Did you know you can invest using your retirement plan? Listen to John Bowens as he elaborates on the power of Individual Retirement Arrangements (IRAs) to raise capital and make tax-free returns. We’ll also cover utilizing its benefits to earn more while keeping your retirement money from stagnation, so be sure to check this out!

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What is a retirement account and how to leverage it for better returns
The process of converting your self-directed IRA into a real estate-backed IRA
Common pitfalls and limitations of using self-directed IRAs
Types of asset classes where you can invest your IRA
The Unrelated Business Income Tax in the context of real estate purchases


Internal Revenue Service https://www.irs.gov/

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John Bowens is one of the most sought-after and respected educators in the self-directed IRA industry. As Director, Head of Education and Investor Success at Equity Trust Company, John draws from his 20 years in the real estate industry and his experience as an active real estate investor. In his travels across the U.S. and virtually, he has trained 60,000 investors during more than 400 workshops and classes, spreading the message about the power of building tax-free wealth and leaving a lasting legacy by investing in what investors know best. In addition to thought leadership in the industry, John has also directed teams in both the front-office and back-office operations with Equity Trust, focusing on the custody of various alternative assets, including but not limited to, real estate, notes, private equity, precious metals, and much more.  John contributed to the book “Self-Directed IRAs: Building Retirement Wealth Through Alternative Investing” with Equity Trust Company Founder Richard Desich, Sr., and has appeared on several national real estate and finance-related radio shows, including the Rich Dad Radio Show. He received his bachelor’s degree in Finance from Ohio University. 


Website: Equity Trust https://www.trustetc.com/
Youtube: Equity Trust Company https://www.youtube.com/@equitytrustcompany


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Full Transcript
John Bowens  00:00
I do not have an adversarial relationship with the financial advisor community. In fact, I have a great relationship with 1000s of financial professionals. And these are professionals that acknowledge that they have a group of clients that want exposure to non stock market based portfolios.
Greg Lyons  00:17
Welcome to the passive income brothers podcast.
Tim Lyons  00:20
Here we take the fear out of real estate investing using real life stories of everyday successful investors. Let’s go. Welcome to another episode of the passive income brothers podcast. My name is Tim Lyons and today I’m joined by none other than my brother, Greg, how’re you doing today, buddy?
Greg Lyons  00:34
I’m doing fantastic. Really excited about today’s show. I think I’m excited about every show. But this one I’m really excited about. Because this one, almost every single one of our listeners has a retirement account. And with that, everyone’s just kind of I know what to do with my retirement can’t wait till I retire. There are so many things people can do with their retirement accounts. I’m just so excited for our guests today. This is going to be fantastic information.
Tim Lyons  01:03
Yes. So we have John Bowens from the equity Trust Company. And I think if you have any questions about using your retirement account, can you use your retirement account? How do I use my retirement account? This is gonna be your master class today. So without further ado, John, welcome to the passive income brothers show.
John Bowens  01:19
Awesome. Hey, thank you so much, Tim. And Greg, really excited to be here and excited to share with your audience a little bit more about how to save with a retirement plan. And when I say save with a retirement plan, more specifically how we invest with our retirement savings accounts, and that we don’t have to rely solely on the traditional financial markets, that is the stock market, we have the ability to use our retirement plans to invest in alternative assets, like real estate, like private placements, like other types of unique non stock market based investments. So again, really excited to be here. And I’m all yours happy to answer any questions that you and your viewers have. So
Tim Lyons  01:58
John, I mean, I think one of the most powerful things is talking about money talking about retirement plans, because on the surface, so many people, we all want the same thing. We all want that financial security, we all want to do the right thing with our money. But you know what money is like politics and religion. Sometimes, John, sometimes you don’t want to mix it up at the party, right? You don’t want to talk about the money piece. But it is so powerful. So this is really kind of today for the viewers and the listeners get the notebook out because the wealthiest folks in our country are using some of these tools they’re using some of these asset classes that you may not know are available to you. And John is going to tell us exactly the roadmap, the blueprint on how to tap into these resources to unlock some financial prosperity. So John, can you tell us a little bit about equity trust deep is the bullpen of the retirement plans out there in America, and a little bit about your company and how you guys operate? And then we’ll dive into maybe some deeper topics.
