Real Estate Without Renters | Jack Kiley | Self Directed IRAs

 

Unleash the power of alternative investments in your retirement portfolio! Join us as we explore the growing trend of self-directed IRAs (SDIRAs) and their potential to invest in alternative assets. Jack Kiley, a respected professional from MidAtlantic IRA, joins Kevin Shortle to shed light on the advantages of SDRIRAs and how they can be used to build a more robust retirement plan. Whether you’re a seasoned investor or just beginning to explore your retirement options, this blog post offers valuable insights into the potential of self-directed IRAs and Solo 401(k) plans.

Listen to the episode here

Interview With Jack Kiley, Principal At MidAtlantic IRA

This is another episode for you. Thanks, as always, for reading and sharing it with a friend. If you belong to a meetup group, if you go to investment club meetings of any type, I appreciate you sharing the show. If you enjoy the show, I always appreciate those rankings and ratings. I looked at them. Thank you so much for all the five stars. I do appreciate that. That enables me to bring more and more guests to the table here. I always want to have good creative guests who know their business, the professionals in the industry, and everything that’s in and related to note and note investing.

Of course, I have another great guest for you as well who I’ll introduce in a minute. I’ll be doing some events. I’ll be also doing a couple of masterminds and I’ll keep you posted as to where I’m going to be. As always, you can go to my website which is RealEstateWithoutRenters.com or KevinShortle.com and find out more information.

Also, don’t forget, if you’re still new to notes and want to get more information, other than listening to podcasts and looking at my YouTube channel and doing your own research, I wrote a number one bestseller on Amazon called Real Estate Without Renters and you can pick that up at Amazon.com of course. I do appreciate that as well. I want to introduce you to a guest, somebody I’ve known for years. Unfortunately, I haven’t seen him for quite some time. A well-respected professional in the self-directed IRA 401(k) space. That is Jack Kiley from MidAtlantic IRA. How are you doing, Jack?

I’m well. How are you?

I’m doing fantastic. I know we had a minute to chat before we got rolling here, but we used to see each other a lot at conventions and I think we won a couple of awards together at some of those some of those events as well.

If we didn’t, we’ll make it up.

I think I got a photo somewhere I can look up and prove it. Awesome. It’s good to see you. The self-directed space is becoming more and more important for investors, isn’t it? You see some scary stats when you look at the government. You’re going, “Social Security, what are we going to do?” People are relying on that. You have to build your own your own retirement and that’s the name of the game.

People are coming to alternative investments in droves, quite frankly. A lot of large pension plans have been in this space for a long period of time. Some of the largest plans like CalPERS in California and some of the other Texas Teachers Union and a couple of other ones have been invested in note pools and rental pools and all those sorts of things for a long period of time.

The reality is the cash-on-cash return on an average stock and bond is about 4%. That’s not enough cash to pay the pensioners. They need something higher. Note pools, in particular, usually double that as far as a cash return on the investment. It makes a lot of sense to those big pension plans. This has been around for a long period of time and it’s dripped in to smaller to individuals. When you and I were doing the dog and pony show, self-direction was not well known. It’s a much more known commodity in the last few years.

The Alternative Investment Space

I have to say that you’re the first one who has mentioned this, which surprised me a little bit. Big companies, like the ones that you mentioned, and big investment funds and such with teacher pensions and such, they’re into the alternative investment space.

Retirement plans in general, we serve a couple of different masters. One obviously is IRS, which everybody knows about, but in the plan world, it’s the Department of Labor. You think unionized plans and ones that are in the billions of dollars usually have about a 10% to 20% component of alternative investments, which again could be note pools or private REITs. You’ll hear like, “Such and such has 1,000 doors.” A lot of their money is coming from retirement plans because again, the cash-on-cash return on that is much higher. You have to remember that those pension plans have to pay pensioners.

The appreciation of assets, for instance, in the stock market is going nuts. The reality is, if your dividend is 4%, that’s all you got to kick out to the pensioners. People have seen that in large plans. It’s bled over smaller IRAs and those sorts of things. As people roll money out of large plans, they’ll say, “We had something like this in the plan. What can I do?” That gets into self-direction. Of course, as you and I know, anybody involved in real estate has known about this for a long period of time.

In general, private individuals who want to build up their retirements and get into the self-directed IRAs, the ones who get into that are looking more at the alternative space because every other plan is basically stock market, pick a mutual fund, that sort of thing. I bet your experience is similar to mine, where there are so many people who are tired of the stock market because they feel it’s a rigged system. It’s like they have no control over anything.

