving that money are considerably different depending on the different custodians that you have. We keep a track of how long an average custodian takes so you can ask us and try to see what our past records have indicated and also what the steps may be that might be a little bit onerous.
Why would you want an account with Quest? There are different reasons. One is diversification. Everyone always hears that. “You need to have your portfolio and diversify.” I don’t know that I always follow that advice to tell you the truth. If you invest in things that you know best, you do good. I’m one of those guys that are rinse and repeat. If it works, let’s do it again and again. I’m not super creative like real estate investor. I call it the shiny penny syndrome, but the truth is everybody should have part of their portfolio some assets that are tied to real estate. The reason is real estate is the largest segment of our economy. I don’t think you can have any type of portfolio balanced or that you would consider balanced without having assets based in real estate somewhere. That does not mean everybody should be a property manager. There are some people who are really bad at things like owning property and dealing with toilets and tenants.
I am especially aware of this because I happen to be one of those people. You should see me trying to collect rent or something. “Can I get your rent?” I’m terrible. I really am. I always need layers and layers of people between me and my renters and things like that, but that doesn’t mean that there’s not ways to invest in real estate without directly owning it. What are some of the other ways we could do this? How about let’s be the bank instead of being the landlord? That’s a phenomenal way to diversify your portfolio, hold real estate holdings, get the value of cashflow, without the headaches of toilets and tenants. There are other ways. There’s limited partnership, that whole large apartment complexes. There are so many people that seem to be doing that, that it seems to be saturating the market a little bit, but there are also control issues. It takes a little bit.
Notes are easy. I love them. I tend to be a little bit partial. For clients in my other areas, forgive me, but it’s the truth. Everybody knows that Nathan and Quincy love notes and that’s what we invest in.
Taxing. It’s important to spend time understanding taxes if you’re going to take time to build wealth, and that’s what we’re doing. If you’re watching these things or learning how to build wealth, you better spend some of your time understanding taxes and self-directed IRAs are one of the best tools in learning how to develop wealth completely tax free. It’s one of the great tools that you need to have some understanding of some, but I like it mostly because you can invest in things that you know and understand.
I often told the story about I peeled open a 401(k) ones that I had. I found outside of mutual fund, there is this large holdings that has been lost in construction. I was like, “Wow.” Even as profitable as the stuff I wanted to hold, often when you are invested in something that’s a mutual fund that’s blasting its money over a large portion of investments, you’re not individually critiquing those investments. As you do that, you may end up messing into something that you are not ethically aligned with. I know whenever I buy a note, I invested in someone’s home. There’s nothing weird going on. I know what’s going on with it, and so there are some social implications to invest in notes that people often don’t think about. You’re investing basically into your own community, not a nameless, faceless entity that could be doing things or could not be doing things that are aligned with your ethical or political intentions.
I like that, but then there’s also the other side. If you just invest in things you know and understand, you tend to do better. I can get it. I loan you some money and I get this much return on it. I understand that. It cashflows, takes years to pay back, I get it. There are other things that I like or reasons that I like to invest. If a self-directed IRA isn’t a type of account, there are different types of accounts that could be self-directed. I broke these up into personal plans, employer plans, and what we call specialty plans. Most of my clients invest in this first grade which is our personal plan, either Traditional IRAs or Roth IRAs. The reason is if you had an employer plan, like a 401(k) or 403(b) for savings plan, one of these types of plans where you go to work and you have an employer’s matching funds and they get a little discount, you get a little discount on your taxes, and that money grows tax deferred. After you’ve left or had separation of service, that’s the account the money falls into, it’s the traditional IRA.
You often hear us talk about Roth IRAs and how important they are. As a matter of fact, that discussion is so important right now. In order to have tax-free distributions from a Roth IRA, typically you have to meet two requirements. One is be over the age of 59 and a half, but the other one is to have a Roth IRA for five tax years. A tax year is not a calendar year. If we opened one up, made a contribution, even a $10 contribution for 2017, over a year, we have less than four years left at that five-year counter. I don’t think that you could build your portfolio without learning about Roth IRAs. I have a whole class that just talks about that. The Roth IRA grows completely tax-free, provided that we’ve met those requirements I just talked about. If you’ve got the ability to take a little bit of money and make it worth a lot more money, it makes a lot of sense to pay the taxes often upfront.
