October 14, 2021

JF2599: Self-Directed IRA vs. eQRP Investing | Actively Passive Investing Show 63


In today’s episode of the Actively Passive Investing Show, Travis discusses the differences between self-directed IRA investing and eQRP plans with Damion Lupo. They’re explaining why you may consider paying for this service instead of a “free” account with a major brokerage firm, and how they’re squashing skepticism on these new plans. 


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Deal Maker Mentoring

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Travis Watts: Hello, Best Ever listeners. This is Travis watts, your host of the Actively Passive Show. Thanks so much for tuning in yet again to our three-part mini-series that we’re doing, something Theo Hicks and I did back in 2020, with how to vet a deal, how to vet a market and how to vet an operator, while talking about investing in multifamily syndications.

This is a three-part mini-series where I am extracting some of the best highlights from my interviews with three guests on a webinar series that I host called Masters of Multifamily. So it’s a different audience base. Unfortunately, it’s a lot more limited, but the information is just too good. I can’t just let it sit over there and not get the views that it deserves. So that’s why I’m extracting the highlights from these three guests, and I’m sending them directly to you here on the Actively Passive Show. This is Episode #3 of a three-part series. This is with my friend, Damion Lupo.

What we’re talking about today, in this episode, is self-directed IRA investing, and as a lot of you may not be too familiar, investing with an eQRP plan, what the differences are, what the pros and cons are; maybe this is the right fit for you, maybe it’s not, but if nothing else, you’re going to take away some great insight strategies in the background of Damion Lupo. I think he’s been interviewed almost 700 times on various outlets, so a tremendous wealth of knowledge. I’m so happy I get to present this to you here today.

And as always, the quick disclaimer that all of these episodes that you’re listening to here on the Actively Passive Show and the Best Ever Real Estate Investing Advice podcast are for informational purposes only. I’m not a CPA, I’m not a tax advisor, I’m not an attorney, I’m not telling you what to do. I’m just sharing some perspective, some opinions, and so are the guests here on this three-part miniseries. So please keep that in mind, please; always seek licensed advice when it comes to making actual decisions with your own portfolio.

Without further ado, feel free to like, subscribe, comment below if you like this mini-series idea, or are a fan of the show. I’d love to hear from you. And here we go, with Damion Lupo.

Travis Watts: Understanding taxes and retirement accounts is critical to so many investors; so many of us here in America, so many investors worldwide. So let’s hone in. I brought you on the show because you have an excellent perspective, number one. You have a growth mindset, which I appreciate.

So Damion, without further ado, can you please tell us about your 20-plus year experience in real estate, kind of how you got to where you are today, what it is you do, and why you’re a self-proclaimed “world’s dumbest failure”?

Damion Lupo: I think I’m the world’s boldest failure. I mean, in the beginning was when I had hair and now I have no hair. That’s what happens when you spend 20 years doing real estate investing and losing your butt. So I started doing stuff in the late ’90s; like six hours before the 2000s I bought my first rental house. That turned into 150 houses, apartments that I built and developed, and it was a really great ride. In my 20’s I thought I was hot you-know-what, and I went out and had my Ferrari and everything else.

And what I did was I’d built up a bunch of cash and built up a balance sheet; i had an amazing experience, but I was my balance sheet. And in 2008, I turned 20 million into negative 5 million. So $25 million swinging in 12 months. And I learned “Wow, being a balance sheet sucks when it goes negative, because – what do you have left?” So it was a huge gift. I didn’t see it as a gift; that gift horse, I looked in the mouth, I’m like, “I hate you, I hate you.” But then on the other side, I realized, “Wow, what a gift to be able to go through that.” And then I started asking some different questions. And quite frankly, I was scared of real estate for a while, because it hurt so bad. Anytime you lose, it’s not necessarily the money, it’s the time. When you get punched in the face and you’re scared of something, you miss out. I missed out on the opportunities in 2009, 2010, 2011, because I didn’t want to look at real estate. That stove was hot, man; it hurt. So I stayed away. And then I started thinking, “What am I going to do differently?” and what I realized is I was doing everything for near term. So I was making money in real estate, even if it was for a year out or two years. I wasn’t really thinking about 20 years out. And what happens is 20 years goes by, you wake up and you’re 40, and then you’re 60. So I started thinking, “Well, what could I do different?” And then I saw my parents both retiring really kind of broke. And I see most Americans can’t even afford a $400 accident, like my car blowing up this week, where it was 600 bucks to fill up my gas, because it was full of mud water.