You have a social media where a CEO makes one comment and what do you do? At least with these alternatives, especially notes and real estate, which I’m assuming have to be probably two of the top ones, I don’t know, maybe precious metals is in there and such now, too, but I think there’s so much more control and so much less risk in those. Is that the general thought process on that?

I think what happens is one of my taglines is that in self-direction, you get to leverage your knowledge. I think what you have here is people end up investing in things that they have either a little more intimate knowledge of or a better handle on. The reality is in the stock market, as you alluded to before theoretically, we all get information at the same time. I’m sure Larry Fink at BlackRock gets his information slightly faster than Jack Kiley does.

In self-direction, you get to leverage your knowledge. Click To Tweet

Theoretically, we’re all getting information at the same time. When I go to events, people ask me about this and I poll the audience. I say, “Who here works for a Fortune 500 company or publicly traded company?” There’s always a couple that raise their hand. I say, “What do you know what goes on at that company?” The reality is nothing. Stocks go up, stocks go down. I’m not saying that there’s not a place in your retirement plan for stocks and bonds. Generally speaking, people who invest in things that they understand better, i.e., notes or real estate, which tend to go hand in hand, first of all, you’re going to do better due diligence on your assets so you’re probably going to invest better.

You’re going to mind the shop better because it’s something that you’re interested in. It’s an iterative process. You’re watching it all the time. I’m a CPA by trade. I can tell you most people, during tax season, when I talk to them about taxes and whatnot and the retirement plan comes up, that’s the first time this year that they’ve looked at it is when they get tax documents. They view this as a passive investment tool all the way through. The reality is, if you’re talking about your familial wealth and you’re talking about growing your piece of the pie, so to speak, your retirement plan is most likely your second biggest asset behind your home. The idea that that should all be in stocks and bonds or bills and somebody else should be watching that is foolish, in my opinion.

I am saving for my retirement because I’m contributing to this IRA. What’s it invested in? I have no idea, but I’m putting money there. Should the mindset be, “I need to be actively pursuing that,” because I do have to look at that as like my house? I want to make sure I’m building equity in the house. I want to pay attention to the market. That makes a lot of sense.

Get Educated

In my training classes, I would say, say it a little bit a different way, but along the same lines. I think of what you’re pointing out, which is, I ask, “What do you invest in?” “I invest in stocks.” “Let me ask you a question. Before you buy stock, you research what they do. You look at their financials, you know what their future R&D is for future growth, you know about the CEO and their background and who’s running it, right?” Of course, the answer is, “No, I heard about it on the subway,” or something. Somebody mentioned it in passing and I jumped in and bought some.” That’s crazy.

Wouldn’t you rather have something that’s going to be setting you up potentially for the rest of your life down the future, something that you’re familiar with or at least that you can get educated in? With these alternative investments, there’s a lot to explore. I know we’re referring to real estate and notes, particularly in this case, but if you don’t know anything about real estate and notes, again, you can get started in that and then start to explore it and then you can start to apply what you learn.

If these are some areas that make sense to you, then by all means, research those. The point being, you’ll be able to control things and you will know if you buy a note, especially if you’re working with someone like me, you’re going to know everything about not only the note and how it was written up, but you’re going to know about the pay history and the borrower. You’re going to know about the collateral backing the loan and what that’s worth. You’re going to know everything and you’re going to go in there much safer and with a higher return.

That’s the point of self-direction. I’ll tell you personally, I’m a note investor as well. With respect to my retirement plan, I like notes because it is all the work. First of all, it’s all about numbers. I’m a bit of a gearhead. I like that. It takes the emotion out of that. I don’t have to worry about a tenant coming up to me and crying the blues about payments and those sorts of things. I like notes from that perspective. Second of all, you’re looking at a few different things and everybody’s appetite’s a little different.

Somebody might like a property, a single-family in the middle of Ohio because they live there. They’re much more comfortable with that than a property in Florida. Other people have different feelings about that. I live in the DC area. Everything is expensive here. This is an investment that allows me to invest. I don’t have to invest copious amounts of money in a single note in areas where it’s much more affordable.

I find it to be a much better investment, at least for me, because again, the work is done upfront. It’s about numbers. It’s about looking at the value of the security, which is the property. Do I like that? Don’t I like that? Have I had somebody go buy it? All those things that I know that you go through with people. We’re basically down to what do I offer. What do I want as a rate of return for what I’m getting? It’s about cranking a couple of numbers and it’s pretty easy.

Note investing is a much better investment because the work is done upfront. It's about numbers. Click To Tweet

MidAtlantic IRA

If people have money invested in MidAtlantic IRA, you act as their custodian. I think a lot of people know, but in case there are some people who don’t know, what is your role in working with people with self-directed IRAs?

