Self Directed Investor Talk: Alternative Asset Investing through Self-Directed IRA's & Solo 401k's

If one is good, two must be better, right?  In the world of Self-Directed IRA’s, the answer is probably YES!  You’ll be shocked at just how smart it can be to have more than one retirement account.  I’m Bryan Ellis.  You’ll learn how RIGHT NOW in Episode 137.

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Hello, SDI Nation!  You’re looking great, today, people!  Did you do something new with your hair?  Hehehehe

You know, it’s nice to be back among the living, so to speak.  As my regular listeners know, I’ve been quite ill during the past several weeks, and it was awful.  I’m on a rapid climb back to full health and actually got to work a full day yesterday which has been quite rare lately, but so very welcomed!  My work backlog is huge, and I’m so happy to be with you here right now!

Folks, I mentioned earlier in the week that by end of this week I’ll finish a new e-Book called “The Portfolio Fortress” that outlines a really great, and very efficient, approach to protecting your assets from financial predators, and it’s particularly apt for those of you with at least 3-5 real estate properties in your portfolio.  The most common strategy these days among people who are concerned about rogue lawsuits is to put every different property into a separate single-member LLC, but it seems like a new court decision every month is proving that strategy to be wildly ineffective.  There’s a better way, and it’s far more efficient than having a separate LLC for every property, and I describe that approach in The Portfolio Fortress.  I’m going to publish it on Amazon for sale there, but I’d like to give it to YOU as a listener to this show for free, if you request it before publication.  The way you get it is to text the word FORTRESS to 33444.  If you’ve already texted FORTRESS to 33444, you don’t need to do it again, I’ll send the ebook to you on today or tomorrow when it’s ready.  But if you’ve not yet requested a free pre-publication edition of it, then text the word FORTRESS to 33444 and I’ll be happy to send you a copy when it’s done in a couple of days.

So… two or more IRA’s?  Who would ever need to do such a thing?  Hehehehe

There are actually many reasons one might consider doing so, and at least one you may have never before considered that I’ll tell you in a moment.

First things first:  There’s nothing in the law that prohibits you from having more than one IRA.  You can have a traditional and a Roth.  You can have multiple traditionals, multiple Roths, a 401k and a SEP mixed in for good measure, and so long as you qualify to make contributions to those accounts, and don’t go over the proscribed limits each year on a cumulative basis, then it’s fine to have multiple accounts.

Sure, there are rules.  For example, if you have an employer-sponsored retirement plan, then there might be some limits to the deductions you can take from contributing to a traditional IRA outside of your employer’s plan.  That’s an area where it makes good sense to consult with your tax advisor.

But the general idea is this:  It is totally kosher to have more than one retirement account.

But is there any reason to do so?

The answer – particularly for many self-directed IRA owners – is ABSO-FREAKIN-LUTELY!

The reason, in two words, is PROHIBITED TRANSACTIONS.

For my newer listeners, to commit a prohibited transaction means you’ve broken one of the rules that the IRS has put in place for your retirement account.  While those rules are complex, they’re easy to boil down into simple concepts:  You can do anything where the money in your account ends up in your own pocket, or the pockets of your family members, unless through a proper account withdrawal.  You can’t use slick strategies to contribute more to the account than the law allows.  You know, things like that which, honestly, seem pretty reasonable to me, given the magnitude of the tax advantages offered by these accounts.

So here’s how Prohibited Transactions tie into the notion of having multiple IRA’s.

Imagine with me, if you will, Joe Blow who has an IRA that’s worth a million dollars.  He has one and only one real estate transaction in that account – a small one – and the rest of his investments are in stocks and bonds.  That one real estate transaction was for $50,000 and he made that investment 5 years ago.  Unfortunately, he didn’t know the rules, and he purchased that property from his grandfather.  That’s a prohibited transaction… but he doesn’t even know it.

So 5 years pass, and the IRS audits Joe.  They determine that his real estate investment was a prohibited transaction, and so he’s got to pay the piper.

What are the ramifications?   You might think it doesn’t matter much since his real estate investment only amounts to 5% of his account value.  But you’d be wrong.  You see, from the perspective of the IRS, Joe’s ENTIRE ACCOUNT stopped being an IRA as of January 1 on the year when he bought that property.

What does that mean?  Well, for starters, it means that he’s got to pay back any deductions he took for the last 5 years for any of the contributions he’s made to his IRA, along with penalties and interest.  That’s a pain in the rear, but it’s not that much money in the grand scheme of things.

But that’s not the real issue.

The real issue is that the prohibited transaction has that effect on EVERY SINGLE ASSET in the account.

And that’s a huge problem.  Because in the past 5 years, Joe has made some shrewd stock investments, and has realized profits in excess of $450,000.  Since those profits were in an IRA, he had no tax liability for those profits.

But suddenly, all because of one poorly-executed transaction, he’s got a real problem.

Joe now owes regular taxes on his $450,000 of profit.  But worse than that, he owes penalties and interest.  And folks, now we’re definitely talking about a bill in the multiple hundreds of thousands of dollars… again, just because he didn’t understand the rules about prohibited transactions.

How could he have avoided this?

One really easy way would have been to use multiple IRA’s.  Here’s what I mean:

Some transactions, like buying publicly traded stocks and bonds, have a practically zero risk of committing a prohibited transaction.  From the vantage point of prohibited transactions, those are very “safe” assets.

But real estate transactions, and other transactions that are inherently more complicated than just calling your broker to place an order… those are the transactions where there’s real risk of a PT.

What to do?  If Joe was smart, he’d have simply transferred enough of the money in his main IRA to a secondary IRA, and he’d have done the real estate transaction in that account, all by itself.

Why?  Prohibited Transactions inherently screw up the ENTIRE IRA in which they’re committed.  In other words, if you mess up with any one investment, every other asset in the account suffers the same fate.  And it’s a fate that can be, financially, rather Armageddon-like.

But if you’re smart enough to put risky transactions – including virtually all real estate transactions – into their own separate account, you’re inherently insulating all of your other assets from that risk.  Because while a PT does result in the “disqualification” of all of the assets in a specific IRA, that fate doesn’t actually extend across separate accounts.

And that’s a very good thing.

By the way… this is just another reason to prefer the self-directed 401k over the self-directed IRA.  For 401k’s, the penalties for prohibited transactions are far less severe than for IRA’s, and they apply only to the specific asset on which the violation was committed, and not every asset in the account.  That’s a big deal!

My friends, thank you for your time today.  And remember:  Invest wisely today, and live well forever!

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What happens to your IRA or 401k when you pass on to the sweet by and by?  Whether your heirs receive the fruit of your effort easily and immediately, or whether they have to fight with the government, creditors and a lengthy bureaucratic mess is TOTALLY up to you.  I’m Bryan Ellis.  I’ll tell you how to make sure your loved ones get what you want them to have RIGHT NOW in Episode 136.

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Hello, SDI Nation!  Welcome to the podcast of record for savvy, self-directed investors like you.

There’s one really interesting thing I’m observing with startling frequency about the way that very wealthy people use IRA’s versus their less affluent counterparts.  It’s not as a vehicle for retirement savings, but as a tool for estate planning.

Now, my friends, much of this audience is, in fact, sufficiently wealthy that this is directly relevant to them.  But even for those of you who are merely affluent, and not truly “swimming in it”… well, this information is highly relevant for you, too.

