fbpx

Equity Trust: Using Self Directed IRAs To Invest In Non-Traditional Markets And Finding The Right IRA Custodian With John Bowens

June 7, 2023

chrisseveney

v

0

CWS 249 | Self Directed IRA

 

Most of us are conditioned to think that there is only one way to use self-directed IRAs – to invest in public assets and public equities. But there is a lot of missed opportunity around private markets. This is what John Bowens brings to the fore in this conversation. John is a sought-after expert and one of the most respected educators in the self-directed IRA space. Leveraging his over 20 years of experience in the real estate industry, he has trained thousands of investors, giving them the tools they need to take control of their finances and build a lasting legacy. In this conversation, he explains how people can take advantage of their retirement funds to invest in alternative assets and how a company like Equity Trust can help them to that correctly. Join in and learn how to become a better custodian of your money, build lasting wealth, and create the life and legacy you want to have!

Watch the episode here

 

Listen to the podcast here

Equity Trust: Using Self Directed IRAs To Invest In Non-Traditional Markets And Finding The Right IRA Custodian With John Bowens

In this episode, joining me is John Bowens of Equity Trust. Thanks for joining us, John.

Thank you for having me. I am excited to be here. I love the show. It’s great to see you again. I am excited to share with your audience a little bit about what I do and a little bit about what our customers do here as far as self-directing their IRAs into various private market investments, which I know you’re very familiar with. I’m happy to answer any questions that you or any of the audience have.

To give our audience a little bit of a background, John is one of the most sought-after and respected educators in the self-directed IRA space. As Director and Head of Education and Investor Success at Equity Trust, John is able to draw from his years in real estate and his experience as an active investor. In his travels across the US and virtually, he has trained over 16,000 investors during more than 400 workshops and classes.

He is spreading the message about power-building tax-free wealth and leaving a lasting legacy by investing in what investors know best. That speaks so well to what our show is trying to do, which is to educate and give people the tools and knowledge to take control of their finances and future. I love that. I am happy to have you here.

Self-directed IRAs come up all the time in conversations I’m having with investors, friends and former colleagues. I’m sure you’re not going to be shocked to know and you’ll agree with me that a lot of people have no idea about a self-directed IRA that is not with a custodian like Schwab or Fidelity. Sometimes, when I talk and I’m explaining how I have a solo 401(k) or a self-directed IRA with X company, they’re like, “Wait.” It’s like I’m talking a separate language. Give me a little bit of your experience with what you come across when speaking with people.

It is not uncommon. I can tell you that I have those conversations. With my team of IRA counselors here, every day, we get phone calls like, “I wish I would’ve known about this years ago.” When I got involved in real estate, I was working for a small mom-and-pop real estate company. I was also in business finance school. I was learning all about IRAs, 401(k)s and other retirement plans. I was learning about the stock market primarily and investment management around the public markets. I was on the trajectory to become a financial advisor and financial planner but I was involved in real estate.

I went to the founders of this company I was working for and said, “You guys have never talked about your IRAs or 401(k)s. I’ve been learning all about the tax advantages of IRAs and retirement plans. Why don’t you have these types of accounts?” They said, “We’re in real estate. We’ve made our wealth in real estate. We’re going to leave a legacy to our family with real estate and our children or grandchildren with real estate. We don’t believe in those IRAs, 401(k)s and other retirement plans because we don’t believe in the stock market.”

It’s a shame. Unfortunately, many of us have been conditioned from a very young age. I spent thousands of dollars academically to pursue this degree and career path. No one ever told me that you could own real estate or an interest in a private credit fund. You could invest in private money loans or buy and sell privately held companies or shares of privately held companies. No one ever told me that you could do that with an IRA.

I was conditioned to think that the only way to save in a retirement plan and invest in a retirement plan was to invest in the public markets. That is the stock market, mutual funds, ETFs, bond funds and maybe some treasury securities. Those are publicly listed and publicly available investments. No one ever told me about the private markets.

Several years ago, I met our company founder. His name is Richard Desich. He’s widely known as the pioneer of the self-directed IRA industry. He put together one of the very first real estate transactions with IRA investors back in 1983. It was a real estate syndication. There were 22 IRA investors that were invested in an entity in a limited partnership. Each of those IRA investors investing only about $6,000 made nearly $200,000 over 19 years on that transaction. It was all tax-deferred and they were traditional IRAs.

I met Mr. Desich and he became my mentor. At that point, I was immediately hooked because I learned that I could own real estate in an IRA and invest in the private markets. The income that I generate from, let’s say, residential rental property is tax-exempt in the IRA. I could also make private money loans. I can make loans to real estate investors, let’s say, a house flipper, for example, and all my profits go back into the IRA. As long as I structure things properly and I follow the rules, I pay no tax.