We are primarily the dotters of I’s and crossers of T’s, as I say. Our mission is to help you invest or help somebody invest in what it is that they want to invest in. There are two broad sets of rules. Quite frankly, neither one of them gets touched when we’re talking about buying existing notes. One of them is permissible assets. Notes are well within the permissible asset spectrum. In fact, IRS only says that you can’t buy two things. We don’t need to go into all that. The other set of rules deals with what are called disqualified persons. These are people that the IRA cannot transact business with. The biggest component of that tends to be family members.

Here, again, when you’re buying notes in the open market, generally, you’re not buying your son’s note. You steer clear of those two broad parameters. What we are doing is we’re looking at to make sure that your funds are transferred in a manner that doesn’t put you at risk. Where we’re a little different, I think, from most other providers is that we want to know when a client is beginning the process. We want our client to call us at the beginning and say, “I’m looking to invest in notes.”

That does two things for our acquisition team. First of all, you’re on our radar screen. If I know that I have 50 deals that are going to be done a week that need to settle or transact a week from Friday, they’re all going to get done. As my kids would say, there’s no drama around that. Second of all it allows us, as the process moves on, to make sure that everything is in place. For instance, where are we going to wire money? What are the documents that need to be reviewed? All of that is done in advance. Most of our competitors don’t want to see any of that stuff until you have it all together.

The challenge, especially for people who are new to any asset class, particularly, is they don’t even know when they have all the documents together. You’re in this, maybe I do, maybe I don’t. You submit it to the custodian and they go, “We need A, B, C.” You go, “I thought I had it there.” It delays things. In this asset class particularly, you can’t waste time. You have to know when. Once you make your decision, money has to move from account to account or Point A to Point B. That allows us to do that. Secondarily, our office is in the DC area and I know it’s been a while since you’ve been to DC, but one thing about DC, like Florida, we don’t get a lot of snow.

When we get a hint of snow in the weather forecast, this place locks down. You’d think we’re going to have a hurricane. There are people that are running to the store to get bread and milk and all these things and this place locks down. Somebody in Florida or Arizona doesn’t care that we got a weather event. They just need their deal to close.

We prepare for all those things and it’ll be funded earlier. We’ll take care of it around whatever the environmental factors are. It helps us to get involved early. Also, every investor has a different way of doing things. Some note people use you and some use another guy. We get familiar or we try to in our acquisition team, but find centers of influence, let’s say. If we have 25 people who have learned the Kevin Shortell way, we put them with the same acquisition people because we know the drill. That helps us.

Real Estate Without Renters | Jack Kiley | Self Directed IRAs

Self Directed IRAs: Every investor has a different way of doing things. Some note people use you and some use another guy. We get familiar with or try to find centers of influence.

 

To illustrate perfectly your point and how important this is, there is a bit of a dance behind the scenes. Everybody on these closings, you’re boarding alone with a servicing company, they have to be prepared. You’ve got a seller who’s waiting for funds, the seller’s got signed documentation, you’re getting the thing coordinated. I had a client of mine who’s using a self-directed IRA, not with you, with another company. Nice note. It was actually 2 notes from the same seller on 2 lots in an area that was it was a good deal. I was happy for him that he found it. Going through the process, got the offer accepted, we’ve done all of our due diligence, that’s all in place.

Now all the paperwork’s coming together. We had some external reports coming in, BPOs, those sorts of things and got it all together. The custodian in that case was nitpicking, “We need this. You get that done.” They’re like, “Okay.” Several days go by, “Now we need this.” Finally, the seller goes, “I’ve closed a bunch of notes and I don’t know what they’re asking for. What’s going on?” That made my client look bad.

At some point in time, all of a sudden, the seller came back and says, “We’re pulling all our notes off for sale,” which I knew he wasn’t telling you quite the truth there. I knew he was pulling this away because he was tired of going through all the rigamarole. The big rub point for people in the industry is people who are not closing transactions. You’re 100% correct. They’re like, “We’re done. We’re tired of playing around, we’ll go with somebody else. We got other people here.”

A lot of people on our acquisition team have come out of two areas. At MidAtlantic, I can tell probably the two biggest asset classes are real estate and notes. Most of the people on the acquisition team have come out of loan processing and real estate closing. They’re already familiar with deeds of trust so they’re looking at things. You’re helping the client assess whether it’s a good deal or a bad deal. Our job is to make sure that we have the documents that we’re supposed to have. We have people here that know what they’re looking at. Nobody’s learning on your clients. That’s my point.