John Bowens  02:59
Yeah. So to start with equity trust, we are what is known as a directed IRA custodian. And so the best way to understand what that means is to think what most people are familiar with in financial services now, so most people when they think IRA, 401, K, 403, B, or other retirement plan, they think of one of the big five financial institutions where they take the retirement plan, they put it with that company, they might be working with a financial advisor, or maybe it’s through one of these sort of Robo advising type platforms, and the money goes in, and they never really look at it again, right, it’s allocated into different types of stock market based investments, maybe there’s some fixed income securities, but the closest you’re gonna get to real estate or an alternative investment is maybe a publicly traded real estate investment trust. But in terms of direct real estate, in order to have the effects of owning real estate directly, you’re likely not going to get that with your traditional financial services firm, because they can only allow you to invest in stock market based investments. So what a self directed IRA is, it’s an account that allows an investor and it also, by the way, could be a self directed 401 K. So it doesn’t just have to be an IRA. There are also self directed 401 K’s there are self directed SEP IRAs and SIMPLE IRAs for business owners. There’s even a health savings account or a Coverdell Education Savings account. So in terms of the bullpen of retirement plans, there are various retirement accounts and these other unique tax advantaged accounts that you can utilize and invest in real estate and other types of real estate based assets instead of investing in the traditional financial markets. Now, unfortunately, it’s what I’ve learned in my years, is that a lot of Americans are conditioned to think that they can only invest in the tradition in all public markets, in fact, I can’t tell you how many times I’ve had investors that come to me and they say, Oh, I’m investing in my IRA. Well, we don’t actually invest in our IRA, we don’t invest in our 401k, what we do is we put our hard earned dollars into those retirement plans. And then those dollars make investments. Now for most of America, they’re doing what they’re working with an advisor or a financial planner, and that advisor, financial planner is selling them very specific investments, traditional investments that only the firm that they represent, can sell. So I want to make sure that folks understand that when you go to a financial advisor or financial planner, there are only certain securities, certain investments that they can sell you. So if you go to them, and you say, I want to buy real estate, or I want to invest in a real estate fund, I want to be a limited partner in a real estate fund. This is the type of allocation I want. Don’t be surprised when they tried to push you towards a publicly traded real estate investment trust, which may or may not be to your benefit. And that’s what really gets me upset about financial services. And why I made the decision 15 years ago to join equity trust is because my background academically was in traditional finance, being groomed to be a financial advisor and a financial planner. And I was scratching my head the whole time and thinking to myself, wait a second. So we’re gonna force Americans to only put their retirement dollars into specific type of investments, we’re not going to allow them to invest in real estate or other alternative assets. And all along the way, I was working for a commercial real estate company, and I was watching the family make a significant amount of profit on an annual basis, even during challenging times, even during challenging times in the stock market, they were still doing very well. Now, they were also paying hundreds of 1000s of dollars in taxes. And so I thought, okay, there’s got to be a better way to invest in real estate, and there’s got to be a better way to allocate our retirement dollars. And that’s when I stumbled across equity trust about 15 years ago, and our company founder, Dick devcich. He’s widely known as the pioneer of the self directed IRA industry. He was my mentor taught me just about everything that I know. And again, that was 15 years ago, we had about 100 employees. And now we have over 400 employees, we do business in all 50 states. And we have over $40 billion in assets under custody and administration. So when someone comes to you, the takeaway here is when someone comes to you and says, Hey, I heard that you can’t invest in real estate with your retirement plan. That’s absolutely so far from the truth. In fact, you can go to the IRS website, irs.gov. And you’ll see where it says in black and white, that real estate is a permissible investment. But due to the administrative burden, financial institutions aren’t required to allow you to invest in real estate. So it’s not a matter of legality, but rather a matter of choice. Yeah,
Greg Lyons  07:59
John, I think you hit the nail right on the head on this one. Tim, and I talk to a lot of investors, we’re speaking about real estate, there’s a difference between your regular financial planner who makes a commission when you buy some of their products, whether it’s insurance, mutual funds, or what have you. There’s a difference between the regular financial planner versus the fee only advisor. And when you have a fee only advisor they’re directing you to what’s in your best interest, taking into account your tax strategies, available funds and so forth. So there’s a big difference. And we run into this a lot when financial advisors say, oh, no, you shouldn’t do real estate, you should do REITs. That’s because the REITs, they can make money off. So that’s just something really interesting. So when it comes down to the nuts and bolts of it, we have a listener sitting right now listening to us saying, Alright, I have my 401 K, but my company doesn’t allow me to invest in my 401k because I still work for that company. How does that person move their money over to equity trust? Do they have to leave that company first take another job or do something else? How can they move their current 401k where they’re working into someone like equity trust,
John Bowens  09:16
when someone is still currently working for the company that sponsors the 401 K? Seldom can they roll over the money while they’re still working. However, there are some instances where they can initiate what’s called an in service withdrawal. That’s the terminology to use in service withdrawal. And what’s interesting is some plans allow a participant and employee to withdraw money and do a direct rollover. It’s not a taxable event. There’s no penalties, you’re just moving from one account to another. So there are some instances where an individual can actually do this in service withdrawal even while they’re still working. uproot the money remove it from as some people will call it a fake nancial prison that it’s in now in roll it over into a self directed IRA, which then enables them to be able to invest in alternatives, including real estate. Now, keep in mind that when you’re under 59 and a half 59 and a half is the qualified retirement age in the United States. And so while you’re under 59, and a half, generally speaking, plans do not permit this in service withdrawal. But once you’re 59 and a half or older, oftentimes, they do permit the in service withdrawal. So just know that if you’re 59, and a half or older, chances are really good, you’re going to be able to roll it over, and then invest in real estate. If you’re under 59 and a half, unfortunately, you may not be able to roll that money over and begin investing in real estate because of course, keep in mind that your 401k Where it’s currently at, most likely, the financial institution that has their arms around that plan is not going to permit you to self direct and invest in real estate, you have to find a self directed custodian that’s open to these alternative investment opportunities that you want to participate in. And the last item that I’ll mention on that is, of course, if you leave the employer, so once you terminate your employment, you should be able to immediately with the exception of a few instances, like if you’re an NFL player, for example, you have to wait a certain amount of time, but relatively speaking, you leave that employer, and you can roll the money over immediately into an IRA.
Tim Lyons  11:27
So, John, that is incredible stuff. Because I gotta be honest with you, when I first heard about this, I immediately so I work as a New York City firefighter, I’m a lieutenant doing that for almost 18 years. And a couple of years ago, when I got onto this journey, I said, Man, I got a 457 plan. I’m like, This is awesome, I am going to just use all that money. I called up my, you know, custodian or the firm that, you know, does my plan. And they’re like, No, you cannot do that you have to leave the job, or retire or the 59 and a half thing. And I was crushed, right? Because I had some limiting beliefs about real estate at the time, because I hadn’t fully done my education, right? I hadn’t fully done my research. So Greg, and I always talk about it’s education times action equals to your results, right. And this is just one piece of the puzzle. This is your education piece here on using your retirement account as a pool of capital that you can deploy into what’s called alternative investments, which I tell you might be my life’s work not to call real estate and alternative investments. It’s been around for millennia. But anyway, so John, a lot of people don’t stay in the same job, right. And they might have two or three, or maybe even four or five different types of plans of 401k, here, a 403. B here, are they able to aggregate that capital into say, one self directed or one solo 401 K type of vehicle, and then use those funds to invest in something like real estate or private equity or something like that?
