Just go to the end of the rainbow? Okay Okay, well in fact this is all about IRAs. Yes, with tax advantages, why wouldn't you open a self-directed IRA to invest out of? It's definitely not for everybody, but if you are one to hold large sums of cash and not sure what to do with it, this episode is for you!
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Clay Malcolm Real Estate Background:
- Chief Business Development Officer at New Direction IRA, Inc.
- 20 years of teaching and 25 years of management experience
- Teaches continuing education classes for CPAs, CFPs, and real estate professionals
- Degree in communications from Northwestern University
- Based in Boulder, Colorado
- Say hi to him at https://ndtco.com/home
- Best Ever Book: Spectrum of Consciousness
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Joe Fairless: Best Ever listeners, 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 fluff.
With us today, Clay Malcolm. How are you doing, Clay?
Clay Malcolm: Great! Good to be here, Joe.
Joe Fairless: Nice to have you on the show, and glad you are here. A little bit about Joe - he is the chief business development officer at New Direction IRA. He's got 20 years of teaching and 25 years of management experience. He teaches continuing education classes for CPAs, CFPs and real estate professionals. He's based near Boulder, Colorado - between Boulder and Denver. With that being said, Clay, do you wanna give the Best Ever listeners a little bit more about your background and your focus?
Clay Malcolm: Sure. Well, I've been here at New Direction IRA for a little over five years, coming up on six, and for my real estate investing experience it's been a great learning place, because IRAs can be a real estate investor, and it's something a lot of people don't know. From my perspective, I came into it personally needing to change my retirement investments, because they were pretty static in 2008... A lot of people got clobbered. So this has met my personal needs, as well as my professional needs. It's a great learning experience, like I said, and the nice thing is that I'm usually telling somebody something that they can use and that they haven't heard before, so it's a really satisfying position to be in. It turns out not to be for everybody, but certainly it's a nice thing to be able to give somebody more options.
Joe Fairless: Who isn't it for?
Clay Malcolm: Well, I would say that it can be for everybody, but I would say that if you're in a long-term government position or a company that has a very robust pension, you might not need to do this, simply because IRAs in and of themselves, your retirement accounts, including HSAs are really built to help yourself later in life, give you income and hopefully retire the way that you want to, pay for your medical expenses, so on and so forth.
If you have that stuff covered, you might not need to move those retirement funds into alternative assets like real estate, but then again, you might. But a lot of those plans for government and some pension plans don't actually allow you to move the money or to do real estate... So if your mind's locked up, then it's probably not the exact right tool for you, but pretty much anybody else, especially somebody who has contributed to a 401k or 401a, 403b, 457 - any of those plans, and you separated from employment, and those plans aren't making money... A lot of those are static; a lot of people actually have put them on the sidelines, and they have real estate investing expertise, but they're unaware of the fact that they can actually combine the tax advantages of the account with their real estate investing experience and preferences. That's the combination that a lot of people don't have in their heads.
Joe Fairless: Can you elaborate on that combo that you just mentioned?
Clay Malcolm: Certainly. The IRS does not limit your IRAs asset purchases other than to say "No collectibles and no life insurance." The IRS does not however tell IRA providers which assets they have to handle, so IRA providers like us, or Schwab, or Fidelity, or your bank - we've all chosen a business model built around the rules [unintelligible 00:05:32.19] and so on and so forth. Banks and brokerage houses typically have built their business where you have to invest in publicly traded securities, which often you get a commission from, and so on and so forth; that's the business model.
We've actually taken the opposite approach, and we're not the only company that does this, of course, which is that we handle almost all the assets that are allowed by the IRS - including real estate - and the fact of the matter is the IRS does not limit real estate investors. So if I get one message across today, it's really that your IRA can keep its tax advantages and be a real estate investor. The thing that conceptually you're kind of adjusting to is just that the money, once it's been contributed to the account, instead of it buying stocks and bonds and funds and looking at the appreciation or dividends and things like that, that same (tax advantage) money is buying real estate, or making a real estate loan, or something like that, and that's how the IRA or the account makes the revenue. It's still tax-deferred while the money is in there, so if your IRA buys a house at $80,000 and several years later gets to sell it for 95k, first of all, good job! Second of all, that entire 15k, the profit, would come back into your IRA and be ready to be reinvested without any capital gains and things like that.
By using the tax advantages, the tax-deferred status, hopefully you can get that money to compound faster, so that's really the get. So really just taking those tax advantages and graphing it on to your real estate investment preferences.
Joe Fairless: This is two separate questions -- actually, I'm not gonna ask you two separate questions, I'm just gonna ask you one question: what are some mistakes that you see people make when it comes to setting up or thinking about a self-directed IRA?
Clay Malcolm: I'll give you the two most common ones. One is people are very unaware of the differences between a 401k and an IRA, and there are some specific rules that they have to follow, one of which is that the IRA provider is the signer for the account, and things like that. So I would say conceptualizing that difference is one thing.