Checkbook Control Vs Non-Checkbook Control

Going back to that previous case study, I told my client, of course, “Let your custodial know ahead of time,” and he said he did and he said they’re waiting for the paperwork. There you go. That goes right to what you’re saying and then the thing falls apart. That was a big bummer. That is important. Knowing the space is so important. Boarding accounts and things like that. If people want to do rollovers, same thing. You make that process easy and once it comes out of their current accounts, roll it over. Now they can self-direct it. What are your thoughts on checkbook control or non-checkbook control?

I think it’s a double-edged sword. For people who are well-versed and comfortable in whatever it is that they’re doing, it makes sense. I say this in presentations all the time. If you came out of the military or you’ve been in a regulated industry, you’re probably going to be okay with it. If you’re back of the napkin art of the deal, seat-of-your-pants kind of person, you’re going to struggle. The challenge here is that all the rules attendant to the IRA now fall to the LLC or the, or manager of the LLC to know because the single member owner of that is a retirement plan. It needs to be treated the same way it would be treated if it was, for instance, with us.

Secondarily and a lot of people don’t tangentially think of this, if you have a checkbook LLC, now you are the bookkeeper. You’ve got to keep a set of books. You’ve got to reconcile accounts. It’s a company, basically. You’ve got to pay somebody or you’ve got to do that work. If your account is at the custodial level, let’s say, obviously we’re doing all that. I guarantee you we are cheaper than paying a bookkeeper to do that, or you spending your time doing that. That’s the two sides to it. If you’re doing something or your investment has a lot of moving parts, it probably makes sense to have the LLC or the checkbook construct because you’ve got to move fast.

Real Estate Without Renters | Jack Kiley | Self Directed IRAs

Self Directed IRAs: If you’re doing something or your investment has a lot of moving parts, it probably makes sense to have the LLC or the checkbook construct because you’ve got to move fast.

 

I always use the example of a rehabber. Rehabbing probably makes sense to do in a checkbook IRA because you got to pay the plumber, the mason guy, this guy and that guy. Of course, those guys all live hand to mouth so they want to be paid when the job is done. Notes, not so much because again, it’s a passive investment. You could certainly do it through an LLC, but basically, you’re buying and selling. The selling part is easier than the buy. We start at the beginning of the process, so it’s not as painful as it is at other places. It’s sitting with a loan servicing company, so the account is just catching payments.

There are not a lot of moving parts aside from the acquisition. People will say the cost of the custodian and all of that. I think if you looked at it on a percentage basis, whatever the value of your assets are versus what you’re getting, especially if you’re somebody that buys and sells actively, it’s probably relatively inexpensive. We have two fee methods for administration. One we refer to as per asset, meaning it’s $350 per asset, doesn’t matter the value. The other is based on value. If you’re turning things a lot, you might want to be on value, or if you have a lot of notes you might want to be on value.

People will say to me, “The value is costing a lot of money.” The reality is, first of all, the value of the note is self-reported. You’re telling us what it’s worth. It’s not like we’re going out and auditing it. You might be able to control that a little bit, but generally, when if you took the total cost of administration divided by the fair value of the assets, I think you’re pretty inexpensive.

There could be some mistakes that people make with checkbook control that could get them in into trouble.

We get asked to take over the custodianship of other LLCs and other custodians and those things. I probably look at, I don’t know, 5, 8, 10 a month. I’ll tell you, it’s simple things that trip people up. For instance, I can’t tell you how many people forget to register or pay that $50 fee to the state to keep it in compliance, to keep it running. If you don’t pay that fee, your charter is forfeited and everything has been distributed to you as the beneficial owner. There’s a little problem. The other one that I see is many times, there will be debt inside of these LLCs.

It might be something like a credit card. I will tell you, 100 years ago, when you and I first started in business, you could probably get a commercial credit card without personally guaranteeing it. I’ve looked. I’ve tried. I’m unaware of any credit card that I can get even in my company name that I don’t have to personally guarantee. If I’m personally guaranteeing it, that blows the whole thing up. It’s little trippy things that could cause you a lot of problems.

I read one and maybe you’ve heard of this too. The guy has a checkbook control and he overwrote a check. He didn’t have the money in there and his bank had it automatically set up to take money out of his personal account to cover any overdraft, and because that happened, that put him in violation. It was over something as simple. It covered it automatically. He didn’t say to cover it out of that account. The check didn’t bounce. The check went through because it was covered with the personal side of it.