John Bowens  13:03
Absolutely. So if someone has multiple retirement plans, they can consolidate all of those accounts into one individual account. So for example, use the example of having multiple 401 K’s. So if an individual work for four different companies over their life, and they’re still working with one company, but the three previous companies they had 401, K’s with, they can take all those 401, k’s and roll those funds over into one individual IRA. Now IRA stands for Individual Retirement arrangement. And most plans most 401 K’s 403, B’s 450, sevens, all of the money going into that those accounts over time. So through your salary deferral all of that money is what is known as tax deferred. So when the money went in, you got a tax deduction for it. It grows tax deferred, meaning in each incremental year, you don’t pay taxes on the income. And then when you start withdrawing money after the age of 59 and a half, that’s when you pay taxes. So the analogy we use a lot in the industry is you either pay taxes on the seed, or you pay taxes on the crop with a traditional IRA or tax deferred 401k. Some people also refer to that as pre tax those types of accounts, you have to pay taxes on the crop, because you got a deduction on the money going in. Now, here’s what you do. If you have these tax deferred accounts, you simply open up a self directed traditional IRA, that’s a compatible account, and you roll all the money over into the self directed IRA. And once the money is in that account, you can then select the non stock market based investments I love what you said there Tim, which is alternative to some people might think negative or might think well, alternative could be risky or scary. But people have been investing in real estate right a lot longer than investing in the stock market. So I love what you’re saying there. And what I’ll say is more I refer to it as non stock market based investments or real estate backed assets. So I have a lot of people that will use the term of wanting to convert their IRA into a real estate backed IRA. And that’s exactly what this process does, you roll your money over into a self directed traditional IRA to start investing, so you don’t have to roll over all of your money, you can rollover just a portion of your money into a self directed IRA. And I have a lot of folks that prefer to approach the process that way. So you know, maybe they have, let’s say, $500,000, in IRAs and retirement savings accounts, and they say, You know what, I would like a 20% allocation to real estate. And so they move over 20%, let’s say 100,000, into a self directed IRA. And then they deploy that $100,000, let’s use the example of a real estate, private placement, or a real estate partnership opportunity. Maybe it’s an apartment building project. So the IRA is investing as an LP as a limited partner in a fund alongside many other investors. And so the 100,000 is rolled over no taxes or penalties, the 100,000 goes out for the investment, no taxes or penalties. And then all of the returns your preferred distributions, as oftentimes referred to as are going to flow back into the IRA. And then let’s say that that real estate fund has a exit strategy of three to five years. And let’s say at year four, they sell and then you have a capital gain event. So now all the capital gains flow back plus the principal flow back into the self directed IRA. So the best way to think of it is investing in private assets is really no different than investing in the public markets from a logistics perspective. So when I buy a stock, cash leaves the account, in return for that cash is a stock certificate. When I use my self directed IRA, and I invest in let’s say, a real estate private placement, or I buy an individual single family rental property, or I make a private money loan secured by real estate, or I invest in gold and silver, or whatever it is that I do, cash leaves the account, and then in return for that cash is some sort of security. So if I’m investing in a real estate fund, I have a limited partnership interest. I have documentation in my IRA, a subscription agreement, a private place memorandum operating agreement, right, I have all these governing documents in there. If I’m making a loan secured by real estate, I have a promissory note and a mortgage, which is actually a lot of what I do with my self directed IRAs is I passively make loans to real estate investors to flip houses. And then all of the interest in principle flows back into my self directed IRAs, totally exempt from taxes. If I buy an individual property, maybe I buy a single family residential rental property, some people are more active with their IRAs, and others, my IRA cash leaves the account, I buy the property in return for that cash is a deed to a property, and then all my expenses just flow to and from the IRA, all my profits flowing to and from the IRA. So that’s the best way for the audience to really wrap their head around what this process is. And of course, for folks to understand that they don’t have to move all their money into a self directed IRA. And then number two is as they’re deploying that money for their investments, there are no adverse tax consequences or penalties.