For example, a person typically when they’ve reached retirement age, if they go in and they’re talking to a financial advisor about doing a Roth conversion, the problem with it is if you’ve reached a certain age, it’s taking you a long time to save up this money, therefore we need to try to keep that account or the principal safe. We don’t want to ever lose that principal because you can’t re-earn it again. As they do that, the instruments that they have to use are like money market accounts, CDs, bond funds, these things tend to pay lower amounts of returns. If I took a large retirement account, several hundred thousand dollars, and I converted it from a traditional IRA to a Roth IRA, that would add to my modified adjusted gross income in the year that that occurred. I haven’t seen any of that money, but I would have to pay tax on it. If we’re talking $200,000 or $300,000, especially if you’re still employed so you already have income, you may be paying tax at a very onerous top rate, 40%. If you did that and you’re only getting 2% or 3% return, it could take you many, many years to recover that hit from having to pay the taxes. It doesn’t make sense for most people to have a Roth IRA under those circumstances, but there’s good news.
We’re not most people. We have learned the ways of taking money and making it more money. I feel a little bit silly, but it is true. As you start to apply different types of investment strategy, especially ones that pay higher returns, you have to look at these types of planning a little bit different. Take that same scenario. If I took $200,000 or $300,000 and I converted it from a traditional to a Roth IRA, I did it right now, when will I have to pay my taxes? The answer is a whole year from now. How much can I make between now and next year off of my note portfolio? I don’t know. I average. I’m pretty conservative. There are guys that do a lot better than me, but I get above 12% because of the hits that come in. I’m much more conservative and there are a lot of people that do much better than I do. Even so, before I’d have to pay that tax, I would have already gained 12%, 13%, 14% if I did it in January or February or March or earlier in the year. I have a long time to earn some money before I have to pay the tax on that.
That changes the analysis because after I’ve had that Roth IRA, how long do I get to keep it as a Roth IRA? Some people say the answer is forever, but that’s not it. You get to keep it until you take it out and go buy something cool and then it stops growing tax free. There are no reasons to take it out, you don’t have to. There’s no what we call required minimum distributions like they are all in traditional IRAs, but then when you die, you get to pass it on to your children as a beneficial Roth IRA. As a beneficial Roth IRA, they can take distributions out whenever they want, tax-free and penalty-free regardless of their age and it can grow for the rest of their lifetime. If you’ve taught your kids like I’ve done, my son’s involved with me here at work, he understands it. When I pass on, he’ll be able to invest with that Roth IRA for the rest of his life. The fact of paying 30% tax this year isn’t that painful when I consider that I could have tax-free growth for the rest of my lifetime and what we call one-life expectancy table or one more life generation.
I’m so excited about Roth IRAs. Quincy is so excited about Roth IRAs. We love to invest in Roth IRAs and get tax-free growth, but sometimes people lose a very important point to this conversation, which is that traditional IRAs can also be self-directed. Pay attention to that because that’s where most money is. If you look at the investments that we hold at Quest, we have over $1.5 billion now, out of those investments, 84% are in traditional or tax-deferred accounts. That’s why it is important to understand. Sometimes I’m going to be asking you to use other people’s money and as you do that, you want to make sure that you’re not confused and they do have to pay that tax upfront in order to self-direct. That’s the choice you can make, is to pay the tax upfront and get tax-free growth or you can continue to let it grow tax-deferred and that’s not a choice for us to make, it’s a choice for whoever on the account. If you have more questions about how to analyze a Roth conversion, just call and ask for one of our IRA specialist or watch one of our courses online. Ask Stephanie. She knows a lot about it too.
They have a ton of education online. QuestIRA.com, and they always have events coming up every month, they’ve got multiple offices; Dallas, Austin, Houston. They do live events every month. We tend to do most of ours online, they still do them live and in person so you can get out and network and bring your notepad because I see people at these events and they’re scribbling. It’s a lot of fun, but it’s good content and good education and it’s applicable to everyone. It’s not just business owners.
I finished negotiating a new lease in Austin. It’s cool. That will be free for all of you and your students. I have a classroom now available for you in Houston, Dallas and Austin.
There’s also employer plans that can be self-directed, like a SEP IRA, a SIMPLE IRA, or there’s also this powerful product called a Solo 401(k). I like it because you get things like checkbook control. It’s not proper for everybody and you have to make sure you legitimized it and do the same amount of time. I like to spend a lot of time talking about these accounts, we’re going to talk about some others, but know that all these types of accounts can be self-directed and Quest does offer what’s called a Solo 401(k) or sometimes they’re referred to as the Solo Roth or the individual 401(k). Those are all terms for plans that we do offer here at Quest IRA.