See, here’s the thing:  IRA’s offer some really cool estate planning capabilities.  I should be more specific.  Roth IRA’s… and Roth 401k’s also… are almost magical.  When the owner of a Roth account passes away, that account is inherited by the now-deceased owner’s designated beneficiary.  And in most cases, that account is then available to the beneficiary IMMEDIATELY… that beneficiary can take some of the money out or basically none of it – they do have to take at least a small amount out to be compliant with IRS rules – but the bottom line:  The beneficiary has nearly absolute discretion of when to withdraw that money.  But even that’s not the cool thing.

The really cool thing is that because it’s a ROTH account, the beneficiary pays ZERO taxes on that money!  Zero, zilch, nada!  It doesn’t even matter if the beneficiary is of retirement age.  The beneficiary can, on day one, begin to enjoy the proceeds of that account without tax ramifications.

That, my friends, is HUGE.  As Donald Trump might say…. HUUUUUUGE!

BUT… and this, too, is HUUUUUGE… your intended beneficiary will NOT inherit your account automatically.  So how can you make sure your intended beneficiary inherits your account?

The answer is to be certain that you’ve properly submitted a beneficiary designation form with your custodian.

Here’s why:  If you file such a form with your custodian, it’s a simple process for them to effect the inheritance your account upon your passing.  Your account will end being converted to an “inherited IRA” account rather than a standard IRA, and that account will, with haste, be available to and under the control of the beneficiary or beneficiaries you’ve specified.  It’s a very quick, simple process.

But what if you do NOT have a beneficiary designation on file?  In that case, unless your master agreement with the custodian specified default choices such as your spouse or children, then your IRA will become part of your estate and must go through probate.

And there are a few serious problems with that.

First, it’s going to take a long time.  Probate is a slow process, and if your beneficiary is in need of the inheritance, well… it’s a bad situation.

Second, it’s expensive… probate lawyers have to eat, too.  And from what I hear, the fees they charge – which the funds in your IRA may be used to help pay – allow those lawyers to eat very, very well.

Third, it’s dangerous… If you have creditors at the time of your passing, those creditors are entitled to make claims on the assets of your estate in order to be made whole.  But if you properly execute a beneficiary designation form, then your IRA will pass directly to your beneficiary, without passing through probate and without being used to pay down debts owed to your creditors.

So here’s the bottom line:  Call your custodian today and make sure that you have specified both a beneficiary and an alternate beneficiary.  And put a mark on your calendar for every year at this time.  Make it as the SDI IRA Beneficiary Checkup Day.  And on that day each year, make sure that you have a beneficiary and alternate beneficiary designation form on file with your custodian, and that the forms on file still reflect your preferences.

It’s the easiest thing in the world to do.  Unfortunately, it’s also the easiest thing in the world NOT to do.  But the negative impact of neglecting this one is really big.  Don’t make this rookie mistake!

That’s all for today, except for this:

It looks like there’s a good chance we’ll be able to acquire a portfolio of rental properties that offer BOTH very solid equity and very solid cash flow.  Really great opportunities, to be sure.  And I’ll be announcing more about that in the immediate future.  But to make sure you get that information in the most timely manner possible, be sure you’re on my TOP PICKS notification list.  Just text the word TOP PICKS to 33444.  That’s the words TOP PICKS with no spaces – spelled toppicks, text toppicks to 33444 to get on the priority notification list.

In tomorrow’s episode, I’m going to tell you what the IRS thinks about your having more than one IRA… and I’ll tell you the situations in which it’s actually really, really, REALLY smart to have multiple retirement accounts.  This is particularly relevant for you real estate investors out there, so be sure to listen in to tomorrow’s episode… and the only way to be sure to do that is to SUBSCRIBE through iTunes or Stitcher, so do that right now!

My friends, invest wisely today, and live well forever!

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Did you know that the Feds are talking about setting NEGATIVE interest rates?  I’ll prove it to you… and tell you the real effect of insanely low interest rates on YOU as a self-directed investor  RIGHT NOW in Episode #135

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Hello, SDI Nation!  Welcome to the podcast of record for savvy, self-directed investors like you!  What you hear on this show will invariably be on all of the other shows you listen to… because those show hosts listen to SDI Radio just like you do!

Negative interest rates… what a weird concept!  Even weirder to have the concept being raised at Federal Reserve meetings, and then hearing denials from the Federal Reserve Chairwoman that sound, overwhelmingly, like non-denials.  And my friends, just like every episode, this isn’t some fluffy theoretical discussion.  It has a real impact on your finances… all the way down to the fees you pay for your self-directed IRA!  More on that in a minute.

First, I’d like to thank you folks again for being so patient with me while I’ve been ill.  I’m still not yet 100%, but thankfully at this point, I’m making clear progress.  Thank you for your prayers.

Second, I’m looking for an INTERN for a very special opportunity.  Given the demographics of my listeners, this isn’t likely a good fit for any of you, but it may be perfect for a college-aged person that you know.  This intern… who I hope will turn into a full time employee… will be trained personally by ME to be involved in every aspect of producing the show you’re now hearing.  And I know a thing or two about the podcasting thing, if I do say so myself, having just launched this show barely 7 months ago, and already consistently being among the tip-top investing shows in the world.  I’d like to teach all of that to a person who will become my RIGHT-HAND man or woman… But they’ve got to be the right person.  This is a FORMAL intern program… it’s 30 hours a week of work and 20 hours a week of training.  And at the end of that time, the right person will have both wildly valuable skills and a job opportunity to continue to push forward my grand ambitions for the Self Directed Investor Radio show.  This position does not require a college degree, but does require a very smart, very DRIVEN, tech-savvy person who wants to MAKE A DIFFERENCE with their lives very quickly.  You don’t need to know anything about podcasting or internet marketing – I’ll personally teach you every bit of that – but you need to be very, very comfortable with technology generally and social media and online research specifically.  Does that describe someone you know?  This could be – it WILL be – the opportunity of a lifetime for the right person.  If you are or you know that person, please ask THAT person to drop me a note at [email protected].

So, negative interest rates.  Crazy concept, right?  Under normal circumstances – when interest rates are not negative – lenders makes loans, because they’re compensated for that loan by the repayment of all principal plus the payment of interest.  But with NEGATIVE interest rates, it’s different… not only won’t a lender receive interest, but he won’t even receive a return of all of his principal, either!

That is a CRAZY scenario, and one would think it to be impossible.  Alas, negative interest rates are the RULE RIGHT NOW in parts of the European Union… and that was certainly the case in Japan for a very long time.  But what does it REALLY mean?

The background on this issue is the most recent Federal Reserve meeting.  Each meeting the Fed produces a chat showing where each of the Federal Reserve Board members expect interest rates to be in the future.  And for one of those Fed Board Members, the prediction was for NEGATIVE interest rates.

Now here’s the thing:  Those board members can predict anything they want, and it’s believed to be the case that the person who made that prediction was a non-voting board member anyway.  But to me, the really shocking thing wasn’t the prediction, but the non-denial denial from Janet Yellen, the imminently unqualified chairperson of the Federal Reserve Board.