Greg Lyons  18:30
That’s a great description of kind of how to use the self directed IRA. And you’ve been a real estate active real estate investor for a long time, Tim and I have gone on this real estate journey. And we’ve really kind of figured out where our niches within real estate, but I think a lot of times, people will move them or they’ll leave a job, they’ll move some money into equity trust, and all of a sudden, they have the keys to the kingdom. And they don’t know what to do, right? All invested this this shiny object syndrome. And you know, that’s what we do at cityside capitals, we offer different investments in multifamily self storage, and industrial but sometimes people get really nervous about what to do. And then there’s just inaction their money will just sit there. What are some of the common pitfalls you see from investors with self directed IRAs,
John Bowens  19:21
common pitfalls and II started to go there, Greg, which is an investor will move money over into a self directed IRA, and they’re in cash, and they don’t make an investment. So they don’t find a place to put that money so that money can grow earn. Of course, there’s benefits in the IRA, tax deferred and tax free growth opportunity. So you want to make sure that you’re really maximizing those tax advantaged dollars in your IRA. You’ll hear me talk a lot about in our YouTube videos that we have for the public so they can learn more about this. I talked about this concept of compounding interest in the app sense of taxation, I like to call it the eighth wonder of the world or some people say compounding interest is the eighth wonder of the world. But I think the ninth wonder of the world, if you will, of compounding interest without taxes, which you are afforded through a self directed IRA, traditional or Roth IRA growing tax deferred or tax free. And so, you know, I really encourage investors to maximize the use of their tax advantaged dollars. Because as those dollars create more tax free and tax deferred dollars, you have this compounding effect. And what that compounding effect does is it eliminates the variable of taxation, which increases your yield. And if you can increase your yield, you can get to your retirement goals and your financial goals in a shorter period of time. So that’s pitfall number one, which is not taking action and deploying the IRA capital. The second pitfall is with respect to the rules and guidelines associated with using self directed IRAs or using any IRA for that matter. So there are what are called disqualified persons to your IRA, in transactions that can occur with a disqualified person that could create what’s called a prohibited transaction. And let me pause for a moment and Tim and Greg, you’ll see that there are publications and articles out online. And I encourage folks to make sure that they’re doing due diligence before they proceed with a self directed IRA. But you also want to be cautious because there are individuals out there that I will call them fear mongers. So they will tell people that self directed IRAs are bad, they’re too risky, you can make a mistake and do a prohibited transaction and your entire IRA is distributed. Well, I can tell you, I’ve been doing this for 15 years, I’ve trained over 60,000 investors, I’ve worked one on one with over 5000 investors, the prohibited transactions that I’ve seen are few and far between. And the reason why is because the government was exclusive rather than being inclusive, they only tell us what we can’t do, not what we can do. And so if you’re following the rules, you get the right training, you watch the video content, and you have conversations with your CPA and other individuals that you’re working with, you’re most likely not going to engage in one of these prohibited transactions. But I will tell you that there are some companies out there, the only product that they can sell you is a stock or fixed income based asset. So all they can sell you. So you can imagine, what are they going to tell you about self directed IRAs, they’re going to tell you that they’re bad, and you could make a mistake and lose everything, because they can only sell you stock based and fixed income based products. And so you got to be really careful with that. But to understand what this all means, disqualified persons to your IRA would include you to your IRA, your spouse, your children, your parents, your grandparents, so essentially anyone up and down the family tree, and you can’t transact with these disqualified persons. So transactions, for example, would be if you own a property now, or you have an apartment building, or a mobile home park, or a private money loan, or whatever it is that you have now, you can’t use your IRA money and buy it from yourself personally, you can’t take your IRA money and loan it to your business. So Greg, and Tim, I understand that you guys have a real estate business and your operation, you cannot take your IRA money and loan money to your operation, that would be a prohibited transaction. And when you think about it, these are really common sense principles. These are highly tax privileged retirement plans. And so the government’s not going to allow you to double dip, so to speak. So you got to make sure that it’s a third party transaction, you’re buying a new property or investing in a new partnership. And as long as you follow those basic rules, you shouldn’t run afoul of the Internal Revenue Code and engage in a prohibited transaction. John,
Tim Lyons  23:56
let’s just stack on top of that some of the things that you can’t like you can’t do a fix and flip and then you do the work yourself on that fix and flip, right is that it needs to be an arm’s length transaction. Is that correct? That’s
John Bowens  24:08
correct. So if you were to do a fix and flip type project, it’s not that you can’t do a fix and flip project. It’s not that you can’t own a rental property in your IRA. It’s that there are certain activities that you can’t perform as a disqualified person. So under Internal Revenue Code section 40 975. It outlines these disqualified persons in prohibited transactions. And it states that a disqualified person cannot provide a service or furnished facilities to the IRA. That’s verbatim from the tax code. So what that means is if I own a rental property, let’s say in my IRA, which I’ve done, I can’t do the physical work myself. If I’m going to do a fix and flip transaction, I can’t use my own labor and my own sweat equity to perform the rehab. I have to pay a third party to do that. Now I’ll tell you, in a way, that’s one of the benefits to me in using my IRA when I own rental properties, because I own rentals outside of my IRA and inside of my self directed IRA. And when I own rentals inside of my self directed IRA, I have the benefit of no taxes, no long term capital gains tax, I don’t have to worry about recapture depreciation, all of my profit is tax exempt. So I might have to pay someone to do some of that physical work myself do some of that physical work instead of me doing it myself. But I’m going to make up for that in the form of the tax free benefits. And that’s the best way to look at owning rental properties, or maybe doing a fix and flip property opportunity in a self directed IRA. Now, I’ll tell you, with my rentals outside of my IRA, it’s very tempting for me to go over there and do the work myself. And oftentimes I do, but I know that with my self directed IRA properties, I’m going to make a phone call and I’m going to pay someone else to do that work. The rule of thumb that’s used, which is important is I can do the desk work, but I can’t do the physical sweat equity. So like, I always like to say, if I pull up to one of my IRA own rental properties, which is okay, I pull in the driveway, I might be talking to a tenant, I might be talking to a contractor, I might be overseeing the project. Okay. The moment I crossed the line is when I decided I’m going to drop the tailgate and start pulling tools out of the back of the truck. That’s what I stay away from that’s like my test or what I just make sure I don’t cross that line. If I don’t cross that line. I should be okay.
Tim Lyons  26:37
Well, John, luckily, Greg and I have absolutely zero, like rehab skills. So we don’t swing hammers, we don’t do screw guns, we don’t do impact drivers, we don’t hang sheet rock nothing. So that would be perfect for me.
Greg Lyons  26:52
I don’t even I don’t even know what you just said right there. So we’re gonna be in great shape.