There are some specialty plans I love to talk about. These are fun in notes. Coverdell Education Accounts and Health Savings Accounts. Most people don’t even think about. Coverdell Education Account is weird. You don’t get to put much in it. $2,000 a year, you don’t get to write-off or put the money in. It’s like a Roth that grows tax free. Typically you’re going to use this for education. You’re going to be starting to use it when the kid is eighteen. Even if you maxed out the contributions every single year, it’s only $36,000 you could put in. It’s not that much time, so you’re most likely not going to be very risk- oriented with your kid’s college money. A lot of people don’t like them, but when you apply the concept of buying a note for $100 and selling it, whether it’s an income stream. Whether you’re buying the middle, the end, the back, the front, I don’t care, that becomes powerful because you can put $100 into this account. If you can create a large amount of money or a pot in any way, that all happens completely tax free and can be removed for a qualified education.
That’s the key right there, qualified education, because that is not just college. It’s college as well as after-school activities, kindergarten through college, as well as private school tuition or books. Here’s where it gets amazing, electronic equipment and services. What am I talking about there? Internet with computers, anybody got any of those type of things? As long as we’re doing homework on them, those are all qualified expenses. Literally what you could do is do a deal, create income right now this year, and then take that money out tax-free and penalty-free and spend it on things that you’re probably already spending money on and do it tax free.
There’s a long list of those. For those of us that are out there that have kids, it’s a great vehicle and you’re right. A lot of people overlook that. Most of them because they see the $2,000 and go, “I can’t do anything with that.”
Here’s what is cool about it. It’s supposed to be used by the age of 30, and if they don’t, it’s supposed to be distributed, but you have another options. You could move Coverdells from one child to another. If they’re grown up and have their own children, they can now move the accounts to the other children, you can move it to other siblings, your cousins, you can move it to your kids. I love those, but one of the most important accounts that is available today to do investing in is something called a Health Savings Account. Most Americans are having some problems with healthcare. I know that my healthcare coverage for my employees here at Quest went up 38% two years ago, 33% this year. It’s going up, and so more and more people are covering themselves with a type of insurance called a high-deductible health plan, both at work and at home. I know that 86% of my full-time employees use this type of health coverage to cover themselves and probably, you do too because it works pretty well and it allows you to have an account, which is called a Health Savings Account. Don’t get this mixed up with the thing that’s called a flexible savings account, where you got to the end of the year and if you didn’t use it, they took it. We don’t want that accounts.
Health Savings Accounts are amazing because you can use it to invest, all the growth happens tax free. As you make contributions into it, you get to write them off your taxes. As you take money out, it comes out tax-free. No other account works that way. Health Savings Accounts can also use distribution from years past. If I had a medical expense and years passed and I had paid money after tax, I can pick that back up. I can pick up expenses from years past, which is an amazing thing that people don’t understand how powerful that can be. As a matter of fact, I had used that. One time, I had an investment, a Health Savings Account. It made good money. After I had made the good money, I went and removed the money tax-free and penalty-free and I bought myself an airplane engine. I know most of you don’t want an airplane engine, just put a toy of your choice. My point is I use my knowledge as a real estate investor and Health Savings Account in order to make this work. I had receipts in years past or dental bills that were from years past that I picked up and I basically turned in those receipts for that. It is an amazing account.
Is there a limit on how many years back you can go?
There is no limit to how years back you can go, but it is limited by the time that you started your Health Savings Account. If you’ve had one back before, then you can pick up on things so it’s important to understand the timing of when you start your Health Savings Account. I know when I first started mine I didn’t have enough money to fund it, so I waited. I got the health insurance, I waited, and I’m going to fund it a little bit later in the year while I’ve had some medical expenses that occurred. If I had opened the account and put $10 in it, I could have used those receipts to get the money back, but I lost that opportunity because I didn’t. I waited like, “I could put $10 in and then came back to it.”
What’s the minimum amount you can use to fund it?
At Quest, we have no minimum.
Even if it’s $10, it starts that clock?
It starts that clock. We have people that put other options for $10. It’s not a comp for contribution to be $10 or $100. One of my mentors and my good friend, John Heyer, I asked him, and he knows an awful lot about taxes. I’m like, “What self-directed account is the most important to you?” The first part of his answer wasn’t very surprising. He said his mom’s Roth IRA, so I had to snicker at that a little bit if he follows, essentially beneficiary IRA. Then he says, “Health saving account.” I find that curious. I’m like, “Why is that?” He says, “I do all my most important investing on my health savings account.” “Why?” He says, “When you get sick, you’ll spend every dime you have getting better. Nothing will deflate your financials like not having enough money to care for yourself.”