Why is that important? Because if you don’t plan for this stuff, you’re going to show up at 60 and go, “Oh, crap”. So I really shifted gears and went deep into a space, into the retirement space, when I realized there was a gap in the market, when people were thinking to short term and nothing long-term. So that’s where I live today. It’s what I do, and we can talk about how that applies to multifamily investors and how you can really use what we do to make sure that when you wake up at 60, you can choose whether you want to do anything or not, or if you just want to stay in bed, like it doesn’t matter; money is out of the equation.

Travis Watts: Incredible. Powerful story. Thank you for sharing. So let’s dive in. You talk a lot about having control over your financial future. It’s something I talk about as well on a lot of podcasts. So let’s highlight just the differences between a self-directed IRA and an eQRP. Then we’ll hit kind of the pros and cons after that.

Damion Lupo: Yeah, absolutely. The self-directed IRAs are a really useful tool. And I’ll tell you, I got one to start with years ago, before I knew what even the qualified retirement plans were. And I did that, because that’s all I knew. And so if you have an IRA right now and that’s the only thing you knew, good job, because you took action and you did something. It’s always important to remember that just because you’re changing something, and you’re going to probably want to change, when you have better information, it’s not about staying consistent. It’s about adapting. We’re living in a time where adapting is more important than information that you knew from last year.

So the IRAs are a great place to get some tax sheltering. The problem with them, especially with multifamily, is when you use a self-directed IRA to invest in multifamily, you end up 1) having a lack of control, because there’s a custodian that’s going to give you friction, you’re going to be paying a lot of fees for things that are totally unnecessary… And the biggest fee problem is the tax called UBIT. So you don’t really control your ability to go to zero tax, you don’t control the speed of your investments, and quite frankly, you’re just in something that has a really big marketing machine. The alternative is the eQRP, which we created many years ago. And it gives you absolute control, because you have a checkbook, you’re in charge being the trustee, you do not pay UBIT tax; and we can go into UBIT and what that is and how dangerous it is… It’s kind of like a ticking time bomb in an IRA. The eQRP is exempt from it, meaning you don’t pay it; your accountant is not going to call you and say, “Congratulations, you made a bunch of money. Here’s your tax bill and your tax shielded shelter,” and you’re going to say, “What?”

So there’s major differences. Really, when it comes down to control, you have the ability to do just about anything – you can buy real estate, you can do it without paying taxes, you can buy crypto, you can buy gold, you can borrow money directly out of your eQRP… You can’t do any of that stuff with an IRA. So anybody that I’ve ever heard of say, “Well, I like my IRA,” I say, “That’s perfect, because you probably don’t know all the things you’re stuck not being able to do.” And that’s the problem. It’s a lack of knowledge and truth.

Travis Watts: 100%. I couldn’t agree more. By the way, I’m about halfway through your book, so thank you for sending that to me. We’ll put a link here at the end if anyone wants to pick up a copy of that as well. Just FYI.

Break: [08:06] to [09:32]

Travis Watts: Were there any other pros and cons that we didn’t cover, that you didn’t cover, that you want to, here?

Damion Lupo: Well, one of the things I didn’t mention was that in terms of getting money into an IRA when you contribute money, an IRA allows you to put $6,000, and if you’re over age 50, you put $7,000. I don’t know about you but over 20 years, putting $6,000 a year in isn’t going to make me feel all warm and cozy. It’s like “Woopti-do, I’ve got 100 grand.” I’m not rich, I’m just old.

With an eQRP, it’s 10x, and you can do it for multiple people. So in a family, if you had a couple of kids, you could potentially put a quarter-million dollars a year into an eQRP… Whereas an IRA, maybe you can get $20,000 or 25,000. It’s a 10x event. So if you’re a fan of Grant Cardone, you realize 10x is usually better than 1x. And eQRP is 10x, whereas an IRA is x.