Tim Lyons  26:58
That’s why we love the passive investing route. John, just so you know. But anyway, and our listeners know that, John, I really like something that really kind of gets me, you know, disturbed a little bit is that people don’t know what’s available to them. And once I found that out, I felt like I wanted to scream it from the mountaintops. Right? Like, oh, my god, I just found out something great. And I feel like everybody should know about this tool or about this process. And that’s really why we started the podcast, we can talk to people like you and really kind of teach people what’s available. So what gets me going on the same track, though, is like financial advisors, and CPAs, and the people who are really those trusted sources about how to protect your capital and strategies and tax strategies and investment strategies. And like, we touched on this before, but for somebody who may be thinking right now they’re driving the car, they’re like, Man, this sounds terrific. I gotta go find some more information about this. But man, if I talked to my CPA, like he might push back, or she might push back or same thing with my financial guy, you know, my dad’s been using them. I’ve been using them my brother’s using them, you know? And like, he just I know, he won’t go for this. How do you frame that conversation? Or have you ever had to help an investor kind of frame that conversation to go have that other conversation with the with TCPA? And Ira folks,
John Bowens  28:21
at 100%? I’m glad you asked the question because, you know, when I make statements like your financial advisor might not be all that keen to investing in real estate or that financial advisors and planners can only sell specific investments, I do not have an adversarial relationship with the financial advisor community. In fact, I have a great relationship with 1000s of financial professionals across the country. And these are professionals that acknowledge and understand that they have a group of clients that want exposure to non stock market based portfolios, non public assets, they want exposure to direct real estate through an individual funds structure or a private REIT structure, or maybe even buy a piece of land and sit on it for many years as a hedge against inflation. So there are plenty of financial advisors and planners that are actually very open to this. The challenge is, is a lot of them. They don’t go to school, and they don’t have the training and knowledge around this, which is okay. And so what we’ve done at equity is we’ve actually built educational material that you can share with your CPA or financial advisor or financial planner. And it’s really easy to get access to this. So if you go to YouTube and search equity trust, we have a video on there, you’ll see so you don’t have to make any special requests or pay anything, you just go on YouTube. And you can share this video with your CPA or advisor so that they can understand some of the rules and guidelines that we talked about. And they can understand the opportunity of investing in these alternative assets and actually spend a lot of time talking to financial advisors and planners about how being open In minded to self direction, could potentially save you hundreds of 1000s of dollars in assets under management. I’ll give you an example. And 2022. So this was when the s&p was down somewhere north of 16 to 70%, I think it was like close to 18%, the market was down at this point in 2022. And I had an investor that reached out to me had about $1.5 million in an IRA. And he was looking at investing in some private real estate partnerships. And he said, I’m gonna call my financial advisor, and we got a meeting setup. And we’re going to talk about what I want to do going forward. And I think what I’m going to do is move over about 15% of my IRA portfolio, into a self directed IRA, and I’m going to use that 15%, for an allocation to direct real estate partnerships. So that made sense to me, he wasn’t moving at all, he’s just gonna move 15%, not that I would object to him moving 100%, because we’re not advisors here, we don’t look at investments and tell a customer whether they should or shouldn’t invest. We don’t allocate portfolios for investors or make recommendations, which is good customers want to come to us because they know that we’re not going to have any biases, and their investment decisions. And so the way the story went is this gentleman reached out to his financial advisor had the meeting. And the advisor did not react very favorably, he told him, Hey, this is what happens there market cycles, you just need to keep your head down and just stay the course. Well, this did not unfortunately, go over well with this investor, which it shouldn’t. And I’ll make a statement here. And it might be a bold statement. But I think it’s an important one, I have found that the financial advisory planner, traditional community, I’ll say, has told Americans for too long to keep their head down, and don’t make any moves whatsoever, and just stay the course. Well, unfortunately, I saw that really negatively impact a lot of retirees in the great recession. And so I have trouble accepting that as a good solution. Well, in this case, what the investor ended up doing, he ended up firing that financial advisor took all of his money, which is over a million dollars and moved it over into a self directed IRA. So whereas he was going to start with only 15%, and the advisor would have retained the remaining amount, he actually moved the entire balance over into an equity trust self directed IRA. So the moral of the story here for individual investors a is you don’t have to be at the mercy of the traditional financial markets, you get to control your money. Keep in mind that a financial advisor or financial planner, can only sell certain investments in certain portfolios, it doesn’t mean that they don’t want to act in your own best interest. I think most of them do. But the reality is, is there’s only so much that they can do for you. And so if you’re somebody that says, hey, I think I could do a little bit better, by allocating this percentage over here, you should consider doing that. And then, of course, the lesson for financial advisors, and the wealth management community is being open minded to this concept of self directed and work with your client through that process. And if if they come to find out that it’s too difficult for them, or they don’t want to do it, then they stay the course. But if it’s something that can really benefit their entire portfolio as a whole, then you’re obviously helping them do something that’s right for their portfolio, and hopefully retaining a larger percentage of their business.