Asked about this issue, Yellen said “I don’t expect that we’re going to be in a path of providing additional accommodation. But if the outlook were to change in a way that most of my colleagues and I do not expect, and we found ourselves with a weak economy that needed additional stimulus, we would look at all of our available tools. And that would be something that we would evaluate in that kind of context.”

Doesn’t sound like a NO to me.  Does it to you?  I didn’t think so.

Well, that’s all intellectually interesting, but that info is mostly valuable for making your friends and colleagues think you’re in-the-know about economic issues.  But does it really matter?

Well… yes, and no.

Yes, it does because ultimately the rates set by the Fed trickle down to other financial instruments.  And who this will hurt – as artificially low rates have already hurt – is the people who were smart enough to save their money and who hope to earn a safe interest rate from CD’s or other interest-bearing investments.

In a negative interest rate environment, CD’s and savings accounts actually become guaranteed money losers since the nominal rate is negative.  But if we’re honest with ourselves that’s not really a change… real rates have been negative for years, given that so many people are collecting only 0.1 or 0.2% on their money, while prices are rising faster than that.  It’s what I call the grocery index:  If you put $1,000 in a CD today and let it mature for a year, could you buy more groceries at the end of the year than you could have at the beginning of the year.  Almost certainly, the answer is no.  That’s an example of REAL negative rates, even though the rate on your CD says 0.1%.

As an aside, my friends:  I don’t understand why anybody would let their parents suffer through the indignity of investing in CD’s or savings accounts with paltry interest rates and negative real rates when there are options that yield 20-50 times more than CD’s and are as safe as can be.  I say “your parents” because it’s invariably the older generation who default to and place great confidence in these types of assets, largely because it made sense when they were younger, but certainly doesn’t make sense now.  By the way, if that’s you, and you’re looking for a way to redeploy capital very safely that’s currently languishing in CD’s or money markets, then reach out to me at SDIRadio.com/consultation and I’ll give you some thoughts about how to help your family stop wasting the opportunity of their own capital in an INCREDIBLY safe manner.

It’s not just your parents, either.  Did you know that custodial fees for self-directed retirement accounts used to be much lower for many of the big custodians?  The reason is simple:  Back in the day, they made a lot of money from the “float”… from collecting interest on the unused capital in your account.  But with today’s falsely restrained interest rates, there’s no money to be made in that way, and so you’re paying more directly in the form of fees and expenses.

I don’t actually expect that interest rates in America will become nominally – that is, officially – negative.  But it doesn’t matter.  The dynamic duo of near-zero rates coupled with rising prices have exactly the same effect on your real economic situation.  More and more, the only reason to keep cash in a CD or bank account is because that’s physically safer, not because it makes sense in any other way.

That’s all for now, my friends.  Remember if to pass the word along if you have a friend or family member who might be a good fit for the intern opportunity I mentioned before.

And remember:  Invest wisely today, and live well forever!

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What is a SERIES LLC, and why are self-directed investors so excited about this new legal structure?  I’m Bryan Ellis.  I’ll tell you the good AND the bad about Series LLC’s right now in Episode #134.

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Hello, SDI Nation!  Welcome to the PODCAST of RECORD for savvy self-directed investors like you!

So have you heard of it?  This thing called a “series LLC”?  It’s a relatively new type of legal structure that offers the flexibility of multiple legal entities in one, in a manner of speaking.

So, for example, let’s say you create a new LLC called SDI LLC and you register it as a “Series” LLC.  What this means is that by creating that one entity, you have actually created a virtually unlimited number of entities because you can then, without paying additional registration fees, create additional entities such as SDI Series 1 LLC, SDI Series 2 LLC, SDI Series 3 LLC, etc…

Now here’s what’s cool about that… the governing law for this type of structure explicitly states that, in the eyes of the law, that each of those series are SEPARATE business entities.  This means that, each separate series you establish of that LLC has separate TAX liability, separate LEGAL liability, an entirely distinct LEGAL identity… even though you don’t have to pay additional fees to register the additional series after the first one.

That has some real relevance for me and you as Self Directed Investors.  Here’s why:  Let’s think about this in the context of real estate.

Let’s imagine you have 15 different pieces of property.  Some are residential, some are raw land, some are commercial.  But you have 15 different pieces, and they’re all owned by your IRA.

And one day, somebody slips and falls on one of your properties – let’s just say it’s property #7, a nice little house on Main Street – and they’re seriously injured.  They’re going to sue everyone with any connection to that property, which will quite surely include your IRA as owner of the property.

What happens if they win?  What happens if they get $5,000,000 judgment against your IRA?  Well, what will happen is that they’ll be able to, in one way or another, take away not just the property on Main Street where the accident happened, but all of the others as well, until their $5M judgement is satisfied.  That’s because, in the eyes of the law, those assets have the same owner, and it’s THAT owner – your IRA – that must satisfy the judgment.  In one fell swoop, your IRA is now worthless.

Just as an aside, I know that some of you are thinking that your IRA provides protection against lawsuits, so you need not be concerned.  That’s not really true, folks.  If you PERSONALLY were sued and lost, then there IS some protection for your IRA in that kind of situation.  But that’s not what we’re talking about.  We’re talking about YOUR IRA being sued because IT is the owner of this property, and not you personally.  In that case, the assets of the IRA are up for grabs if it loses the lawsuit.

And that’s where a Series LLC might come into play.  The way some people are using these things is that they’re setting up a Series LLC that’s owned by their IRA, and then they’re creating a separate series of that LLC – essentially a separate business – to own each piece of their property.

The theory there works like this:  Instead of your IRA owning 15 separate properties, it owns a series LLC with 15 separate series, each of which contains one piece of property, including that infamous property #7, the nice little house on Main Street.  And when there’s an injury on that property that results in a lawsuit with a $5M judgement, things work out a little differently this time because Property #7 is not actually owned by your IRA directly.  Instead, it’s owned by SDI Series 7 LLC.  And since that house is the only thing owned by SDI Series 7 LLC – because every other property is in a different Series of SDI LLC – then you still take a hit… but it’s only against Property #7.  All of the other properties are safe, being legally separate from the one asset where there’s a big judgment.

Sounds pretty good, doesn’t it?  I’ll admit, the theory is extremely attractive.

But don’t do it, folks.  At least, not right now.  Here’s why:

The fact is that Series LLC’s are just too new from a legal perspective.  There’s not enough case law to predict what’s going to happen when you’re actually on the other end of a lawsuit or a bankruptcy or a tax audit.  The uncertainty factor is stratospherically high.

In fact, as of this time, only 13 states plus the District of Columbia and Puerto Rico even offer Series LLC’s.  And those states don’t use the same law.  For example, in some states, like Nevada, you can add as many series to your LLC as you want at no additional cost.  But in other states, you actually have to pay additional fees for each series.

But the real question is in the states where there are no Series LLC laws.  What you really can’t predict is whether each Series will be considered as a legally separate entity in those states.  And even if you only do business in a state where there IS series LLC legislation, the reality is that it’s still entirely possible you could face legal action out of state from a vendor or from a person living in another state who just passes through your area.

And it’s more than that.  Try opening a bank account for a Series LLC in a state where these entities are not yet common.  You’ll find it’s not a simple task.

Now folks, I’m not a lawyer.  And I don’t play one on TV.  But even to my simple mind, this Series LLC thing just doesn’t add up.  From where I sit, the only real advantage to it… sometimes, not all the time, but sometimes… is that you might get to form multiple entities without paying additional registration fees.  Again, that’s not true in every state, so even that advantage is questionable.