Travis Watts: That’s a great analogy. So you mentioned something earlier that I think is so critical for so many investors… So let’s dig into this UBIT, this Unrelated Business Income Tax. So I get the question a lot… Let’s just kind of highlight it from a high level, and then dig into what that means whether somebody already has, say, a self-directed or an eQRP, or they’re looking to get one or the other. How might they be affected then by this ticking time bomb?

Damion Lupo: Well, the UBIT tax is this tax that the IRS said and Congress put in place; they said, “If you’re using your retirement account”, let’s say you have $100,000 in your IRA, and you go buy a million-dollar property, or you invest in something that has $900,000 in debt, and then that thing makes $500,000 in profit, they say, “Well, it wasn’t really just your $100,000 that made the money. So we’re going to tax you on part of that profit; we’re going to tax you on the percentage.” So if it was 90% leveraged, they would charge you tax on 90% of your profits.

Normally, in multifamily, 70% leverage is pretty common. So just think about that, every dollar in profit you make in a multifamily, 70 cents of it is going to be taxed at about 37%. So all of a sudden, you’re like, “Wait a second. So every dollar of profit, basically, I’m going to give away 20 cents.” That ought to be hitting you to where you say, “That sucks. I didn’t know about that” or “How do I fix that?” Because a lot of people don’t know about this until after they do their taxes and they hand their accountant their stuff, and their accountant says, “Here you have this UBIT tax.” And they say, “What’s a UBIT? It sounds terrible.” It’s a tax.

And it’s interesting, because the IRA industry – I just don’t think they have very good lobbyists. Because where the eQRP is — the eQRP is in a different part of the tax code, and it’s exempt. Because the lobbyists are better. The developers that were using pensions and 401(k)’s years ago just had better lobbyists, and they got an exemption.

So bottom line is you can expect to lose about 20 cents out of every dollar in profit for most multifamily deals if it’s an IRA, even a Roth IRA. On the other hand, an eQRP, any type of eQRP that we set up, you’re exempt; you get to keep 100 cents out of 100 cents.

So when you look at it from that perspective, the question is, “Why in the world would you ever use an IRA for anything?” And people go, “Well, I’m already invested” and I say, “Perfect, we’ll move the asset.” It’s called an income rollover. That means that we move it over into the eQRP, it gets retitled, there’s no tax or penalty, the sponsor might charge you a little bit for the paperwork… And then all of a sudden, you save that 20 cents. If you make $100,000 – just think about that, you may be saving $20,000 per deal. So is it worth it? I don’t know. If you don’t hate your money, you probably want to do something that keeps all those 20 cents in your pocket.

Travis Watts: Very, very powerful stuff. Damion, what are some things that maybe you can’t invest in using an eQRP?

Damion Lupo: There are certain people and certain things; the things are pretty minimal. You can’t invest in collectibles, you can’t invest in a collectible car, but you could invest in a business that did collectible cars. You just can’t go and car flip. I’ve had people ask me, “Can I flip a car?” And my response was, “Why would you want to do that to yourself?” But people do it. So I just say, “Don’t do it in your retirement account.” Any collectible rugs, wine— obviously, wine, the IRS is smart enough to know that if you collected wine, you’d just be drunk, hungover and broke when you’re retired. So they say no to that.

Other than that, it’s really just certain people that you’re not allowed to invest with; people that are up and down on your family tree – parents, grandparents, kids. But your brothers, sisters, friends, business partners, cousins – all open season, you can do a deal all day long with your business partner or brother or sister; lots of options. So it’s really just a narrow scope on what you can do, and the IRS is very specific in what you can’t do so you don’t have to guess, and that’s what we’re here for. The whole team of us is to help navigate you through the process of making sure that you’re not blowing up your plan. We’re the navigator, you’re the driver. Use us as much as you want or tell us to shut up.

Travis Watts: I’m a little bit bummed that I can’t invest in rugs myself… But other than that, I guess that makes a lot of sense. So, good.

Damion Lupo: It’s funny, because when you have teams and when you have advisors, the best question that I learned years ago for studying with Robert Kiyosaki – he used to say, “Stop saying you can’t do something. Ask a question, how can you?” And that got me into trouble, because I was like, “Well, how can I buy more houses?” Not, “Should I buy more houses?” So I just bought every house I saw and it got me into trouble, because there were some I shouldn’t have, and I ended up “Should-ing” all over myself.