Greg Lyons  33:44
John, this is why Tim and I were really excited to have you on just because of the value you could bring with really actionable steps for people. And you’re not a fly by night company. You’re a $40 billion company assets that you have custodian over, but you’re not making recommendations for people to invest. You’re really an educational source and a resource for people to see what’s out there. And as opposed to cityside capital. We are laser focused on private placements in multifamily and self storage. You know, that’s what we do. When people come to equity trust they could of course invest in multifamily. But what else is available for people to invest in through their accounts with you all? Yeah,
John Bowens  34:33
as far as real estate is concerned, individual rental properties, private money lending, trust deeds, mortgage notes, even non real estate assets like a hedge fund or a venture capital fund or private equity firm investing in digital assets like cryptocurrency or gold and silver, so owning physical gold and silver as far as real estate is concerned. That’s my background and my passion and To give you an example of how this works, I’ll give you a personal example. I bought a property it was a single family. Well, it had two units in it, but it was a residential rental property. Right outside of Cleveland, Ohio. I bought this property in March of 2020, for $63,000. And I actually partnered my traditional IRA, my Roth IRA, because what you’ll learn is if you have multiple different types of retirement plans, tax deferred and tax free Roth, you can actually partner the accounts together to buy properties and invest in different types of real estate assets. So I bought this property for $63,000. From a motivated seller, this was a landlord that wasn’t doing a very good job keeping up with the deferred maintenance and the tenants it had tenant issues and had deferred maintenance issues. So we bought it for 63,000. Over the course of two years, we got the property stabilized. So we got good tenants, it was cash flowing at 750 per month, per unit, so 1500 gross per month, about 12 to 1250, and the net operating income, we took care of all the deferred maintenance. A lot of the deferred maintenance were things like a new toilets, fixtures, shower fixtures, some cabinetry repairs, some flooring, repairs, paint, carpet, those types of necessary repairs that weren’t being done over the last probably five to six years, if not longer. And so we got the property stabilized. And then we listed the property and sold the property in May of 2022. So about two years later, we sold the property, we made a $35,000 profit. So our annualized return on investment was 32%. And our $35,000 in profit, went back into our self directed IRAs, and we paid 0% long term capital gains tax. Now had we done that investment outside of our IRA, we would have paid about $5,000 in long term capital gains tax. Instead, this was in our self directed IRA. So we captured that extra 5000 tax free, and then we’re able to take that money and put it into a private money loan. Well, we made a loan to a real estate rehabber, to buy renovate and sell a property right outside of Cleveland, Ohio in a city called mentor. And we made an 8.667% return, it was about an $8,600 profit that went back into our self directed IRAs tax free. And interest income outside of an IRA is subject to ordinary income tax rates, which for us would be at about 30% tax. But instead, we did this deal in our self directed IRAs, and we paid 0% tax. So while the market at that time was down in 2022, the market was down 15%, if not more, most Americans retirement portfolios were 15 to 20%, down from their original balance at the height. And we were making at that time anywhere between 30 to 35% on our money. So you know, the story there is you can take control of your retirement plans, and you can invest in in a different type of asset class. That’s not to say everybody’s going to be guaranteed to make 30 to 35%. Right, I understand you guys are in a licensed environment, a securities licensing environment. And you understand that there is no guarantee, if you move your money over into a self directed IRA, there is no guarantee that you’re going to make X amount of return, you make X amount of return by you putting in efforts and selecting investments, and getting yourself educated. And that doesn’t always mean that you’re gonna go out and find a property and find contractors and renovate and sell it and make a profit, like the example I gave you, that could mean that you’re going out and finding a company that you can work for, that you can make an investment in, and you can feel confident that you’re going to be able to make a better rate of return than what you were making in the stock market.
Tim Lyons  38:53
Done. Well, a few things I want to stack on top of that is you just spoke to the Velocity of Money, right? You had your money soldiers out there when that $63,000 property and then it came back to you and then you did immediately turns it into a private money loan. All the while people sitting in their 6040 portfolios, we’re taking a bath. And look, I here’s the thing, I think there’s probably a place for a lot of people’s appetite for stocks, bonds, ETFs. And we’re not saying I’ll never tell anybody not to do that, you know, if that’s what you want to do. But here’s John putting in a little bit of effort, right? Yes, do there’s some deferred maintenance, couple new toilets, couple of coats of paint, you know, some new carpet, and he’s able to have an outsize return because he took a different route to have his capital, philosophizes capital. And that’s what I’m so fascinated about. I love to hear stories just like yours, John, so thank you for sharing that. I just have actually two quick questions. The first one is are you able to use retirement account of funds for that deferred maintenance like Are you allowed to use Is your funds to buy sheet rock to buy pain for the person, whoever is going to be doing the rehab,
John Bowens  40:05
you actually have to. So when your IRA buys a property, your IRA has to finance 100% Of all the expenses. And then that way, all of your profits go back in tax free. So if I bought a property, let’s say I bought that property 63,000. And then I started writing checks personally, or from my business checking account for the expenses, that would be considered a prohibited transaction, I would invalidate the IRA, the entire Ira would be distributed January one, and the year in which I did that transaction, which started in 2020. So I had to make sure that all of my expenses were paid for from the IRA, and then all my profits went back into the IRA. So all the renter’s checks over those two years, went back into the IRA, all my expenses paid from the IRA. And then when I sold the property, the title company sent the wire transfer directly back to equity trust to be deposited into my account. So that is, I’m glad you brought that up, Greg, because that’s a really important note that you got to make sure that all the funds are flowing in and out of the retirement plan. Greg,
Tim Lyons  41:04
you see how I did that? I kind of like you know, just fed it in there. Yeah. So anyway, the, the the second question I had, which comes up sometimes when people are the asked me, Tim, do you work with self directed IRAs? Yes, we do have a solo 401 K’s? Yes, we do. What’s the difference? And then I’m like, you gotta call my man John Bowens over at equity trust, because he’s going to be the expert to talk about all that, right. So there’s one thing that people kind of bring up to us a lot, and it’s about UDF. Fi and you bet. So I believe it’s called the unrelated business income tax, you bet, right? And undefined debt financed income or something like that. Can you just touch on those two topics, how they relate to the self directed account? Like the pros and cons?