Other than that, I see no clear advantage.  And one huge disadvantage:  No legal history.

30 years ago, nobody wanted to use traditional LLC’s because there was no case law for them at that time, either.  But that’s certainly changed, and traditional LLC’s are now a very common and reliable business structure, with plenty of case law to support them.  So maybe case law will catch up, and the Series LLC will become a viable and solid structure like the normal LLC.

Unil then, may I make a suggestion?  Leave the Series LLC to the trailblazers.  Let them get the arrows in the back.  But you, you have two options:

One is to just use as many different traditional LLC’s as is necessary to own your various properties.  That’s one option that can certainly work, though it’s a huge pain in the rear in terms of organization and compliance.  A real pain in the rear to be sure.

So what’s a better option?  Well, my friends, there’s a strategy for protecting your properties that I absolutely LOVE… and it’s simple!  It requires only 2 LLC’s or other legal structures of your choice, no matter how many properties you own now or in the future.  So it’s very simple, and it’s also very, very simple to maintain.

Want to know more about it?  I’m happy to share that info with you.  Later THIS WEEK, I’m releasing a brand new e-Book called “The Portfolio Fortress:  How To Keep Your Wealth Out Of The Hands Of Legal Predators”.  And it will tell you all about this great strategy that’s SIMPLE, SAFE and STRONG.

Now, my friends, this is really only intended for those of you at least 3-5 properties or more.  And if that describes you, I really want you to have it.

And I’ll not charge you a single dollar for it.  I want you to have it.  I want your assets to be kept safe!  So if you’d like the e-Book and you own at least 3 properties, you can get it at no cost by texting the word FORTRESS to 33444 right now.  Again, just text the word FORTRESS to 33444 right now.  If text doesn’t work for you for some reason, you can email me at [email protected].  Again, it’ll be released later this week, and until then, I’m offering it as a free gift to listeners of this show.

Thanks for listening, and remember:  Invest wisely today, and live well forever!

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Hosted on Acast. See acast.com/privacy for more information.

You don’t know my voice… but as a listener to this show, you know my work, as you’ll soon see!  I’m filling in today for Bryan while he’s ill, but we’re not going to miss a beat. Today you learn how to confirm beyond any shadow of a doubt that the latest, greatest self-directed retirement account strategies you’re hearing about are officially kosher with the IRS before you ever take the plunge.  I’m Carole Ellis.  This is episode 132.

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Hello, listeners in America and the world over!  It’s so exciting to be with you today!

I’m sitting in for Bryan today, who is, despite his stubborn insistence to the contrary, still quite ill.  He’s been struggling with some rather severe respiratory illness, and hopes to be back to full health soon.  But you folks should feel honored:  Each day, for the past 2 weeks, he’s only been able to work about 2-3 productive hours per day before being too exhausted to continue, and each day, he’s given that time to you guys, because he LOVES doing this show.  It really makes him very happy to spend this time with you.  But last night, I through down the gauntlet and demanded that he actually rest until he’s better, like the doctor ordered.

By the way, my name is Carole Ellis, and I’m Bryan’s wife and business partner.  And before you’re tempted to think that I’m behind the SDI microphone today only because I’m Bryan’s wife, well let’s go ahead and dispense with that now, shall we?  Bryan encouraged… insisted, actually, that I brag on myself a bit – he actually called it “establishing your overwhelming credibility to my listeners” – so here goes:  I’m currently involved in over a dozen active real estate investment projects as I speak to you.  Additionally, in just the last 30 days, Bryan and I have flipped 2 houses, both profitably; we have done hard money loans and sold a real estate note.  It’s Bryan’s role to find great deals… it’s my role to be the voice of reason and make sure he doesn’t miss anything on the due diligence side.  And by the way, I’ve written books and training programs for famous investors; I just wrote an article about the business of Private Lending which is featured in this month’s edition of Personal Real Estate Investor Magazine and is on newsstands right now; I’ve got another article coming out in a few days in another national real estate magazine about the research we’ve done into one particularly promising real estate market out west; and I’m the editor of a real estate investing newsletter with nearly 700,000 subscribers.  And by the way… nearly all of the hard data that Bryan shares with you on this show comes from my research.  So let’s just say I’ve got my finger on the pulse of the investing world in a pretty big way.

Ok, enough of that.  Let’s talk about something that’s important today… AVOIDING trouble with your self-directed retirement account.

But first, Bryan wanted me to tell all of you that he’s really in the mood to buy some first-lien real estate notes.  And honestly, people, I hope you’ll sell some to him.  He gets pretty moody when he’s in the mood to buy, and I’d like to see that be resolved as quickly as possible.  Hehehehe.  Seriously though, if you’ve got first-lien real estate notes against residential property, and if you actually own those notes – no brokers, please – then reach out to Bryan via text or online.  You can reach him by text by sending the word SELLNOTE to 33444.  That’s spelled S-E-L-L-N-O-T-E with no spaces.  Text the word sellnote to 33444.  Or you can go to SDIRadio.com/sellnote.  Either way works just fine.

Let’s talk about something that’s near and dear to my heart:  Due Diligence.  Like I told you, in the deals Bryan and I do, a big part of my role is to make sure that he sees the big picture.  He’s a numbers guy, and is incredibly good at it.  But sometimes, there’s more to a deal than just the numbers, so let’s look at that today.

When it comes to self-directed retirement accounts, it feels like the sky is the limit because the tax advantages one receives through them can be so very large, and because there are so few practical limits to how one can invest their capital.

But even though those limits are few, they are important… and those limits sometimes conflict with the creativity of you people as self-directed investors.  I hear Bryan talking about the wildly imaginative ideas some of you have come up with for making profit through your self directed IRA’s or 401k’s, and… wow!  There are some smart people who listen to this show.

But here’s the thing:  With self-directed IRA’s, it’s very nearly true that the sky’s the limit in terms of the kinds of investment strategies you can use… but it turns out there’s another limit, too:  The foundation.  What I mean is this:  The foundation of every self-directed IRA or 401k investment is the LAW.  You see, while there aren’t a lot of restrictions, there are some, and they’re very important.

To run afoul of those restrictions can be a very, very bad thing.  You’ve certainly heard Bryan talking about the issue of Prohibited Transactions, a circumstance in which you unintentionally break one of the rules concerning IRA’s or 401k’s.  The ramifications are staggering and scary… it’s very, very plausible… normal, even… for a very substantial portion of your portfolio to be absolutely destroy by taxes, penalties and interest as a result of a prohibited transaction… and there’s no easy way to fix them.

So what can you do to avoid that fate?  Two things:  One of them is that you should NEVER do the obvious things:  Don’t do anything with your IRA or 401k that will benefit you or your lineal family members in any way.  Don’t borrow money from your IRA.  Don’t treat your IRA like your personal bank account.  You know… the basic stuff.

But the other way to avoid that fate is this:  When you come up with the latest, greatest strategy to use in your Self-Directed IRA or 401k… do two things:  First, consult with a competent, experienced attorney about whether your strategy has any supporting case law to suggest that it will pass muster if the IRS chooses to take a closer look.  And second, if there is NOT clear case law to support your concept, that doesn’t mean you shouldn’t use the strategy, but it does mean you should seriously consider the next step:  A private letter ruling.