Medicine is getting better and better and more expensive and more expensive and more expensive, and the differences between the haves and have nots are going to get greater. You should be developing some bigger wealth on this area to deal with these things, and the belief that you’ll never get sick or die is not realistic. It’s also one of the things that’s more difficult. People can plan for their death usually easier than they do planning for becoming disabled or becoming sick. It’s a curious human fact thing that they do. It’s an important step. Watch my class about Health Savings Account. You’d be pretty amazed. All the money that I did in my Health Savings Account, I’ve had tremendous gains on it. Every investment I’ve ever done has been a note purchase, even my Health Savings Account. I’m doing a lot of different types of investment, but that particular account, that airplane engine, I could honestly say that was purchased with buying and selling notes.
All of those types of accounts can be self-directed. There’s not any particular type of account that can be self-directed. There are some restrictions that we have to talk about before I get to the issues. There are not much jurisdictions, transaction restrictions and people restrictions. If we do a restricted transaction inside an IRA, it becomes a prohibited transaction and it can blow up the entire account. I have seen a person do a prohibited transaction where the fines when we total them all up, because it takes years to catch it in the future, was almost 160% of their entire account. We don’t have to be too concerned because they’re pretty easy to figure out in what to do.
The biggest problem that we have are the people restrictions. There are people that can’t do business with their IRA. What can’t they do? They can’t buy, sell, trade, loan, or extend services or receive a benefit either directly or indirectly from the investment that the IRA makes. You are the primary person who are disqualified to your IRA. That means that if you have a note, you can’t sell it to your IRA. IRA cannot buy a note from you. You must take your IRA and treat it completely separate from you. All expenses related to the investments you do in your IRA must come from the IRA and all the profit goes back into it. You never use your own IRA to create current profit for yourself. What’s the solution?
Obviously I’ve talked about it a lot. Use other peoples’ IRA to sell them off notes and do well. In addition to you, there’s a group of people who are equally disqualified to your IRA. Those people include yourself, your spouse, your lineal ascendants and descendants, your children and parents, their spouses, and companies those people own control, manage, or highly compensated by. They can do what I said. I didn’t say family, because it’s not family, it’s up and down. It’s parents and children. Brothers, sisters, cousins, those people are not disqualified and you can buy and sell assets between those other people, just not you, your spouse, children, parents, or their spouses. Putting it in an LLC or a trust doesn’t change the thing. We still can’t do it because a company that you own, control, manage or highly compensated by are also disqualified from the IRA.
There are transaction restrictions, but we already talked about them. These are the things that people can’t do. They can’t buy, sell, trade, extend services or receive a benefit directly or indirectly. There are some direct investment restrictions that honestly don’t have too much effect on us. They are life insurance contracts, not too many people are doing that, I guess some people like to invest in that, but that’s pretty rare. In addition to that, there’s collectibles. Collectibles are specifically defined as works of art or gyms or metal, or alcoholic beverage collection. If you have any questions, feel free to call or give us a call or ask us. We have fifteen IRA specialists on staff. All you have to do is say, “I’m with Scott Carson.” You’ll be immediately transferred to an IRA specialist that gives an executive request that understands what you’re trying to do, that is intimately knowledgeable about the investments that you’re trying to make, trying to be very helpful to you.
What could you invest in your self-directed our IRA? I’d say anything that you are knowledgeable about. HHHere today we’re talking about notes, but you can take title to it. A lot of people think that Quest IRA is a real estate IRA company, and the reason is because we talk about a lot of real estate investment strategies, but 49% of our assets that are held at Quest are notes, that’s our largest asset class. Real estate is one of our smaller classes, direct purchase real estate is only 19%. There are a lot of LLCs, there are limited partnerships that are doing all types of things, and then there’s weird things like horse sperm and embryos. If you could take title to it, you can have it in Quest IRA.
I like to bring that up because personally I would never invest in horse sperm. I don’t even like the paperwork because I’m not sure where to begin, but people who do it make a lot of money. The reason they are making a lot of money is they’re investing in things they know and understand. If you invest in the things that you know and understand, you’re going to get a higher return than investing in something that you don’t understand. It’s a fact. I like notes because I’m not as smart as some people and it’s pretty easy for me to say, “I give you this much money and I get a payment back every month.” Even a guy like me can figure that out.
