September 29, 2018

JF1488: What Are The Best Asset Classes To Invest In With A Self-Directed IRA? #SitationSturday with Bryan Ellis

Bryan and Joe had a conversation on the podcast over three years ago, he’s back today to tell us about self directed IRA investing. Even if this doesn’t apply to you right now, there’s a chance you will be in the future. Bryan has a very extensive real estate background as well as owning  where he focuses on helping other people invest their money. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Joe Fairless: Best ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’re gonna be talking about a specific situation that you might perhaps be in, or if you’re not in it right now, then you might be in it in the future, and that is you have some money in a retirement account, you’re looking to do a self-directed IRA, but you’re not sure what are the best asset classes to put that money into. Fortunately, we’ve got the founder of with us. How are you doing, Bryan Ellis?

Bryan Ellis: I am doing well, Joe. How are you today?

Joe Fairless: I am doing well, and nice to have you back on the show. Best Ever listeners, you recognize Bryan – he was on episode (listen to this) 207. It aired back in March 28th, 2015. That’s over three years ago we were talking. Holy cow!

Bryan Ellis: Yeah, it’s been a while.

Joe Fairless: It’s been a while. I know we saw each other in Atlanta…

Bryan Ellis: I think it was Atlanta, yeah.

Joe Fairless: It was Atlanta, yeah, like a year or so ago. So we’ve seen each other since then, and I’m glad that we’re catching up again. Bryan is the host of Self Directed Investor Talk, he’s also published in Forbes, Entrepreneur Magazine, and a bunch of other publications. Based in Atlanta, Georgia. With that being said, Bryan, how about you refresh us on your background and your focus, and then we’ll go right into the best asset classes to focus and invest in via a self-directed IRA?

Bryan Ellis: Sure, Joe. Well, I have a very vast background in real estate. I’ve been in the real estate industry since the mid ’90s, and I was impressively bad at it for the first couple of years… But most of my focus has been on single-family properties, and some leasing, some flipping… Just about everything you can do – rehabbing etc. I’ve done just about all of it, and done all of it a whole lot of times at this point. But along the way, I discovered, as all real estate investors do, that it’s kind of important to have access to money, even if it’s not your own money, and that’s what spurred my interest in self-directed retirement accounts.

Now, this was back in the late ’90s, and today if you say self-directed IRA, still most people don’t know what that is. Back then nobody knew what it was. It was like doing research on a long-lost civilization, that had been gone for thousands of years back then… But things have changed a bit since then, thankfully, and in the process of the last intervening 20 years, I’ve learned a whole lot about self-directed retirement accounts, such that at this point I largely focus on helping investors – largely real estate investors – who want to use their retirement savings to invest in real estate, which is something that most of them either don’t know how to do, or only think it can be done, but have never actually pulled the trigger. So that’s the gap that we fill in, it’s helping them do that.

Joe Fairless: Are you a custodian?

Bryan Ellis: No, I’m not.

Joe Fairless: You’re not a custodian, okay. And what is a custodian?

Bryan Ellis: A custodian is the financial company that is required by law to be in the mix with every self-directed IRA. They’re basically like a stockbroker, but whatever you do in a self-directed IRA, it’s their name that’s on the line, essentially. They’re acting in your place. That’s what a custodian is for an IRA. For solo 401K’s you don’t really have to have a custodian, so it’s not really relevant there.

Joe Fairless: So your company works with investors who already have a self-directed IRA set up, to then invest in certain opportunities.

Bryan Ellis: Yes, most people who come to us already have one set up. Part of the trainings that we have in the self-directed investor academy do target specifically people who are very new to the process. So we’ll teach them not just the advanced stuff, we’ll also teach them how to choose the type of self-directed account you need, because there are actually about a dozen of them, and most people have chosen the wrong one.

We’ll teach them how to choose the right type of custodian for them, and how to choose the types of assets that will actually really work in a self-directed IRA, versus just being theoretically compatible. We do have some content that targets the brand new folks as well, but really the most people who come to us have some background.

Joe Fairless: I didn’t know you a self-directed IRA academy…

Bryan Ellis: Yeah, Self-Directed Investor Academy.

Joe Fairless: Okay, Self-Directed Investor Academy. I wrote it down right, I just said it wrong. Is there a  cost to participate in that?

Bryan Ellis: Yeah, that program is a monthly subscription program, because we actually had two additional trainings to it every single month, and that’s $39/month… So it’s the least expensive thing there is out there.

Joe Fairless: Oh, yeah.

Bryan Ellis: And later on, if you decide that you’d like to, we can offer your listeners a free trial to it.

Joe Fairless: Cool. That’s great. And as a member, do you get access to previous content and stuff [unintelligible [00:07:53].05]

Bryan Ellis: Yes. It’s really kind of foolish on our part probably, but from day one, whoever is a member, they get access to everything that’s been done from that point in the past, to that point.

Joe Fairless: That’s cool. So that’s not a big revenue maker I don’t imagine, so how does your company make money?