The other paradigm shift that I think is a little bit tough for some people to get into their heads is that in this particular scenario, which is typically called "Self-directed IRA Investing", the account holder is calling all the shots. The provider, us - we're a very neutral part of the equation. Our job is to make sure that the account is documented properly, so that the IRS knows that it's a part of that account type and it gets to keep the tax advantages. But the account holder himself is the one who chooses the assets, and you can use your regular real estate team or a financial team, but you choose the assets, you negotiate the deal, you're the motive force.
In the scenario where somebody's IRA is with a managed company, whether that's a bank or brokerage house, it's a very passive kind of participation. In the self-directed world, especially in real estate, it's very active; you get to make calls, and we're really just responding to your scenario, the thing that you've developed. And again, we don't supplant anybody, so bring your own real estate team, bring your financial team, whoever helps you work, your preferred method for real estate investing - bring them all, and they can just, again, take that same scenario and move it into your IRA. But a lot of people don't realize that you're gonna have to be the motive force, and get to be the motive force.
Joe Fairless: When your company starts working with someone, what are some surprising elements that they come across? And perhaps you just covered it, where that's basically the same question. If so, say "Joe, dude, that's the same question"... But I'm wondering what surprises people when they're working with you.
Clay Malcolm: I'll give you a different slant. I think that one of the surprising things is that they think it's gonna be very expensive usually, and they think that it's gonna be difficult. Neither of those things is necessarily true. One of the things I mentioned is that each IRA provider has their own revenue models and their own technology... But in this day and age of electronic banking things, tools that you can use, so on and so forth, a real estate investor who has an IRA that owns a property - you can pay your bills online for free with some providers, the paperwork is becoming almost always electronic - things like that.
Again, it will vary from provider to provider, but I think people are surprised that it can be relatively easy. The information is out there, we do a lot of education, so we want people to do it well. The other thing is that our fees are different and often less than what they've been paying at a 401k company or an IRA company, so that surprises some folks, too. But I would just say that your ability to get into this type of investing - it probably doesn't have the barriers that a lot of people expect that it will.
Joe Fairless: What is your company's revenue model?
Clay Malcolm: We basically charge for our bookkeeping labor... Things like when you open an account, it's $50, because we have to push some paper. When you make a purchase or sale, we have a transaction fee that corresponds to how much paper it is, basically. If you're buying precious metals, it's $40. If you're buying a piece of real estate, it's $250. All of it is really based on our bookkeeping labor. It's like hiring a bookkeeping and custodial entity to document your IRA transactions.
We're not gonna take percentages, we're not gonna be reliant on -- we don't sell any assets, things like that... So that's the way historically banks and brokerage houses have built their revenue model. So again, we've kind of taken the other approach - you're hiring us as a service so you get to do the type of investing you want, and we'll just tell you what we charge and you run the show.
Joe Fairless: There has to be a larger way that your company makes money other than just charging $250 here and there...
Clay Malcolm: Well, there is an ongoing annual fee, because an IRA obviously keeps its tax advantages over a number of years, so a lot of the real estate investors that we work with choose our flat, which is $295/asset/year; it doesn't matter what the value of the asset is... It could be 100k or one million, or whatever it is, because every year we report to the IRS the value of the account, and certainly we have to set you up with the online portal so you can pay bills, and that kind of thing. So that's what the ongoing fee is about. So yes, there is an ongoing piece.
Joe Fairless: There's gotta be another way that your company makes money. Do you invest? Because $295 - you have to have 203 people just to make $60,000, which would be to pay one person's salary -ish... So do you invest the money that is in the self-directed IRA or do you borrow against it and then invest in something else from a larger revenue standpoint for your company?
Clay Malcolm: It's a good question. We, as part of [unintelligible 00:12:15.07] FDIC-insured, but it's also static... But typically speaking, in our agreement with account holders we're allowed to invest any of the cash position that's left with us. Now, as you might imagine, most people come to us with an asset in mind, so the cash is only here for a short amount of time. So they open an account, they do a transfer or a rollover, and then they take that money to buy a condo or a commercial property, or whatever it is that they do to invest. So the cash doesn't typically stay with us very long, but we are allowed to invest it in the interim while we have it. It's still liquid for everybody, but we can invest it, so there is some revenue there.
Joe Fairless: Okay, I imagine that's gotta be the foundation of the business from just a business model standpoint for you all.
Clay Malcolm: Well, in our particular case because we try to get people to understand that their cash position is gonna be static and that they really need to be looking for investments, it's not our major source of funds, and it's not something that we really promote. We can do it and we do do it and it does help us to keep our costs down, but generally speaking, most of the way that we're approaching this is we've been very bullish on investing in technology. We have IRA holders who have real estate, and the renters can pay the rent electronically. As you might imagine, in the bookkeeping and in the financial world, anytime you can automate a process and take a person's attention away, so you don't have to sit there and go "Okay, this check is for this thing, and I'll enter it into here and there..." - any of those efficiencies that we can create, we do. So we're trying to keep our cost down because, frankly, it's all part of the bottom line, and we encourage people -- if you're the motive force in any investing venture (and that's basically what you're doing with your IRA here), we encourage you to do due diligence on every participant, whether it's the asset or the IRA provider, or anybody that you're working with... So we encourage people to look into our business model as well.