But the better choice is, how can I do this? Seriously, if somebody wanted to invest in rugs – great, go invest in a company that does rugs. You can invest in corporations, go find a corporation that sells rugs. So truly, there’s no real limitations. You just have to have better advisors that think through and come up with solutions, versus what most attorneys do, which is tell you no; and it doesn’t really help.

Travis Watts: Got you. And I get this question a lot too from investors, myself included back in the day… So a lot of people have old 401(k)’s from previous employers. I think the most common route as you know is probably just to do a rollover IRA to a big brokerage firm; everyone usually seems to take these Fidelity or Schwab or Janus or something like this. So, can somebody with an old 401(k) convert into an eQRP? Or what if somebody has an active 401(k), meaning they still work with their employer right now, what are their options?

Damion Lupo: The most common options for rolling things over is when people leave a job. And at that point, they have total control over where they want to put their money. Unfortunately, most people are just steered towards a financial advisor that’s going to hold the money and just feed them to death; or they’re going to go to a Schwab or a Fidelity, and they’re going to have access to mutual funds and really nothing else. That’s what people normally do, because they just don’t know about this information. The reality though, is that you do have options. You can move it over into many things; you could put it into a self-directed IRA. I don’t recommend that because you’re going to hit UBIT tax, we’ve talked about that.

The best option is to move the old 401(k) or Thrift Savings Plan or 43B, depending on whether you’re a teacher, firefighter, military, anything… You can move it into an eQRP, where you have control of it. So you really do have options. When you’re still working at an employer – there’s something called an in-service rollover. Legally, it’s possible to pull out certain parts, profit sharing and matching… But typically, most plans are restricted, and they do it on purpose to keep your money trapped. So it’s mostly when you leave your job. When you leave your job, it’s open season; and don’t let anybody tell you that you can’t do something. You definitely can, and it’s really up to you to choose how much control you want.

Break: [16:27] to [19:07]

Travis Watts: So let’s switch gears a little bit. Let’s talk about the concept of “You get what you pay for.” For anyone who’s listened to me talk about building financial independence or my background, it’s a lot about frugality and saving money. And I tell you, this is one area where it really kicked me in the butt. Years ago, I used a tax prep service. It wasn’t even a CPA firm, much less a firm or a company that specialized in what it is I was doing in real estate. It wasn’t until I found a true professional, proactive strategist CPA firm, where I started realizing, “Oh my gosh, I’m missing out on so many of these opportunities. I’ve lost tens of thousands of dollars already over the years and it’s time to get my ducks in a row.”

So can you tell us about why might we consider, as investors, paying for something like an eQRP, or even a self-directed IRA custodian, versus using a “free” (I’ve put that in quotations) brokerage account with a major brokerage firm?

Damion Lupo: The reality is everybody’s in business, so there are no free lunches. And when people say, “Well, I have this option” — so people will say, “I get a free IRA” or “I get a free solo 401(k) at Schwab, or something” and then I go, “Yeah, and you’re going to get what you pay for.” They will charge you in ways you can’t imagine. They will definitely get a chunk of your butt out of the deal.

And the truth is, it’s like going with what you’re talking about, with a tax preparer versus a tax strategist. And when you look at those things – I don’t care if you’re paying 50 bucks, you’re going to pay a price if you’re paying 50 bucks or $5000. So we’re a full-service provider, we’re the only ones that create the eQRP. I mean, there’s nobody else that does it. People would like to claim they do, but they don’t.

What people do is they do generic, cookie-cutter box lunches. This is more like a Michelin-rated experience. And if you don’t know what that is, it means that it’s a premium. It means it’s something different, and you can’t just go replicate it. I know there are knockoffs out there, but when you think about employees or you think about whatever you’re buying, you’re going to pay a price. If you invest in the right people, guess what? It’s not an expense; if you invest in certain things… When people are cheap, that’s when things cost them money. You go find a cheapest C player, meaning somebody that’s not very good, they were kind of just like a sloth, that will cost you money every month. That person that’s an A that comes in, makes you 10 times what you pay them. And that’s just how you have to look at anything, if it’s a tax preparer versus a tax strategist, if it’s unique eQRP versus a free IRA or solo 401(k). There is a price you pay, the cost and the price are different. So we have to be really mindful of this.