Right now, it’s important. If you don’t have an account with Quest, you need to open one right away. It’s pretty simple. You open an account, call or email us, we’ll send you paperwork, basically name, rank, and serial number, and who gets it when you die. How do you fund the account? Some people make the contribution. If it’s a Roth IRA, I highly recommended making new contributions quickly. A lot of people are rolling over their funds from a 401(k) or another IRA, but either way works. We don’t have any cash minimums, so as little as $10 will start you an account at Quest. They just don’t complete some Quest forms and Quest funds with their account. It’s pretty simple.
Let’s talk about some of my stories here. Here’s one I wanted to talk about. This is an investment that I did years and years ago. It’s a partial note purchase. I put this in here specifically for a reason. The note paid off in a pretty short period of time and what ended up happening is because it paid off early, I had a realized returns of 74%. That was a good story, but I’m going to tell you I wouldn’t do this investment again. Why won’t I? Because it was a partial note investment that I had partnered with other people. I had learned from experience that this doesn’t work very well for me. This is one of the questions I’ll ask, you don’t do partial note purchases, right?
We don’t. We know people that do, just for us personally, we don’t.
It sounds good on paper, but when you start to partner together with a group of people that you don’t know, I’ve had it where it’s lead to potential problems and figuring out what to do, whether we want to foreclose or what strategy we want to take. It was odd. It was odd being invested with people that I know. I don’t do these anymore, even though at the time back then it worked well. I do partner my IRAs. For example, I’ll use my IRA, my Roth IRA, my wife’s IRA. These are disqualified persons, but I’ll put them together and partner and we’ll all buy one note. These are all people I know, they’re members of my family. They’re all IRAs held with Quest or whatever else. That’s okay. That’s partnering with people you know, but buying the partial note purchase, I’ve been avoiding that. I was curious what you thought about it.
We don’t do those. We do have a question though. We always have those that ask, “Is there a danger in investing in non-performing notes inside my own self-directed IRA? It seems that non-performing notes are more active than passive.” That goes off on the bridge of restricted transactions and things like that.
The question is, is there a problem? You get this into this academic discussion. I’ve heard CPAs and attorneys go, “Am I providing services to my IRA?” Here’s my answer. First of all, you got to wonder what is the risk of having to make that argument in an IRA court under these circumstances. I’m going to say that’s pretty low. As a matter of fact, I’ve never seen it yet, but it could happen I guess. If I had to make that argument, I would say, “One of my duties to my IRA is being a fiduciary.” What does that mean? That means that I have the right to bring all of my knowledge and all of my ability to the table to try to benefit the IRA. I can’t provide the service. I can’t buy a piece of land and go off and build a house. That’s definitely building the services. When I’m performing cognizant types of things in order for my IRA to have a larger return, I can argue that that’s not providing a service. I’m being a good fiduciary. They would have a very hard time arguing against that or anything else because that’s a good argument. Think about it. If you go and buy stocks, you’re going to spend some time researching that. They’re going to do those things. I don’t think it should service your own notes. I do think there are certain things I don’t think you should do.
You should never service your own notes.
If it’s in an IRA, that’s important, but I agree with you. You should never service your own notes back to the same reason why I don’t deal with renters directly on this. Let’s talk a little bit about some of the issues or some of the discussions that come up with, like how do you hold ownership to a note. There’s different ways. With your IRA, you could call up and say, “Quest, I want to buy this note.” We buy the note, we put the name of the note, Quest IRA for the benefit of John Doe, IRA 12345.”’ That’s how it’s titled. We send the money. We do everything.
For most of my clients, this works really well because while my clients are only buying one or two notes, they are long-term, they are hanging on to them, they’re just creating a cashflow, there’s no need to pay the expense of forming an LLC or create a trust. When we do that, when we create an LLC or trust, one of the problems is who’s going to be the managing member? It’s okay to have your IRA own an LLC or trust but remember back to disqualified people, people who are disqualified to the IRA are yourself, your spouse, your children, your parents, their spouses, the companies those people own, control, manage or highly compensated by. We have to find somebody that’s not a disqualified person, not you or your closely held family members, to be in that trustee position and sometimes that can be a little onerous. For most people, you could go through systems at Quest when we buy the purchase of a note and they hang on to it directly.
There are others that have other issues. Let’s say you’re like Stephanie. You’re in the frontend, the backend, you’re using other people’s money to leverage it out and get the cashflow streams, and we’re doing a lot of things. Here’s the reality. If you’re going to do that with a direct ownership in the IRA, you’re going to get feed to death by your IRA custodian, which is good for Nathan, but bad for you.