John Bowens  41:52
The first I’ll say, Tim, and Greg, I really appreciate you guys being cognizant of this and asking the question, and having conversations with your clients about it. Because there are a lot of folks in the multifamily real estate syndication, real estate, private placement world that sweep it under the rug, don’t want to talk about it, because it could potentially reduce their sales or reduce their money raising efforts. And I think that the industry needs some compliance around this, it needs people talking about it. So again, just want to give you guys kudos, and say, Thank you for asking the question for the viewers to understand what we’re talking about here, because it’s probably confusing, unrelated business income tax, and unrelated debt financed income tax, they’re really the same thing. You DFI is just a derivative of You bet. Now, let’s talk about you, but in the context of real estate purchases. So what ubit is, again, it stands for unrelated business income tax. What it is, is it’s a special tax on IRAs, when the IRA owns a debt leverage piece of real estate, or if the IRA is involved in a partnership that has real estate, that has a loan against it. Now, let’s use the example of if the IRA owned, let’s say, a single family residential rental property. So Tim, let’s say you bought a property for $100,000, with your self directed IRA, and you went to a non recourse lender, because you gotta go to a special type of lender, these are called non recourse lenders. So you go to a non recourse lender, and let’s say you borrow 50,000, for the $100,000 purchase, the IRA makes a $50,000 down payment, you get a loan for 50,000, your IRA owns that property your IRA owes the bank, the non recourse lender, the $50,000 balance plus the interest usually amortized over a certain period of time, usually not to exceed 20 years. And so now your IRA has outflows of the mortgage payment, the rental incomes coming in, you’re paying for expenses, you’re managing the real estate, just like any other property in your IRA. Well, the income, the rental income, and the proceeds if you sell the property are not 100% tax free or tax deferred like they are when you don’t have debt financing. What happens is this unrelated business income tax, and it’s based on the percentage of the property that’s debt financed. So in that scenario, 50% down $50,000 loan $100,000 acquisition, so your indebtedness, or in other words, your let’s call it amount of the property that’s debt financed, is 50%. So what’s going to happen is 50% of your net profits, that is your profits after all of your expenses and your depreciation 50% of your net profit is going to be subject to this unrelated business income tax on a buy and hold rental property scenario. You may have enough expenses and depreciation to totally offset any of the gains, therefore, you don’t have to worry about this unrelated business income tax or sometimes also referred to as unrelated debt financed income tax, just think of those as as one in the same. But eventually, if you sell the property or there’s enough cash flow, then you’re likely going to have this special tax. It’s not a deal breaker, because plenty of investors I’ve seen, they analyze and pencil out the transaction. And they still find that it’s prudent for them to make an investment with leverage, even though they’re paying those taxes. And I’ll say, with commercial real estate, when you’re investing in a partnership type arrangement, the same rules apply. It’s just you’re a percent owner. And so there’s a calculation that’s performed to determine what your percent of the allocation is. And then you calculate this unrelated business income tax, again, also known as unrelated debt financed income tax. So it is important understand with an IRA that you have this youbut with depreciation and bonus depreciation, you might be in a position to really offset that. And for it to still make a lot of sense for your self directed IRA. But it is something that we encourage folks to talk to their CPA or their accountants about. And lastly, I’ll mention because you brought it up about the solo 401 K. So what’s interesting is solo 401 K’s have an exemption 401. K’s in general, qualified employer plans, in general have an exemption from unrelated business income tax, as it relates to debt financing real estate acquisitions. So if everything is structured properly, your solo 401k would be exempt from the ubit tax, which means a lot of investors to their best ability will try to invest in real estate partnerships with a self directed solo 401 K, instead of a self directed IRA. Now lastly, and then to conclude is, not everyone qualifies for a self directed solo 401 K. So I wish it was as easiest as every single person would just open up a self directed solo 401 K, you dump your retirement money to the self directed solo foreign K invest in the partnership, and then you never have to worry about ubit tax. Well, unfortunately, it doesn’t work that way. Because you have to qualify for a solo 401k You have to be self employed, you can’t have any employees with the exception of a spouse, and you have to have earned income. So you have to be self employed and actually showing some earned income in order to be able to qualify to keep that self directed 401 K. And unfortunately, Tim and Greg, you guys may have seen this before, there are companies out there that all they can sell a customer is a self directed solo 401 K. So guess what they tell everyone that everybody qualifies for self directed solo 401 K, they open these plans. And then oftentimes these people call me two years later and say, John, how do I unwind this mess that I just created? I’m finding out now for my CPA that I never even qualified for this from the beginning. Why didn’t this company Tell me about it? I said, Well, we had video training, we all kinds of education talking about it. But this company sold them on this concept. And unfortunately, they didn’t qualify for that. So I’ve had customers that do things even like start an eBay business or for somebody that’s in retirement, maybe they do some part time, Uber driving, right, and they show income and they can have a solo 401k. And they can make contributions every year. So I encourage folks to talk to their CPA or their tax accountants about how they can qualify for a solo 401 K, and then use that account to invest in real estate partnerships. So they can be exempt from the UBI T tax.
Greg Lyons  48:35
You know, I hope our listeners are still with us, because this is really good. And unfortunately, when you start talking about you bid and UEFI some people just kind of they kind of stick their head in the sand and say, You know what, this isn’t for me, I’m not going to do real estate and, and just kind of keep going about they’re the same way they’ve been doing things. The thing I like, you know, Tim and I being licensed, we don’t guess. And if we don’t know the answer, we’re gonna find someone that does and that protects us, but it really is designed to protect the investor. And that’s why we like having you on John and equity trust the education you can provide getting people into a solo 401k A self directed IRA, getting people into the correct things for their it’s so personalized. And having that guidance from you all, I think is just fantastic. Tim, I only got through about 20% of the things I wanted to ask but I do think we probably need to move on to our three questions. What do you think? I
Tim Lyons  49:39
do, and the good thing is we’re gonna have to have John back on so John, we’re gonna quickly reschedule you because I think we’ve only hit the tip of the iceberg here. But in the name of time, let’s move on to the three short answer questions. And the first one John is maybe not in your capacity as equity trust but if you had your your at home hat on and someone said to you at the local party, you know, John, isn’t investing in real estate just too risky? How would you respond to that?