A private letter ruling is when your attorney provides information to the IRS about the strategy you’re considering IN ADVANCE of your use of the strategy.  The IRS takes a look at it and gives you their impression about your idea’s level of compliance with the law.  In most cases, doing this results in having a very, very clear indicator of whether the concept you’re considering is legally solid from a tax perspective.  Furthermore, doing so makes it virtually impossible for the IRS or anyone else to ever suggest that your strategy was intended to be fraudulent or abusive in any way, since you sought official clearance ahead of time.

Getting a private letter ruling can take time and cost some money.  But it could EASILY be worthwhile, because remember:  If you commit a prohibited transaction, the real problem there is that it usually takes several years before you and the IRS realize you’ve done so… and when they do, they start the meter running on taxes, penalties and interest as of January 1 of the year you committed the error.  And the effects of those mounting taxes, penalties and interest can be staggering… literally wiping out much or all of your entire IRA.

So, just as I advise Bryan, I’m advising you:  Be careful on the FRONT END.  It’s a great thing that there’s so much flexibility available with Self Directed retirement accounts.  And it’s just as a great that through private letter rulings, we have a way to make sure that our creativity doesn’t actually cross a line it shouldn’t.

That’s all for today!  But I’ve got a request… if you enjoyed my stint as guest host today, please let Bryan know, ok?  Send him a note at [email protected] and tell him what you thought.  Thank you, I’d really appreciate it.

And like Bryan always says:  Invest wisely today, and live well forever!

Hosted on Acast. See acast.com/privacy for more information.

Real estate can be a great investment for retirement.  Retirement accounts can be a great way to eliminate taxes.  So you might be surprised to discover it may be a TERRIBLE idea to buy real estate inside your IRA or 401k.  I’m Bryan Ellis.  I’ll tell you why RIGHT NOW in Episode #131.

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Hello SDI Nation!  Welcome to the podcast of record for savvy, self-directed investors like you!

No secret here, my friends:  I love self-directed retirement accounts… particularly roth accounts.  The tax advantages are really amazing and for many people, the bigger and less well-known benefit comes from the estate planning potential of those accounts.

So it’s my default to assume that if an investment can be done inside of a self-directed IRA or 401k, that it should be.  And while it turns out that’s a reasonable DEFAULT for nearly every other asset class, that default is absolutely NOT true for real estate, and we’ll talk about why right now.

But first, a quick announcement for those of you who own real estate notes.  If you own a real estate note, may I interest you in a nice wad of cold, hard CASH?  I’m looking to acquire some first-lien real estate notes, and am ready to make it happen right away.  So if you personally own one or more notes – no brokers, please, this ain’t my first rodeo – and if you’d like to find out more about converting your note into a big chunk of cash, reach out to me now by texting the word SELLNOTE with no spaces to 33444 or go to SDIRadio.com/sellnote.  Again, that’s text the word SELLNOTE spelled SELLNOTE (with no spaces) to 33444 or go to SDIRadio.com/sellnote. 

Now… on to the question of:  Should you do your real estate investing through your retirement account.

You know, there are some amazing benefits to investing for retirement through an IRA or 401k, particularly the self-directed versions of those accounts.  The tax benefits are astounding.  For example:  Let’s say that you make an investment and experience a profit of $250,000.  Well, outside of a retirement account, you’re going to owe taxes on that profit… and those taxes could very, very easily be way over $100,000.  So you sell your investment, you pay your taxes, and you’re left with $150,000… and then you can make another investment.

But with a retirement account… that profit is sheltered.  The $100,000 you’d have paid in taxes stays in your account, not subject to taxation, and you can reinvest it in any type of asset you’d like.  So, in other words, your profits accrue entirely tax free.

And depending on whether you’re using a traditional or roth account, you’ll get other tax advantages too.  With a traditional account, you get to take an income tax deduction for money that you deposit into the account.  And with the Roth account… it’s REALLY amazing… you actually never, ever have to pay taxes on your profit at all.  It’s really amazing.

So why in the world would you ever consider NOT doing your real estate investments in an IRA or 401k where these amazing tax benefits can be achieved?

Well, there are a few reasons.

First:  Funding.  If, like most people, you prefer to leverage your investment in real estate by financing some of the purchase with a loan, your options for doing so through a retirement account are very limited.  Tax regulations make it basically impossible to get a loan for your IRA through your local bank or mortgage broker and, in fact, there are relatively few lenders who do the specialized type of lending – called non-recourse lending – that is compatible with retirement accounts in the first place.  And watch out!  You can bet on it that your IRA will actually owe an income tax bill if you get a loan to do deals.  That’s right… not everything is inherently tax-free just because it’s done in an IRA.  So the first big reason to consider doing real estate deals OUTSIDE of your retirement account is that funding becomes substantially more complicated.

The second reason is all about taxes.  You see, the big reason to use a retirement account is because of the tax benefits it offers.  No other reason even comes close to that one.  But real estate – unlike stocks, mutual funds, precious metals, etc – real estate offers some really astounding tax saving potential that renders the benefits of a retirement account far less relevant.  For example, this thing called “depreciation” makes it possible for many real estate investors to substantially reduce, or even eliminate, their present-day income tax burden.  That’s massive, and something that no retirement account can simulate!  There’s also something called a “1031 exchange” that makes it possible for real estate investors to take a huge profit from one deal and roll it over to the next deal without paying any taxes.  There again… HUGE… and goes a long way towards duplicating the tax-free accrual of profits that is offered by retirement accounts.  Bottom line:  Retirement accounts offer some really astounding tax benefits… but with real estate investments, there’s more than one way to skin a cat.

And the final reason to consider doing real estate deals OUTSIDE of retirement accounts is this:  There is substantial inherent RISK in using retirement accounts in the form of prohibited transactions.  The term “prohibited transaction” simply refers to any time you break one of those arcane rules that the IRS has created around retirement accounts.  My friends, committing a prohibited transaction is like financial Armageddon.  The ramifications are severe.  It’s possible your entire retirement account could be wiped away due to taxes, penalties and interest.  And it’s not hard to commit one.  For example:  Imagine you have a rental property in your retirement account.  You receive a bill for $75 for an insurance premium. The bill arrived late and you don’t want your policy to be canceled, so you pay the bill out of your own pocket, and then apply to your retirement account custodian to reimburse that money to you.  That, my friend – as innocent as it is – is a prohibited transaction.  And the reason it’s such a huge problem is because it’s likely to be 3-5 years or more before the IRS discovers that it happened, and once they discover it, they’re going to tag you for taxes, penalties, and interest for the entire time.  It can be a TRUE disaster… and frankly, it’s hard to avoid that type of thing when investing in real estate through your IRA.

So given that the tax advantages available to real estate investors are so substantial even when NOT using a retirement account, I hope you can see why my bias is AGAINST doing real estate deals inside of a retirement account.

But at the end of the day, there’s one beautiful advantage offered by retirement accounts – Roth accounts, specifically – that is just without pier:  The ability to pay absolutely ZERO taxes on profits during retirement.  My friends, that one alone could outweigh everything else.