If you’re having to tell Quest, “I need a check sent to here.” We’re having to go through those systems of filling out the forms to get each thing done. If we’re doing it once or twice a year, that’s easier than forming an LLC, but if we’re doing it ten times a month, that’s something else. At that point, I would suggest forming an LLC or a trust. I’ll talk a little bit about the difference of the two. Your IRA then buys that trust. Make the trustee or the managing member not a disqualified person, where you move the fund into that LLC and then the LLC or trust continue to buy different assets. You’ve seen this a lot this way, right?
What should I do? A trust or an LLC, if I’m going to go down that way? What are the advantages with a trust? A trust is simple. You fill in the names, they go apply for an EIN online, take that information down to your local bank, and we open a bank account. We got a trust bank count, we’re off and rolling. It’s basically free. If you wanted to see a trust that has some special IRA language in it, I’m not giving tax legal or investment advice, but for educational purposes only, I’ll send it to you in a Word document so you could change it around if you’d like. Just ask me at Nathan@QuestIRA.com and I’ll give you a free trust that you can take a look at, along with an article about Trump.
Sometimes it’s probably beneficial to go ahead and form an LLC and go through the expense of forming that LLC, make sure if you do that, that the expense for forming the LLC also comes from the IRA. This is the reason. In Texas, trusts are very common here, but in other states they’re not as common. Sometimes if we have to deal with the court or something like that, a foreclosure situation, it can become more onerous or difficult. Then there’s the issue of additional funding. From what I understand, it is often believed that once you formed the trust with IRAs, you shouldn’t put additional amounts in there. If I needed to add money, additional year contributions, I’d have to shut down that trust and then reform it up, where if I have an LLC, additional contributions into the future shouldn’t create a problem. Those are some of the issues to think about. I have a class I teach about Roth processes, about investing with two entities, and if you’re going to use one of those, you might want to watch that class about investing with entities. Any comments that you have about that?
I would say for them to definitely take the classes because that’s a lot of information. Most of what we see comes through the LLCs. There are several people out there that do use trusts, but on our end, they come through LLCs or just individually.
Most of your clients are buying multi-state. It makes sense to use an LLC. I have acknowledged this, “Please do not be the managing member.” If we see an LLC or a trust that has formed where a disqualified person is the managing member, they’ll stop the transaction and not allow that to be processed through because we view that as a prohibited transaction. Other people are more conservative. “Can you do collections or servicing yourself?” We’ve talked about this too. I don’t think you should ever, for any reason. I also think everybody should have a base. Now you say, “What? That’s off the wall, that’s over-rated,” but it isn’t. Think about it. As you become better and better at what you do, your time becomes worth more and more. It doesn’t take very much earning potential to make more than I made. If you spend your time cleaning your toilets, maybe go, “I can do that, I can clean my toilets,” you can collect your own notes if you want to, but you’re spending all your time doing grade C activities. I’m pretty good CEO. The reason why I’m a good CEO is I’m bad at everything, like everything, and so I call on people to do things for me and that is a real key to building wealth, is using professionals to do what you can’t do therefore you have more time to focus on doing the things that make your money.
Scott often says not to perform tasks that are below what you feel like your pay grade should be or what you want your pay grade to be. Don’t do tasks that are underneath that, that you could hire out. Everybody understands it takes a little bit to get to that point, but when you do, you maximize your time and able to pursue things that are going to make you more money or to have greater reach than if you were at home cleaning your own kitchen or your own toilets. We’re all guilty of that at some point, it’s always a good reminder, but especially with notes, even back to the servicing and the collecting question, there are particular things that you can do to reach out to borrowers. As far as the servicing goes, we have companies that do that, we have attorneys that handle those things, so legally everybody’s protected and it’s well worth it. It’s well worth the money and it’s part of the law anyway. Most everybody in there depends exactly what you’re saying.
This next topic I got is a hot topic. It’s what we call fair market value. Every year on December 31st when we closed down, we have to take a value on the assets that are in the account and then we’ll put that on the form and we send it to Uncle Sam, 5498. If I got stocks or mutual funds, it’s simple. I go to the ticker tape, I fill out how many savings we have, I do the math and boom, there’s my valuation, but when I’m talking about self-directed account, there are stuff in there that has no ticker tape. Every year we have to get a valuation and now the regulators in almost every state are now requiring documentation. It used to be just in the IRA. It doesn’t matter. We could just say what we think it’s worth and go. They’re not buying that anymore. They want to see some documentation.