I thought, “This is a smart idea, being able to use an IRA or a retirement plan to invest in the private markets, specifically invest in real estate.” That could be owning real estate directly. It could be real owning real estate through a fund-type structure, like a Reg D type fund or maybe on the private credit side. I am making loans to real estate investors. That might be direct lending with the IRA or investing through some sort of fund structure.

I learned about all these types of things and the tax advantages. I always call it compounding interest in the absence of taxation. That’s what I learned from Mr. Desich years ago. It is compounding interest with no taxes. I learned that what that does is it helps people get to their retirement goals and financial goals in a shorter period.

I had to make the decision at that time to abandon the traditional model of public equities and public assets and move in this direction of alternative investments which are private market investments. I’ve done very well with it. I’ve had the opportunity to create a portfolio of private market investments for myself and my spouse. I am investing in real estate, private money lending and other types of alternative investments. I am also being able to train over 60,000 investors across the country.

Most people have never heard about this not because they’re doing something wrong but probably because whoever they’re around or whoever’s within their financial circle probably isn’t talking about it. Maybe they don’t have somebody like you that can educate them on this or have somebody like myself or Equity Trust to educate them. Maybe they have a financial advisor or financial planner but that financial advisor or financial planner, it’s not that they’re doing a bad job for that person but it might mean that they’re not incentivized to provide information about investing in the private markets. They may only be compensated if you put your money in the public markets.

It’s important for consumers and investors to understand that not everybody’s going to talk about this concept of self-directed IRAs and investing in alternative assets. Some of those people may not be able to make money on it. They may not be incentivized to talk about it. Lastly, self-directed is an industry term. It indicates that you have the ability to take control and be able to invest in the private markets. You don’t have to rely on someone else.

CWS 249 | Self Directed IRA

Self Directed IRA: “Self-directed” is just an industry term. It indicates that you have the ability to take control and invest in the private markets. You don’t have to rely on someone else.

 

Let me ask you this. You were on the pots of becoming a financial advisor. One thing that I find so interesting is when I’m talking to someone, they’re like, “I have a self-directed IRA.” Most of the time, I assume they’re going to say, “It’s with Fidelity.” Typically, that’s the way the conversation goes. They’ll be like, “My financial advisor never told me about this. They would know about this. This can’t be a thing. They would tell me if this was a thing.” I’m curious. Was this something that you were taught as you were going through this option? Was it something that you learned about when you were on that track to become a financial advisor?

No. No one ever told me about it. It even upsets me, looking back on it in retrospect. I’m like, “I was around all these smart people and no one ever taught me about it.” I never even was taught much about the private markets. Everything I was taught and conditioned is this model of publicly-traded assets. I learned about a certain percentage of equities, fixed income, large-cap, mid-cap and small-cap, depending on your age and tolerance. You’re going to allocate your resources accordingly. Nowhere did I ever learn about the private markets and that I could use an IRA to invest in real estate. I wish someone would’ve told me this years ago.

A good example is I had a client in 2022. He is a house flipper. He had an opportunity to put $13,000 and some change from his Roth IRA into a real estate joint venture. He found the deal and brought another money partner or investor partner into the transaction. They did a real estate joint venture. It was a pretty straightforward single-family flip transaction. He ended up making $34,000 tax-free in his Roth IRA. He invested $13,000 and some change. He made $34,000. He paid 0% tax. He grew his Roth IRA from $13,000 and some change to over $47,000, 100% tax-free. He’ll never pay taxes again. That’s a home run transaction. That’s not the everyday transaction.

Think about it from a compounding interest perspective and be able to create those dollars in the Roth IRA, for example. There are other types of accounts as well but specifically, a Roth IRA is a tax-free account. If you’re compounding your interest in a tax-free Roth, eventually, when you take the money out, you pay 0% tax. You leave it to your children or grandchildren and they pay 0% tax. Years ago, I started learning about the power of this compounding interest in the absence of taxation and how I can invest in the private markets and potentially make a better rate of return than what the public markets are doing.

I can’t advise people or tell people that by investing in the private markets, you’re going to be able to out beat the public markets or significantly reduce your risk by investing in private assets. Ultimately, diversification and risk are in the eyes of the investor. What I do and teach is helping people be more involved with their money. We always talk about here how money likes speed and money likes us to be involved. If we’re not being good stewards of our money or we’re not involved in managing our money, we shouldn’t be surprised if we take losses. That’s the truth of the matter.

Money likes us to be involved. If we're not being good stewards of our own money, we shouldn't be surprised if we take losses. Click To Tweet

We have a lot of folks here. I work with a lot of folks, friends, family members, clients and business colleagues that want to take control. They want to invest, examine the transactions and find investments that make sense for them. They want to invest in assets that are close to hard assets. Meaning, they want to have a lien on a property or own real estate in their IRA. It could be they want to have a membership interest in an entity that owns real estate. They want to own hard assets. They don’t want to invest in a paper asset that they don’t have confidence in.