The challenge with LLCs, the entity structure is easy. It was designed to be easy. If I have a company or I have an investment entity that’s an LLC, I can take distributions out of it. I can put money into it. I don’t have to go through a formal process. My bookkeeping, it’s got to be formalized. I have to make sure that those contributions don’t end up on the expense side of things and all that. The construct and operation of that entity are very easy. People who have a lot of LLCs like me and other people who are in real estate and other ventures and those sorts of things are used to moving money from Point A to Point B to point C because it’s very easy to do.

With LLCs that involve IRAs, you need to be careful because moving around money causes issues. We said we had this conversation internally. This is not a big thing on their radar screen. It may or may not be over time, but at the custodial level, what we see is the money going in. That’s basically all we see. We require a fair market value on the LLC, which again, is not hard.

With LLCs that involve IRAs, you need to be careful because moving around money causes issues. Click To Tweet

I think in the compliance world, we’re getting to the point where we are going to require a set of books. We’re going to require a balance sheet and a profit and loss statement at least on an annual basis. I will bet you that probably half of the people out there that have single-member LLCs don’t have one. We’re talking at about this on the industry level because that at least forces people to formalize what they’re doing if they’re not already. A lot of people probably are, but people are people.

We’re talking with Jack Kiley at MidAtlantic IRA. What’s the website again?

It’s MidAtlanticIRA.com.

I think people lose out on understanding they can open 401(k)s too with their own business. A typical example, a lot of note investors form single-person LLCs. They may have a regular job and maybe they contribute to a 401(k) at that regular job. Maybe they have an IRA. They can still open a 401(k) with their note investment LLC. Tell us how that might work and what restrictions we might see.

Retirement Plans

Retirement plans fall into two broad categories. You’ve got individual retirement plans, which are IRAs and Roth IRAs, and then you have company-sponsored or business-sponsored plans, which is probably a better way to say it. Those might be SEPs, Simple IRAs or Solo 401(k) plans, what we’re talking about. The first driver to that is you have to have a sponsor, which is a business. If you are in the business of notes and that’s not the note investments per se, that is in the business of buying, selling, commoditizing that, then that’s a business. The business can sponsor the retirement plan. Many people have 401(k) plans and it doesn’t have to be in an LLC. It could be a sole proprietorship.

Corporate structure or business structure doesn’t matter. The focus is that it’s got to be a business. When you’re thinking business, I’m putting my CPA hat on here for a moment, you’re thinking about anything that you pay Social Security and Medicare tax on. If it’s an S-corporation and it pays a wage to you pay Social Security tax on that, that’s the driver for making the contribution to the plan.

If it’s an LLC or a sole proprietorship, your net income from the entity is your “pay” because you pay Social Security and Medicare on that. That’s the amount of money or your compensation that you use for making the calculation. For people who have a day job, for instance, and they have a side investment business or this business, this is a nice way to effectively move money from your right pocket to your left pocket, from your taxable pocket to your tax-deferred, or if you’re interested in Roth components tax-free.

You’re doing what I call jumping buckets. You’re moving from taxable bucket to tax-deferred to tax-free. It’s a nice vehicle because ultimately, one of the blocking points to putting money in a retirement plan that I hear is, “I can’t invest in the things I want to.” If you’re a note investor and you can invest in notes either personally or in your retirement plan, now you’re getting the power of deferral by putting it in your retirement plan. The contribution limits are much higher. I think the contribution limit is on the order of $65,000 or $66,000 if you made enough. It lowers your income tax load so you get a deduction for it.

Over the last couple of years, there have been a lot of interesting components that have come up with this. There are two components to the 401(k) plan contribution. One is profit sharing, which the company makes or a match, which a lot of people know about. The other is the deferral that comes out of your pay. If you’re self-employed, that’s coming out of your net income and that could be up to $22,500 in the current year. You can swish away a lot of money.

There’s more information, I’m sure, at MidAtlanticIRA.com. That is the website. We’ve been talking with Jack Kiley. Jack, thank you so much. Great information for everybody. I do appreciate it.

I appreciate being on your show. I enjoyed it. I like the banter back and forth, obviously. You got to get out of your hole and come up to DC here once in a while.

I was hitting Maryland for a while when my son went to college. He went up outside of Maryland there and went to college. We were up there occasionally. We were up there a couple of times a year for tennis tournaments and stuff, but he’s since graduated and moved out West. We’ll get back up there. I’ve got some good friends up in that area. I’m sure some people that we know in common up there that I’m still in touch with. We’ll do that. If I do, I’ll make sure to let you know I’m in town. You take me out for a drink or dinner or something.

Maybe both.

Thanks, Jack. Thank you everybody for reading. As always, if you enjoy it, please give me a nice rating on there. I appreciate that as well. I look forward to talking with you all again very soon.

 

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