For a regular note, I’m going to lend Stephanie some money and my attorney’s going to wrap that up, and it’s a hard money type of note. Most likely, we don’t need any documentation other than the face value of the note, which is a pretty easy to get because that’s what we say it’s worth is what whatever the value. If it’s amortized, might have shown amortization schedule to show the reduction of the principal. When we’re talking about discounted notes, what’s the discounted note worth? I don’t know. It’s certainly not worth the face value. Every year you have to get a full appraisal on each note, which is going to be ridiculous. That’s not going to make sense. What will we be? Let’s focus in on what the regulators are looking for.
They’re looking for some documentation. I think it’s pretty easy. You can start with the face value of the note, since you bought it at a discount, you can simply apply your discount to that face value of the note with a statement stating why you think that it’s still discounted value and you can maybe show an amortization schedule showing the reduction of principle. Showing that might be one way to do it. You could also have a professional that you know. Someone maybe like Stephanie could write a letter saying what they think that the value of the note was. That would be okay. We need to have some type of documentation. It doesn’t have to be too onerous, but every year we’re going to have to ask you to send a little bit of information. Even if you have an LLC, you’re going to have to tell us what’s inside that LLC and provide a little bit of documentation. I know this is more onerous than it’s been in the past, but it’s something that we’re going to have to face.
We’ve made it simple at Quest. You can go online and upload these documents quickly and it only takes a couple of minutes to do. We’ve got little videos that talk about doing that. Most of your students don’t have a problem with this at all. I get a little statement that you have provided. We’ve been really good with it. Your students have all turned into fair market values and have very little problem with it. What’s going to happen if we don’t get those back with some type of documentation, they’re going to force us to distribute those assets or say we can’t be custodians anymore. It’s good to be a little bit more serious than it has been in the past, but nothing to worry about too much. If you have questions or you do have a self-directed account with Quest and you want to understand what to do to get your fair market value, just ask one of our IRA specialists. They’ll walk it through for you and probably within five or six minutes we can figure out how to get it documented and get that off the table from here.
I get this question asked a lot, “For $100 on my Roth IRA, can I turn it into a cashflow stream or something like this?” I’d have to say, “Yes you can, but you need to understand that there’s some structuring or restructuring of investments.” If you’re starting with no money in the account and that’s a Roth IRA, there’s no other investments. They might come in and go, “You are providing a service,” or, “You did an illegal contribution,” or something like that. I could maybe see them doing that, but again, what’s at risk here? I didn’t have an IRA before anyway. Investing is not about avoiding the risk but about a controlling them, so I don’t see any risk.
For other people, I have seen people get in trouble doing this, but it’s very rare and it’s always the same circumstances. They didn’t buy one note for $100 and then sell it in their IRA. They bought 40 in one year in one account. Then they say, “You’re running a business inside your IRA.” Now you can make that argument pretty easily. A good way to avoid that is to have other assets in that IRA. I’ve got some notes that I’m funding, some notes that I’m buying and flipping out and other things. Then you can always say, “I bought this note. I put it under contract and someone came along and bought it.” It’s a legitimate investing strategy. They’ll have a hard time arguing against it. If you’re going to do 40 or 50 buying and selling a notes in one year inside one IRA, you’re probably exposing yourself to damage, but for the average Joe, for the rest of us, they’re doing a little bit of note investing inside their IRA, create some cashflow, maybe having a small Roth IRA and creating a little pop in it by doing one in the beginning, that’s okay.
Raising private capital. Where do you get the money? Where is it? Why would somebody buy a note from one of you and let you make all that money on it? I can answer that question easy. I do it. Why? Because I don’t have a lot of time. At this point in my life, I’ve got a reasonable amount of money that I’m in control of and I’m trying to invest. I’m also a CEO of Quest. It takes a lot of my time. Time versus money, it makes a lot of sense for me to find other people that will get the loan, do the thing, then I split out loans all the time with my financial friends and do that. There are a lot of my clients that have warmed up with the same thing.