The people that our clients that are appropriate for the eQRP are the ones that understand value, they understand that there’s a dollar amount that they’re paying, and what they’re getting, the control and the team is worth 100 times that. And if somebody says, “Well, I can get a free or a very low-cost thing” I say “That’s probably the right choice for you then”, because we’re not interested; we’re trying to build people up and empower them and connect them, and it just takes a lot of time and energy.

And here’s the truth, if you’re paying somebody very little and they’re actually giving you stuff, how could they afford to run a business and support you? So it’s always an interesting question like, “Well, how does the business work if there’s no revenue?” I get [Inaudible [22:16] does that a lot. But the reality is if you want great people, there is an exchange. And if you’re worth a lot, you ought to understand that people that are worth a lot, systems that are worth a lot, are worth the investment of your time and money.

Travis Watts: Such a great lesson, such a great point to consider. So I want to switch gears and I want to talk about some skepticism in the industry. A lot of people are hearing this for the first time thinking, “Why didn’t my financial advisor tell me about this? How come I’ve never heard of these plans? Is this a scam? Or what is this all about?” So I’m guilty as anyone from time to time of having some skepticism. I think we all are when we hear or learn about something new. So can you speak to anyone who might be feeling perhaps this way to an extent about the eQRP plans?

Damion Lupo: Usually, when we haven’t heard of something, you ask where would you have heard it? And when you talk about financial advisors, most financial advisors are in a box; they’re in a box selling mutual funds. A financial advisor would even say to you, “Yeah, I think you should go invest all your money in real estate” – that advisor is going to be starving to death. So why would they ever tell you, “Here’s a way to pull your money and do something different with it, so I don’t get paid”? There’s a misalignment.

So if you’re paying a financial advisor a flat fee for guidance, that’s one thing, because they’re going to be very open. But if they’re being paid based on what they sell you and you want to do things that they can’t sell you, why in the world would they ever want to tell you about the secret sauce? Most of them are trained by institutions that teach them about their products; they’re not going to teach them about eQRPs. There are very sophisticated advisors out there that understand qualified plans; we work with a lot of them, and they use this as a tool, as an add-on, meaning it’s not everything for somebody, it’s just part of their arsenal. So they say, “This actually makes a lot of sense. This is how we’re going to strategize to reduce or eliminate taxes in parts of our clients’ lives.” So they’re not afraid of it; they run with it, because it’s such a valuable add-on. But most of them just don’t know about it because they’re trained by a system that doesn’t really acknowledge anything outside of the box.

Travis Watts: You and I share some of the same investment philosophy, or criteria, rather… So I like to call it “boring, but effective” and what I’m talking about is investing in class B multifamily apartments. I’m curious to get your thoughts on why B class, or why value-add multifamily investing?

Damion Lupo: Well, I’m a big fan of simplicity. And when you think about simple, I’ve done everything under the sun. And B is boring, because that’s where most of America is; they’re in a boring state of, “This is where I live, I do real work.” And those are the types of people that are most of the population. I like that kind of stuff. It’s simple.

When I invested—and I remember I had an apartment I did in Memphis that was a C at best, it was more like an F, or an S, for it sucked. It was a disaster. I actually ended up losing that to foreclosure. And it was after I put several million dollars into it and my security guard was shot and killed on property. That was not a good property, that was not a B-class property. It was truly a terrible hellhole.

So there’s something different about going into a place where nobody’s going to die; you’re going to have real people that are grateful to be at the property. So I’m a big fan of things that are simple. I want to go to sleep at night knowing that I’m going to wake up tomorrow and it’s pretty much going to be the same thing. There’s a security and a consistency around that that I think is priceless.

Travis Watts: Well, I hope you guys enjoyed that. Those were some of the highlights. Again, I didn’t extract the entire episode from Masters of Multifamily. I like to make that still exclusive to that audience base, but hopefully, you’ve found some value out of this episode.

Thank you, as always, so much. We appreciate you being here. We appreciate you tuning in. And this is my passion, this is the Actively Passive Show. This is really my purpose right now in life, is just giving back to others, explaining multifamily investing and helping people along to their own journey to financial independence.

So reach out if you ever have questions. My email is travis@ashcroftcapital.com. Always happy to help or be a resource. We will see you next time on the Actively Passive Show. Thanks for tuning in.

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