So what’s the right answer for you?  Obviously, the answer is to speak with your own tax professional to determine whether that real estate investment you’re considering should go into your retirement account or not.  Because in real estate, unlike nearly every other type of asset, there are so many different ways to get great tax advantages, that it’s a wise use of your time to consider each one, with professional guidance.

And one final time, folks… if you own any real estate notes and you’d like to convert that into a nice wad of cash, let’s talk.  You can reach me by texting the word SELLNOTE to 33444.  That’s SELLNOTE with no spaces.  Text the word SELLNOTE to 33444 or go to SDIRadio.com/sellnote.

My friends, invest wisely today… and live well forever!

Hosted on Acast. See acast.com/privacy for more information.

Donald Trump!  He’s soaking up all of the headlines in the Presidential race, but nobody really knows much about what he believes.  Is there a right way to see Trump from the perspective of a wise, responsible self-directed investor?  There sure is.  I’m Bryan Ellis.  I’ll help you see that perspective RIGHT NOW in Episode #130.

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Hello, SDI Nation!  It is SO GOOD to be back in the saddle.  For the last two weeks, I’ve struggled with a combination of pneumonia and bronchitis… and it’s been MISERABLE!  I’m not at 100% yet – probably still only about 85% - but I’ll give every bit that I have to making this an unforgettable experience as you listen to this, the podcast of record for savvy, self-directed investors like you!

Thank you for the rather overwhelming response to the last episode, #129 – available at SDIRadio.com/129 – where I encouraged you to view “bankruptcy” not as a financial escape hatch, but as a standard of financial preparedness.  My theory is this:  Bankruptcy is the one situation in which a person must absolutely come clean and disclose absolutely everything about their financial situation.  Privacy doesn’t matter.  Everything is on the line and known by all parties.  So if, in that situation, your financial affairs can be arranged in advance in a way that’s BOTH totally in compliance with the law, AND capable of making sure that your assets aren’t lost even if you went through bankruptcy, then in my humble but undeniably accurate opinion, THAT is the gold standard of asset protection.  So talk with your own attorney about getting that kind of protection established, because it’s important that you do this long BEFORE you’re facing legal or creditor difficulty.  By the time you’re already in the middle of the fire, it could be too late.  If you don’t have an attorney that you trust on these issues, go back and listen to SDIRadio.com/129 for a referral.

So what about Donald Trump?!

Let’s get the partisan issue out of the way first.  Donald Trump may be running as a republican, but let me tell you without question:  Trump is not a republican.  Trump is not a democrat.  Trump is the founding and sole member of the Trump party, and he’s doubtlessly running for President to advance his own interests.

So for those of you who are tempted to tune out just because I’m talking about a guy who is running under the Republican label… let’s leave the small mindedness at the door, shall we?  Polling already clearly indicates that Trump has substantial interest across party and ethnic lines, and since the guy has a commanding lead, it makes sense for you and me to know a thing or two about him, since he’s clearly a serious candidate who COULD become the next President of the United States.

Spoiler alert:  I’m not going to tell you whether I support Trump or not.  I don’t know yet.  But what we can analyze are his ideals and determine whether his approach is compatible with our needs as self-directed investors.

A moment ago I commented to you that Trump isn’t Republican or Democrat but is pursuing his own interests.  How’d that rub you?  My suspicion is that for many people, that may feel like a negative comment, but for the more enlightened among us, it may actually be a positive point of differentiation.

Here’s my analysis of Donald Trump:

First, I respect what he’s done in business.  He doesn’t have a perfect record, by any means, but overall, he’s been wildly successful… to the point that his name is plastered onto opulent resorts all over the world, and to the point that you and I are discussing him as a serious Presidential contender.  Some people are critical of him because of some history with bankruptcy, but that’s not entirely reasonable.  Some of his companies have gone through bankruptcy, but he’s personally never done so.  And for those of you who view with suspicion the ability to go through bankruptcy and still come out the other side as a billionaire… just think back to a few minutes ago on this very show when you were shaking your head in agreement, thinking “wow, wouldn’t that be great if my assets were insulated even from bankruptcy”.  That’s what Trump has done… it’s what you should do, too.

Second, I respect his clarity of communication and complete disregard for political correctness.  For example, before Trump, nobody was talking with any strength about the threat represented by illegal immigration.  Everyone was too afraid of being called a racist.  Trump’s been called a racist as a result, too, and he simply doesn’t care.  He knows what he’s saying is true… and it resonates in America.  Frankly, the millions of legal immigrants in this country know he’s right, too… since polling clearly shows that Trump has an unprecedented level of support among legal Hispanic immigrants.  It’s really astounding.  You’ve doubtlessly heard the phrase about “Who’s going to be the bigger man?”  Well… it’s patently clear that Trump is perceived broadly as the bigger man… and he’s leveraging that rather expertly.

Third, I’m in awe of, and very concerned by, the fact that Trump defaults so quickly to personal attacks.  That’s worked for him really well for a very long time.  You may recall the famous interview Trump did with Larry King back in 1989 when Trump started the interview by telling King how bad his breath was… to which King replied “Now that’s how you get the edge.”  Trump is a tough negotiator and is willing to use any edge to increase his own, and I suspect that’s worked beautifully for him in negotiations.  But as a Presidential candidate, there’s got to be a little more than that.  Truth be told, I think there’s a LOT more to Trump than that, but I am concerned that he defaults to that too much.

Finally, I’m concerned that we don’t really know what Trump intends to be from a policy perspective, other than a few key issues he’s discussed, including immigration.  But my friends, I’ve got to tell you… part of me sees that as positive.  I don’t get the sense that Trump has any interest in being bogged down in the way things have always been done.  I think he actually does believe in his campaign moniker:  to “Make America Great Again”.  And while there’s room for Trump to be a dangerous figure as President, I think that it’s possible – I’m not yet certain, but it’s possible – that Trump’s interest really is to Make America Great again.  If that’s his intent… if he proves to me that’s what he really wants to accomplish… then I’m going to have a difficult time opposing him.

I want to reiterate:  I’m not a Trump supporter.  I’m really not.  But I’m open to being one.  He makes me nervous, but he makes me feel hopeful, too.

Do you know why I’m speaking to you like this about him?  It’s simple, really:  Trump is offering the one thing that EVERYBODY cries out for in one manner or another.  That one thing is LEADERSHIP.  Steel-spined, unequivocal LEADERSHIP.  The kind of leadership that says:  The thing that’s impossible without ME is totally achievable WITH me.  I don’t know if Trump as President could match Trump as candidate.  But with our alternatives, one is tempted to give him a try.

And my friends, this is neither a political show nor a political episode.  I want you to back up just a bit and look at this from the point of view of YOUR interests as a self-directed investor.  To a huge extent, your fortunes and my fortunes are tied up directly with the fortunes of this country.  The value of our real estate, the value of our currency, the value of our stock market… all of these things are – much to my chagrine and I know to yours as well – substantially and inexorably tied to policy that comes out of Washington DC.  And in recent decades, America has declined in its role as a world economic and military power.  America is no longer viewed as the obvious default choice for investors worldwide.  And why?  There has been NO Steel-Spined leadership.  There’s not been anyone, since the 80’s, who dared to represent America as a shining city on a hill.  There’s been no one who has even made a credible effort to tell the world that the way we do things in America is different, is better, and is all because of one thing:  FREEDOM.