Bryan Ellis: That does reasonably well for us, but the other thing that we do is that in the process of educating people about self-directed retirement accounts invariably people end up coming to me and saying “Bryan, I’ve got some money. What do I do with it?” We’re not financial advisors, we’re not investment advisors etc. but what we do is sometimes connect those people with opportunities that make sense for them, and let them evaluate in concert with their own advisors, and we can all enjoy the spoils of war together thereafter.

Joe Fairless: So are you on the general partnership side of those deals, where you connect an investor to a deal?

Bryan Ellis: In terms of the specific legal structuring, we do it in a lot of different ways… But we have done everything from just connecting people to individual pieces of real estate that they could buy, and we just took a slice of the transaction, all the way to — we did at one time have a formal hedge fund that we operated in Northern California where we did a lot of fix and flips. So we’ve done everything from the least formal to something a lot more than that.

Joe Fairless: Going back to the focus for today’s conversation, when you look at the best asset classes to invest in as a self-directed IRA investor, what do you come up with?

Bryan Ellis: The cool thing about self-directed IRAs and solo 401K’s is that there is a practically unlimited universe of options. Now, I am very partial to real estate as a general focus, because it’s a proven commodity; it’s something that if you have a little bit of patience, it tends to work, even if you don’t do everything exactly correctly, which I kind of like that, having a bit of margin for error.

Within that framework, the simplest thing that I have found for most people to get involved in doing in terms of real estate in their IRA is turnkey rental properties. Buy one here, another one there, and pretty soon you have 5, 10, 15 turnkey properties. And a turnkey property is just a rental property, but when the person purchases it, the property has already been renovated, it already has a tenant involved, and it already has a property manager handling it. So it’s a cashflow-producing asset, instead of just a house. So that is something that really makes a lot of sense for a lot of people.

The fact that there are property managers involved – that’s really what makes it a good fit for IRA’s, because that means you can really keep a safe distance from that asset, which is really very important.

Joe Fairless: Why do you have to keep a safe distance?

Bryan Ellis: Because there are some rules that one has to comply with in the IRA world, and if you cross those lines, you commit what’s called a prohibited transaction. In IRA specifically, if you commit a prohibited transaction, it is cataclysmic, and it doesn’t matter how small the transaction is that you did.

For example, maybe you have a five million dollar account, and one day you commit a prohibited transaction in a deal that was worth $10,000. Well, you’ve blown up that entire five million dollar account, and what most people end up doing is losing 40%-60% of the value of the entire account as a result of crossing those lines.

So  you’ve gotta be very careful, and that is one of those rules that really matters – you really can’t, as a practical matter, get too close to the properties, because if you do, you’re just dramatically increasing the probability that you’re going to do something that’s not allowed. So that’s the reason for that.

Joe Fairless: Turnkey rental properties – one recommended approach that you have for investing with self-directed IRA’s. What’s something else?

Bryan Ellis: Another one that I really like it real estate secured notes. It’s really interesting, Joe, and my observations about the path that a lot of small individual investors take in their careers is that a whole lot of them will start out and they’ll do something like renovations, or they’ll do some leasing, or just basic introductory strategies like that, and then a few years later they’ll kind of fall into a groove and do what they’re gonna do, and a lot of them end up collecting rental properties along the way, and what I’ve seen is that a lot of people run about being in the business 20-25 years or so, a lot of them start graduating (that may be the wrong term, but I’m not sure), a lot of them start gravitating away from rental properties and into real estate secured notes. Those things make a lot of sense, because you get all the nice cashflow that you could get from leases and rental properties, but there’s no management concern, there’s no interaction with tenants, there’s none of that stuff.

Now, it’s not an absolute gimme, there are responsibilities, but it’s just a much lower degree of responsibility than owning a rental property, much lower degree of legal risk than owning a rental property, and also there are some rules that we can talk about if  you want – and then we’d be getting pretty deep into the weeds, so maybe we don’t – that make real estate secured notes a particularly attractive and compatible asset with IRA’s for the IRS itself.

Joe Fairless: How is it being compatible beneficial to the investor?

Bryan Ellis: Let me clarify – are you asking how the additional compatibility that the IRS has stipulated is relevant?

Joe Fairless: Yes.

Bryan Ellis: Well, it simply means that doing those kinds of deals, if you do them with any modicum of legal reliability, the probability that you cross over those prohibited transaction lines is much lower.

Joe Fairless: Compared to what? Turnkey rental properties?

Bryan Ellis: Compared to just about anything else. Yeah, I mean, if you look at it, the prohibited transaction issue is not a function of the asset class, it’s a function of how you interact with the asset, regardless of what it is. So you can commit a prohibited transaction with privately-held stock, or with intellectual property, or just about anything else that you could do in an IRA. It’s not real estate specific. But in the case of promissory notes and real estate secured debt, that works really well for the governments own admission, and I think basically the reason why is that there’s a clear separation; that is a clearly passive asset, whereas it’s arguable that if you’re being your own landlord, for example, it’s arguable that even though you’re earning passive income, that you’re not passively involved. So that’s really the distinction there.

Joe Fairless: One, turnkey rental properties. Two, real estate secured notes. Anything else?