Remember, there’s trillions of dollars in retirement accounts. Most of America’s wealth is held at retirement accounts. Every time you go to a gathering or something like that, there’s millions of dollars available to invest. We put on 600 different events a year, online things, you can come out and meet some of our clients. I can’t personally go, “This is a great guy. He’s got notes,” I can’t do that, but I can have an event. We can have people come, you can come, my clients will come, and we’ll find each other. It’s a great way to spread the knowledge and use their money for self-direction, is not a bad thing for them either. It’s helping them get above average returns with loan secured by real estate. If you’ve done this a few times, you’re going to get this amazing thing that’s going to happen. People come right up to you and say, “Thank you for showing me this. This is incredible,” because prior to this they were getting nowhere returns. If I can get 8% secured by real estate consistently, that is so much stronger than 99% of all other types of investing I could do. There are plenty of people that will do that. I call it using OPI or using Other People’s IRAs to fund your transactions.
What you do is you use other people’s IRAs to create wealth for yourself now or create that income now for yourself to buy things. Then you take your IRAs and your Roth IRAs and you start to implement the strategies needed for your needs for your future and your healthcare needs and your education needs and the needs to pass your wealth on. If you have any questions or if you wanted that copy of that trust that I talked about, you can personally email me. That’s my email, Nathan@QuestIRA.com.
I know that that’s a lot of information to take in and a lot of different accounts that you can peruse and figure out which kind do you want to open and what you want to use. Nathan, one question we get a lot of is, can you use multiple IRAs to fund for a particular investment or for a note deal?
Partnering with disqualified people or partnering your IRA and your wife’s IRA or your children’s Coverdell, that’s so common here and it’s easy to do too. We’ve gotten so used to it. As a matter of fact, our system has payments coming in and it’ll automatically split off in different things like that, so that’s easy to do. Don’t get mixed up just because you’re disqualified, your wife or something, means you can’t buy, sell, trade or extend service doesn’t mean you can’t come together and partner and invest in the same note. It’s great to teach this too. You pick a small Coverdell or a small education account and you get them the feeling of investing for themselves so that’s a strong lesson to teach children.
Nathan, thank you for coming on and sharing all of this with us. I imagine we’ll probably get a bunch of questions when we’re done, but if anything, give the guys out at Quest a call. I have to give them kudos for every time I’ve called them with a question about something because I know a lot about IRAs but nothing like they do. It’s great because those are the ones that obviously you want them to know as much as they know, so when you call them and say, “I had this harebrained idea.” I’m not buying horse eggs, but other unique things. Everybody has something unique, but they’re like, “You could do this,” or, “No, that wouldn’t work the way you’re thinking it would.” “Awesome.” They’re always personable. Those guys are the ones who answer the phone are like, “Have a fabulous day,” or, “How can I make your day fantastic?”
It’s part of our fish philosophy. It’s how can we make your day. That’s one of the things that each employee got to say to get someone to say, “You made my day.”
I’ve called on days before and I’ve been doing five things at one time and stressed out. “How can I make your day?” “You just made me smile. That’s a great start. Thank you.” They’re easy to work with, they’re very familiar with note investors and with real estate investments. Unlike some other groups that I won’t name or get into, they’ve always been easy to work with it.
We’re not perfect. We make mistakes and everything because self-direction is complicated because we’re dealing with a lot of big parts, but when you do have a problem, you’re going to pick up the phone and talk to an IRA specialist, hotline it right in, and you’ll get someone that pays attention to your problems and fix it. Not only we will fix it, we’ll try to avoid whatever caused the problem. We’ll try to try to do that. If you ever have a problem with Quest or having a funding thing, feel free to write me and at Nathan@QuestIRA.com or my executive vice president, Nate. If you put Nathan, you will get two different people but either one will be able to answer all of your questions for you. It’s important when you call in, identify yourself as a Scott Carson student. That’s helpful. It helps us to understand the level of investing that you’re doing and the education that you had. That’s helpful to do that.
The track that you’re on so they have an idea of what you’re more interested in and where you’re going in the note space. That’s also very helpful.
Thank you very much for having me. I appreciate you.
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About Nathan Long
As the CEO of Quest IRA, Nathan Long oversees the operations of the company and aids in improving the practices implemented. After joining his brother, Quincy and the Quest IRA team in 2007, Nathan has aided in growing the company to over forty employees located in four different cities, with continued expansion expected in the near future. Prior to working at Quest IRA, Nathan was in the automotive industry for over 17 years as an upper level executive for Automotive Investment Group, AIG, and participated in growing the ABC Nissan Branch in Phoenix, Arizona. Nathan also holds the title of Certified IRA Services Professional (CISP), from the Institute of Certified Bankers. Throughout his time with Quest, Nathan has focused his time and efforts on providing superb customer service and developing excellent educational resources.