John Bowens  50:07
That’s a question I get all the time. And I used to get it a lot when the market was doing really well. So everybody at the family parties would say, you’re insane for owning real estate in your retirement plan, my, my, my guy over at XYZ, you know, financial company is getting me X amount of return. Well, guess who was reaching out to me when the stock market was down? 16 17%. And my portfolio is in the opposite direction is everybody else? Right? Now, all of a sudden, I’m getting calls from people saying, you know, how do I do this? How do I do that? So, you know, my response is, you know, risk is, you have to look at risks through the eyes of the individual, through the eyes of yourself and not other people. Because, you know, when I look at investing in real estate, I feel like I have a lot more control than investing in other types of asset classes, whereas other people might be the opposite.
Greg Lyons  51:02
That’s great answer there. Our second question, John comes from Robert Kiyosaki a kind of a de facto mentor, and the person that really got us started on our real estate journey. And he said that savers are losers, and debtors are winners. What does that mean to you?
John Bowens  51:19
So the way I approach that, and I, I appreciate that comment from Robert Kiyosaki, I had an opportunity to be on his podcast not too long ago. And I would say that putting your money in a savings account earning little to no interest isn’t gonna do you any good. You have to I think it was Tim who brought up those are those are soldiers and you got to you got to velocity philosophy, I think is what you said your money. And that’s what I would stress to people. As far as debt is concerned, you know, owning real estate with debt is, you know, in using other people’s money, I think it’s a very wise decision has to be done appropriately. But I think there’s two different kinds of debt, right? There’s debt you use when you make investments. And there’s debt you use for consumer type items, which could even include your primary residence, and you really need to keep those separate. And I think that’s a problem in America and society in general, is that we don’t communicate the difference between the good debt in the bad debt. Do
Tim Lyons  52:20
100% I totally feel aligned with that answer. Because it’s still astounding to me that Greg, I had to figure all this out in my early 30s, and not when I was 1819 years old. But anyway, John, the third question, third and final question comes from a guy named Jim Rohn. And he said, a formal education will make you a living in a self education will make you a fortune. And I feel like this question is teed up for you perfectly, so take it away.
John Bowens  52:49
Yeah, I love that question. One thing that I tell a lot of younger folks that I talked to, you know, high school and such, is the formal education, I think it’s still very, very important. I do see a lot of social media buzz around, you know, a formal education isn’t going to do anything for you, you know, I learned everything in the school of hard knocks, blah, blah, blah. And I have trouble subscribing to that, because I think going through a formal education, it shows a lot of commitment that you can complete something. Most people that have worked for me that went to college and then dropped out, they never made it, in the occupation they were in, they were never motivated enough, they didn’t show up to work on time, they weren’t passionate enough. It’s the people that say they’re going to do something, commit and do it and complete it, that I find are the people that are most successful in life. So I still believe that a formal education is very, very important for individuals. And then beyond the formal education, it’s taking some of the skills and the commitments that you learned, and the skills around committing to things in your formal education, and then taking it a step further. And I’ll close with saying that, you know, the diploma, the certificate, whatever it is that that we have, I have it, I’m sure you guys do too, as well as I don’t want to say it’s not worth the paper that it’s written on. But we can’t just wave that certificate or that diploma, and say I’m entitled to XY and Z, because we’re not, you know, we have to go out there and work hard for it. And you know, we have to demonstrate commitment and blood, sweat and tears in our professions and whatever we’re doing, and being laser focused in whatever it is that we’re doing. You know, for me, it’s all real estate, and it’s helping people save for retirement through alternative investments, mainly in real estate. And that’s what I focus on day in and day out. And it’s it’s it’s helped me do very well for myself professionally, as well as in my own self directed IRAs and my own investments.
Tim Lyons  54:49
Well, I’m about to start doing some push ups in the aisle way because John just fired me up on this Monday. So John, thank you for that. I appreciate that. And we’re gonna have to have you back on so I just want to stack on top. I totally agree. I mean, Greg and I are both college graduates. We had tremendous network opportunities. We learned how to be adults eventually. But there’s a time and a place for everything. But I will say, I am so grateful that I actually turned the corner and did some self education, in the real estate space, on taxes on personal finance, finance, on personal growth and development, right? Because getting your mindset where it needs to be taking the action, doing the things following the blueprint that other people have put up before us has been instrumental for Greg and I’s success. So John, thank
Greg Lyons  55:33
you so much. And it’s made a difference over the last few years. But I think the greatest benefit we’re gonna have is 510 1520 years down the road and the things that we’re doing right now, we’re just watering the seeds for exponential growth. And that is what’s important.
Tim Lyons  55:48
100% John, this has been a phenomenal episode. I know it was a longer than usual episode for our listeners, but how can people get in touch with you, they want to find out more about what you guys at equity trust can offer the education platform and all the good
John Bowens  56:03
stuff. Yeah, so the websites easy to find trust etc.com. So it looks like trust etc.com Or I know a lot of folks listen to podcast want to get more education before they actually speak to someone at equity trust. So folks can go to our YouTube channel, which is just search equity Trust Company on YouTube, and you’ll find all of our training videos and other education, subscribe to the channel and get educated there, but I appreciate the opportunity, guys. Awesome.
Tim Lyons  56:31
Thank you for spending the week with the passive income brothers podcast and we look forward to serving you again next week. Thank you for listening to another episode of the passive income brothers podcast. We would be grateful for your support of our podcast by giving our show a five star rating and review and subscribing to our show on your favorite podcast platform. Don’t forget to take inspired action after listening to this show, so that you can start building out your passive income streams. Finally, head on over to cityside cap.com to connect with us and find out more information about how to get started passively investing in real estate