Can Trump make this happen?  I don’t know.  I hope somebody can.  But one thing I know for sure:  Not even one other candidate is suggesting that they’ll really even try to do so.  But Trump is looming large with one and only real promise:  To make America great again.  That’s impossible to ignore… particularly for wise self-directed investors.

My friends, invest wisely today, and live well forever!

Hosted on Acast. See acast.com/privacy for more information.

BANKRUPTCY!  If you’ve done it, you don’t like to talk about it.  If you’ve never done it, you might with contempt on those who have.  But I’m about to tell you why BANKRUPTCY is more important to those of you who are financially strong than for anyone else… and for a reason you’d never, ever guess.  Get ready for a perspective on Bankruptcy you’ve never heard before.  I’m Bryan Ellis.  This is Episode 129.

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Hello, SDI Nation!  Welcome to the podcast of record for brilliant, discerning self-directed investors like you!

Apologies once again for the raspy voice.  This respiratory challenge is really taking it out of me, folks, but I find it impossible to resist the urge to spend this time with you each day, and am so grateful for your time and attention, so let’s get started.

I’d like to begin with an interesting formal announcement from the IRS.  Apparently, they will no longer accept checks for tax payments in excess of $99,999,999.00.  That’s right.  So for those of you who might have to write a check for your tax liability of $100,000,000 or more, you’ll need to submit multiple checks.

Hehehehehe.  I’m not kidding.  Gee whiz.

So… Today we talk about bankruptcy.  You may think this is wholly unrelated to being a self-directed investor, but nothing could be further from the truth.  As you’re about to see, the rules surrounding bankruptcy line up perfectly with Core Value #1 of Self Directed Investors:  That You Must RESPECT YOUR OWN CAPITAL.  Here’s how:

Bankruptcy is kind of a dirty word to many, and viewed as something to be avoided at virtually any cost.  And you know what?  I basically agree with that.  I’ve never declared bankruptcy, and never expect to do so.  You probably won’t ever do so, either.

But I want you to understand why bankruptcy is a GOLD STANDARD of preparation, where the safety of your assets are concerned, even though you, God willing, will never have to go bankrupt. 

So here’s how bankruptcy works:  A person – let’s call him Joe – experiences financial trouble.  Let’s just imagine that Joe is NOT a financial deadbeat whatsoever… he’s a reliable guy entirely.  But he was in a car accident and was sued for a huge amount of money, and he lost.  So Joe now has a problem – he has creditors, and those creditors want to take Joe’s stuff, because he owes them money in the form of this judgment.

Joe can no longer stand the hounding he’s receiving, and he hires a lawyer to declare bankruptcy on his behalf.  The process works roughly like this:  Joe declares his assets and his liabilities for all the world to see.  Joe’s creditors make their claims about how much of Joe’s assets belong to them.  And here’s the thing:  Joe doesn’t have the right to refuse to cooperate.  In fact, the entire authority of the federal government comes to bear against Joe.  He has to disclose EVERYTHING.  Failure to do so means Joe has broken the law, and in that case, the issue isn’t just debt, its jail time.  So basically, every bit of financial information about Joe is rather easily available to the creditors, and to the court.  Everything is in the open.

So Joe’s creditors dig in, ask every question they can, and at some point the judge determine which creditors get which assets, and Joe is basically left without any financial assets at the end.  He might get to keep his home, or maybe he won’t (depending on the state).  But basically all of Joe’s assets MUST be liquidated in order for Joe to gain the one huge BENEFIT available through bankruptcy… and that benefit is massive:  Once the process is complete, Joe no longer has any liability to any creditors.  They’re all gone.  They can no longer hound Joe.  He’s out from under their weight.  No more bills, no more phone calls, no more lawsuits.  The financial nightmare for Joe is over.  Joe is now penniless, but Joe is free.  Joe can start over.

But here’s a crazy question:

What if it was possible for Joe to structure his assets in such a way that, even though he declared bankruptcy, that he never lost a single asset?  Before his BK, Joe lived in a great house.  After the BK, Joe lives in the same house.  Before his BK, Joe had 2 or 3 great cars, some large bank accounts – including a sizable retirement account – and other valuable “toys” like boats and a vacation home.  And after the BK, Joe still has all of that stuff… and can use it all as much as he likes?!

How could it happen, you ask?  Because Joe was forced, under the force of law, to disclose every single asset he owned, and to liquidate all of those things in order to be protected from his creditors through bankruptcy.  So why did Joe seem not to lose ANYTHING?

It’s because Joe didn’t actually own any of that stuff.  Joe was smart ahead of time.  More specifically, Joe’s attorney was smart.  His attorney designed a plan, in advance, such that in the event that Joe ever had to face an intense financial inquisition – like bankruptcy, which along with tax audit is probably the most invasive financial inquisition imaginable – Joe could honestly and legally disclose his ownership of assets as being NOTHING.  Zero.  Zilch.  Nada.  Even though he clearly has a wonderful lifestyle, both before and after the BK proceeding.

And if Joe owns nothing, nothing can be taken from him.

How did Joe accomplish that feat of financial and legal brilliance?  There are a number of different ways it could happen, but one of the most common and legally proven approaches is the use of a well-structured trust of some sort, which holds those assets for the benefit of Joe and his family.

I’m not going to go into the legal minutia of trusts, because I’m not a lawyer and that is a PROFOUNDLY complicated area of law.  If you’re looking for a referral to a lawyer who is EXTRAORDINARY at this stuff, and in whom I have profound confidence, feel free to email me at [email protected] and I’ll happily make an introduction for you.  But I’m not going to get deep into those weeds right now.

The point I do want to make – and which is OVERWHELMINGLY relevant for you – is that you, as an affluent individual, are a financial target.  Think of it like this:  if a beer-swilling, hourly laborer whose entire portfolio consists of the $258 in his checking account… if that guy is in a car wreck, he’s not going to face a lot of legal ramifications.  Why?  There’s no value in it.  Even if he’s sued, there’s nothing for anybody to win from him.

But YOU… you’re different.  You probably don’t see yourself as wealthy… and maybe you’re not absolutely rolling in excess cash.  But the truth is that the average listener to this show is certainly affluent, with well above-average financial assets.  And even though you may not feel wealthy, you do have assets… assets that are at risk unless you protect them.

And again, I submit to you that the gold standard of protection of your assets is this:  If you could go through Bankruptcy, and come out on the other side without having lost access to any of the assets you’ve accumulated, then in THAT CASE, you’re well protected, and you’re truly showing respect for the assets with which you’ve been blessed.

A great approach for being prepared for anything is to work backwards.  So get with your attorney, and ask them to tell you exactly what would happen to your assets in the event that you were faced with the need to declare bankruptcy, or if you faced a surprising and substantial tax audit.  If the answer is that all of your assets are at risk, you should write to me at [email protected] and I’ll tell you who you need to speak to in order to rectify that situation.

Remember, my friends:  Rule #1 for wise self-directed investors is to Always respect your own capital.  Most of the time, we talk about that in the context of choosing investments that are wise and low-risk.  But today’s perspective – that of showing respect for your capital by structuring it in ways to protect it from financial predators – that perspective is just as relevant, just as valuable, and more important now than it’s ever been.

My friends, invest wisely today… and live well forever!

Hosted on Acast. See acast.com/privacy for more information.