Bryan Ellis: I guess a third one, and this is way down the list, not in terms of relevancy, but in terms of accessibility… And that is – you know  a fair amount about this side of the world – doing multifamily investments, but from a passive investment point of you. You know, you’re putting your 100k or 500k or whatever usually into a syndication, and let the syndication handle doing all the work. That works as well, depending on how the money is handled in the syndication, but usually it’s fine.

That works really well too because obviously it’s a desirable thing to have exposure to multifamily income, and I’m seeing a lot more people being particularly interested in that as a mode of investing their retirement savings in the real estate.

Joe Fairless: Real quick, what’s a downside to each of these? Turnkey rentals first.

Bryan Ellis: Turnkey rentals – it’s the same downside as to any rental property; you could pick a bad tenant, you could buy a bad property to begin with, or you can have a bad manager. All the risks are the same.

For notes – there again, same as if it’s outside of an IRA, the big risk is that you — actually, let me back up to the rental properties. If you get involved and do anything yourself on that property, then you are introducing a risk that doesn’t exist outside of the IRA world, which is the prohibited transaction risk.

Moving on to the notes – the risk there really is about the same, because prohibited transactions are gonna be hard to accomplish there. The risk is that you buy a note with a borrower that doesn’t pay, or won’t pay, and you don’t have good collateral, or maybe the paper that backs up the loan is not well-structured, is not really up to snuff. All those could be problems.

In doing syndications, that’s a different thing entirely. Generally speaking, you’re not going to run afoul of prohibited transactions whenever you’re doing  a syndication; however, that’s not necessarily true. There are some other factors, and one of the biggest risk points there is that if the syndicator involves debt in their business activities, that could have a negative impact on the IRA itself, because IRA’s actually have to pay income taxes year-to-year on any money that’s generated as a function of using debt. That’s a risk point that most people don’t know exists.

But the good news about all three of those assets and risk points that they involve is that most of that stuff is knowable largely ahead of time – not all of it, but most of it is knowable and analyzable ahead of time, and most of it is something that you can watch for quite closely on an as frequent of a basis as you like.

Joe Fairless: On the syndication one, you said if it involves debt it could have a negative impact; are you referring to the bottom line profitability, or are you referring to a prohibited transaction?

Bryan Ellis: I’m referring to the tax liability as it exists for the IRA. A simple example is — let’s use a simple asset. If an IRA buys a house and pays $100,000 for it, and it collects $1,000/month in rent, and this is a totally cash deal, there’s no problem. But if the IRA does that same deal but it borrows the 100k, well that $1,000/month it collects – that money is a function of debt; it’s a debt-financed transaction. So that $1,000/month that they collect is actually taxable on a year-to-year basis, even though it’s in an IRA.

So if you did something similar inside of a syndication where debt was involved in some part of the transaction, and if the syndication is structured like most are, as a partnership of some sort, then it could be the case that the IRA has to pay some money year-to-year based on the profitability of that syndication for that year. That’s not prohibited, by the way. That’s just a factor that the IRS doesn’t want you to be able to make money or to make tax-free profits on money that was not your money… So that’s what we’re talking about.

Joe Fairless: It makes sense.

Bryan Ellis: Yeah.

Joe Fairless: Who can an investor talk to about something like you’ve just described? “Hey, I’ve got an IRA. I wanna invest in a deal”, they’ve got debt on the deal, like most of the deals do… Who should they speak to?

Bryan Ellis: Well, one option that they could speak to is anyone of the self-directed IRA attorneys, particularly those who have a focus on the taxes. That would be a good place to go. You could come to me as well, that’s an area that we offer some assistance to our clientele, although we don’t offer legal advice obviously… We do offer some situation-specific education, you might say. And there really aren’t a lot of others.

You might be inclined to go to your self-directed IRA company, but really they’re not supposed to be involved in the investing side of your account, they’re not supposed to get anywhere near it. If they are willing to do that, that’s a pretty good indicator you need to go to a different company.

Joe Fairless: Right, right.

Bryan Ellis: So go to an attorney or come to us over at the Self Directed Investor Society.

Joe Fairless: I love it. I learned a lot. I’m grateful that you were on the show again. Bryan, how can the Best Ever listeners get in touch with you and learn more about what you’ve got going on?

Bryan Ellis: Well, probably the best way to do it, Joe, would be to go over to, and we have set up a free 3-day trial that your folks can get access to the Self Directed Investor Academy, the training resource that I mentioned to you earlier. So is where they should go, and that will get them taken care of.

Joe Fairless: That’s great. Well, the three asset classes that you recommend self-directed IRA’s take a look at – one, turnkey rental properties; two, real estate secured notes, so note buying, and three, passively investing in syndications. There are many things that you talked about as it relates to self-directed IRA’s. One in particular that you elaborated on was the prohibited transactions, and there needs to be clear separation from you and your investment.

Really good stuff. I’m grateful you were on the show. I hope you have a best ever weekend, and we’ll talk to you again soon.

Bryan Ellis: Thank you, Joe.

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