Those are the two things that we're trying to work on: making sure that people understand what we're doing, and also make it easy for them.
Joe Fairless: Based on your experience as a self-directed IRA expert, what is your best advice ever for real estate investors?
Clay Malcolm: Well, the best advice ever for the Best Ever listeners is really just to keep the idea that your IRA money is in play when you're out looking at deals. That doesn't mean just your IRA money either; if you're gonna invest in a deal and you are gonna control it, but you need other investors, introducing that idea to them, that their IRA money is available to possibly invest in a project can be a huge boon.
Lots of times people are out looking for money, looking for investors, and all they really need to do, in some cases, is to just introduce the concept that their IRA money can invest in real estate, because most people don't know, and that's a fact... Most people will go, "Huh? Never heard of that." I asked my bank, "Could I invest in real estate with my IRA?" and he said no. And the reason he said no is because they don't handle real estate, not because the IRS prohibits it.
So I think my best ever advice for listeners is really to just keep in mind that that pot of money that is tax advantaged is available... So don't forget about it, make sure that you incorporate it, and it can be for other people, as well, so it's a real estate investor in and of itself.
Joe Fairless: What does someone have to submit, once they identify that they wanna do a self-directed IRA, in order to be fully up and running, and how long does that take?
Clay Malcolm: Good question. The typical process that we see is that somebody will open an account with us - in our particular case it's online, so it takes 15-20 minutes to fill it out. The account is usually officially open within a business day. Transfers, rollovers and contributions are the way that money gets into that account in order to be positioned to disburse. Contributions are very fast, you can do those online with us. Transfers and rollovers are a little bit longer process, simply because we don't control them; you're actually asking your bank or brokerage house to liquidate those funds and then send them over.
We tend to tell people it's 1-3 weeks to get that money from the old IRA or the old 401k over to us. Often, it is somebody who has a 401k at a company that they no longer work for or that they forgot about and left it there, so that comes over via transfer or rollover; no tax, no penalty... You're really just moving it from one custodial entity to another. So I would say opening the account and getting it in position - we're probably looking at 1-3 weeks; that can vary some.
During that time, most of our investors are already looking for the project or even negotiating the deal. So you can make an offer on a property even if all of your money hasn't hit us yet. You can make an offer, be negotiating the deal, because the money will be needed at closing time. Often, people are in this sequence - they'll be multitasking along the way, trying to get the investment ready to go as the money moves. So I would say that you're looking at a few weeks.
Joe Fairless: Very helpful. Clay, are you ready for the Best Ever Lightning Round?
Clay Malcolm: Ready, Joe!
Joe Fairless: Alright, well let's do it! First though, a quick word from our Best Ever partners.
Break: [00:17:34.22] to [00:18:26.19]
Joe Fairless: Clay, what's the best ever book you've read?
Clay Malcolm: I will say Spectrum of Consciousness, although anything that Wallace Stegner wrote, I really like.
Joe Fairless: Alright... New author for me, new book for me - thank you for sharing that.
Clay Malcolm: Certainly.
Joe Fairless: Best ever way you like to give back?
Clay Malcolm: Well, my favorite way is I have been involved with a company that reads textbooks onto tape, so that blind students can use those textbooks in their studies. I always thought that was cool.
Joe Fairless: What would you say is a mistake you've made on a particular business deal or just as a business professional?
Clay Malcolm: I would say not empowering myself to make a move... And I'll go back to 2008 - I hadn't practiced moving funds into different investments, and it stalled me. It was an interesting thing, it's part of my psychology that if I haven't done it before, it seems bigger than it would be, and if I had been more agile and thinking and been empowered already to make financial moves, I think I could have mitigated some of my losses. It didn't work, but that was the lesson, for sure.
Joe Fairless: Where can the Best Ever listeners get in touch with you?
Clay Malcolm: Well, the easiest way to get in touch with me is an e-mail address, which is email@example.com. I do get to travel a lot and have a lot of things that I need to be doing around here, but that way I can get that information, that question or anything and get back to you pretty much anywhere I am.
Joe Fairless: Well, from giving specifics on the process for opening up a self-directed IRA, and the timeframe that that requires (usually about 2-3 weeks from start to finish), to talking about the price points that it does cost with your company in particular, to the mistakes, like not knowing the difference between a 401k and an IRA, and the ramifications for the difference (like you said, the IRA provider is a signer on the contract), as well as the little know fact for some investors - perhaps not all of the Best Ever listeners, because we've talked to self-directed IRA experts, but as you mentioned, the self-directed IRA account holder is the one calling the shots... And then your overall lesson learned, that can be applied really towards anything we do as a real estate entrepreneur, and that is - I love your quote - "if you hadn't done it before, it seemed a lot bigger than it should have been"... Isn't that the truth with anything in life? If we haven't done it before, it just seems like it's a whole lot more complicated and harder than it actually is once we end up doing it.
Thanks, Clay, for being on the show. I hope you have a best ever day, and we'll talk to you soon!
Clay Malcolm: Sure, I enjoyed it!