Conventional wisdom says that you’ve got a good rental property deal if your rent equals 1% of the purchase price.  Sure, go ahead… but it’s a dangerous smokescreen that could thrash your portfolio.  I’m Bryan Ellis.  I’ll tell you exactly why RIGHT now in Episode #128.

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Hello, SDI Nation.  I’m still sounding awful, but starting to recover from my bout with pneumonia and bronchitis, thankfully.  And do you know what?  There’s NOWHERE I’d rather be than RIGHT HERE with you on the podcast of record for savvy self-directed investors like YOU!

I feel the need to gush over you guys again and how amazingly well you’re supporting this show.  I’ll just summarize that by saying… THANK YOU!  You people are awesome.

So, I had an interesting experience recently that I wanted to tell you about.

I had a great rental property investment available, and called one of my clients who had expressed an interest in acquiring new cash flow deals.  Now, who is named Cathy, is a very smart lady.  I respect her opinion.  So when she rejected the deal I offered to her rather abruptly, I was surprised.

Why did she reject it?  It’s because she has a rule… her rule is that she only wants rental properties that collect rent that’s equal to at least 1% of the purchase price of the property.  So in other words, if she pays $100,000 for a house, she wants to collect rent of $1,000 per month from that house.

For the sake of simplicity, let’s call that the 1% rule, ok?

Now, before I go on, I’d like to say that Cathy is smart enough that I have no doubt that she has criteria beyond just that one, and so Cathy, if you’re listening, please be aware this is NOT a response to you, as I’m well aware that your evaluation criteria is much more substantive than that one rule alone.  I know you’re a successful investor and I very much respect your opinion.

But your response absolutely set me to thinking about that criteria, because it is such a common notion, and one that is accepted as gospel by so many people.

But is that actually a good guide?

If that’s the primary factor in your evaluation process, the answer is NO… it’s a TERRIBLE standard.  And I’ll prove it to you right now.

Imagine you have that house that you bought for $100,000 and that you are, in fact, collecting $1,000 per month in rent.

Well, that’s great!  It’s a good foundation to start from.

But let’s throw in a few very REAL-WORLD considerations.

Let’s imagine that that house is 50 years old.  It’s structurally sound and should last many more years.  But… it’s old.  Isn’t it likely that a house that’s that old will likely require significant repairs or upgrades during the course of your ownership period?  The answer is YES, absolutely.  Even if those issues aren’t yet apparent, it’s the nature of older property that these risks are more frequently realized than with newer properties.

Ever heard of that website called Angie’s list?  It’s designed to help people find high-quality service providers in your local area.  According to them, the actual average cost of replacing a roof for their customers has been in the $11,000 to $12,000 range.

And just like that, an ENTIRE YEAR of cash flow is gone.

Same deal with air conditioners.  I know this one all too well as we’ve got to replace one of the 3 units in my family’s home.  Pricing for that covers a wide range… around a low of $3,000 up to $8,000 or more.  I’d say $4,000 is a reasonable average…

And POOF, just like that, another 4 months of rental income disappears.

Now, folks, we all know that there’s no way to absolutely prevent those kinds of issues.  But is it rational that you’re less likely to have those problems by purchasing newer, high-quality homes versus very old homes?  Yes, of course that’s rational.  And a great way to show respect for your capital.

But those kinds of issues, as expensive as they are, may never materialize… and that’s why it’s so easy to ignore the risk and move forward with overly simplistic judgment criteria like the 1% rule.  So what are some other factors that may render that standard as impotent and maybe even dangerous?

Well, there are two expense factors that you’ll ALWAYS have to think about, without exception.  Those factors are INSURANCE and PROPERTY TAXES.  And here’s the thing, my friends:  WHERE you buy property has a HUGE effect on those expenses.  Here’s what I mean:

CBS News tells us that nation wide, the average property tax bill is about $2,000 per year.  But certain states have consistently and substantially HIGHER property taxes… and that expense comes straight out of your rental income.  In New Jersey, the AVERAGE property tax bill for home owners is $3,971 per year.  That’s $2,000 per year more than average, equating to a reduction in your monthly cash flow of $166.  That’s a huge drop… and you take that hit every single month.

Texas is another good example.  Honestly, Texas is a better representation of the real issue here because I don’t see a lot of people clamoring for property in New Jersey, but there’s a lot of excitement about Texas real estate.  The average property tax bill in Texas is $3,327… over $1,300 per year more than average, equating to a drop in your net rental income of over $110 per month.

As an alternative, look at Alabama, which is actually a pretty interesting market.  Average property taxes there are $752/year.  And that happens to be one of those markets where you can still get a strong rent-to-value ratio.  Another example is this:  I’ve got a deal in Arizona right now that’s a great deal… though the rent it collects is not equal to 1% of the property value.  But do you know what?  It’s a great new property, in great condition, and it’s property taxes are a measly $683 per year.

My friends, focusing on the top-line number is short sighted.  The top-line is the amount of rent you collect.  What REALLY matters is the BOTTOM-LINE number… the amount you get to keep.

I’ll make more money on that deal in Arizona where the top line is LOWER than it would be if the same house was purchased in Texas.  And that’s because the expenses are far, far lower.  I get to keep more of the money.

Same sort of issue exists for two other areas:  Insurance and legal compliance.  Some states simply are more expensive than others for buying hazard insurance.  The national average is $1,034 per year.  But in Florida, the average is double that.  The average in Texas is 50% higher than the national average… unfortunately Texas has very high expense ratios for both property taxes and hazard insurance.  Very similar stories for Oklahoma and Mississippi too.

Bottom line?  It’s all about the BOTTOM LINE… not the top line!  The amount you collect in rent is definitely critically important.  But here’s the harsh reality:  The deal I’ve got in Arizona will cost about $1,200/year for both property taxes and insurance.  Same house in Texas costs over $4,800 per year… $400/month… for taxes and insurance.  That’s a bottom line net ADVANTAGE of $300 per month for the house in Arizona that collects “less” rent on a monthly basis.

Which one of those deals is more profitable?  The answer is obvious… but not if you allow yourself to be smoke-screened by the 1% rule.  That rule sounds wise, and it’s not a bad as part of a collection of good evaluation criteria… but so many people select rental property PURELY on the basis of that rule… and as you’ve seen, that rule as a primary guideline can easily net you FAR LESS MONEY in your pocket than other deals with lower income but SUBSTANTIALLY lower expenses.

And none of this even touches on the one factor where there’s REAL risk to your cash flow:  Legal compliance.  In some states, landlords have strong rights… and it’s fairly inexpensive to do business as a landlord in these states.  In other states, tenants have strong rights… and it’s costly and DANGEROUS to be a landlord in those states.  And where legal compliance is concerned, your costs can go from nothing at all to tens of thousands of dollars with just one bad tenant.  States like Massachusetts and New York come to mind.

My friends, I simply want you to factor in EVERYTHING that matters.  Don’t be beguiled by smoke screens like the 1% rule.  Repeat after me:  The only thing that matters is the BOTTOM LINE!

We’re done for today… may I ask a favor of you?  It would be SO HELPFUL to me if you’d go over to iTunes and leave a 5-star rating for this show, but only if you think we deserve it.  Truly, I’d be so genuinely grateful.  Thank you!

My friends, invest wisely today, and live well forever!

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