Who does this make sense for? More importantly, who does it not make sense for? Is there a minimum you would suggest you should have in an account where you’re like, “This makes sense from an investment perspective?”

That is a good question. Who is it not for? I’ll start there. As far as minimums are concerned, there are no minimums per se from a custody perspective. In Equity Trust, we are a directed custodian. We’re not going to tell someone that they can’t move money over into a self-directed IRA and make an investment unless they were trying to do something that was blatantly prohibited. By and large, we’re not going to prevent them from making investments. We’re not their fiduciary. There are no minimums.

The minimums are going to be determined by the investor and maybe the investments that they’re making. Sometimes, if you’re investing in a private fund, they’re going to have a minimum investment. Maybe that’s very small. Maybe it’s only $5,000 or $10,000. Maybe it’s $25,000. Maybe it’s $50,000. The investor is going to have that conversation with whomever they’re working or investing with to determine what their minimums are.

As far as moving money over from one IRA firm to Equity Trust, that’s a pretty straightforward process. All one is doing is transferring or rolling money over from one 401(k) provider or IRA custodian to the Equity Trust account. That’s a simple transfer or rollover process. One of the common questions I get is, “If I roll the money over or transfer money, are there adverse tax consequences or penalties?” The answer is no. You’re moving money from one account to another. As long as you follow the process and all of the guidelines, you won’t have any issues with moving your money over without any tax consequences.

When sending money out for an investment, let’s say I buy a property, make a private money loan or invest in a private credit fund, whatever it is that I’m doing, I’m not borrowing against the account or distributing money from the account. I’m making an investment. You want to think of it like buying a stock or mutual fund, which is what most people are familiar with. When you buy a stock, the cash leaves the account and in return for that cash is a stock certificate.

It’s all in electronic form but that’s what it is. That’s the underlying asset. When you buy real estate or invest in a private credit fund, it’s the same process. IRA money leaves the account and in exchange is a membership interest called a subscription. It might be a property so you have a deed to the property. I do private money loans to real estate investors secured by their properties. When my IRA money sends funds out for a private money loan, I have a lien on that property. I have a promissory note and a mortgage.

That’s the best way for the audience to think about this logistically. It is moving money into a self-directed IRA with a company like Equity Trust who’s a custodian that specializes in these types of alternative assets and then directing your funds out for the investment. Don’t be surprised if you go to your current financial institution and you say, “I want to buy real estate. I want to invest in this private asset.”

They’re probably not going to allow you to do that. It’s not because they’re doing a bad job. It’s that that’s not their core competency and specialization. Their specialization is stocks, bonds, mutual funds and traditional investments whereas our specialization as a custodian is helping people invest in these alternative assets.

To answer your question in a roundabout way, this isn’t for the people who don’t necessarily want to be involved in the management of their money. If you want to solely rely on a financial advisor or wealth management consultant, then this isn’t for you. This is for the folks that want to take control, invest in the private markets and spend a little bit of time being involved in the management of their money. It doesn’t mean that they’re dealing with tenants and toilets.

That’s not always what it means. There is plenty of turnkey investment opportunities that one can participate in the private markets but there is a different degree of involvement. This is not relying solely on a financial advisor or financial planner. Keep in mind that generally, they can only sell you specific investment opportunities. Traditionally public market investments are the only types of investments that they’re going to be able to sell you.

There are some financial advisors and wealth management consultants out there that are friendlier to private market investments and that do help people invest in the private markets. Don’t think that you’re going to meet your financial advisor or financial planner with a ton of opposition. There are lots of financial advisors that I meet out there that do a great job for their clients and are very open to investing in alternative assets.

The moral of the story there is don’t be afraid to ask questions about that. Especially for those that are in real estate investing already, those folks I find are the folks that tend to gravitate towards self-directed IRAs and have an accelerated pathway to be able to start investing with their IRA funds. It makes a lot of sense for them because they’re leveraging a skillset that they already have and are replicating that in their self-directed IRA. The byproduct is saving money on taxes on their investment returns.

Let’s talk about timing. “When would I do this?” One thing for me that was so unclear before I moved into real estate is when you leave an employer or let go, which we’re seeing a lot of and I’m in California so we’re seeing a ton of that in the tech space, these people are leaving companies with huge 401(k)s typically. Let’s make that assumption. What they’re being told is, “You can keep it with us and roll it over to Fidelity or Schwab.” No one talks about the third option because they don’t know. That third option is you can roll that money or part of it even into a self-directed IRA that allows you to invest in real estate.

The advantage to that is there are people who are IRA or 401(k) rich but they don’t have cash and they’re interested in real estate. This might be more for my contemporaries and colleagues that have two kids at home and are putting them through school and daycare and are like, “I still want to get involved in real estate. I have this 401(k). I don’t necessarily have the liquid cash from savings to invest personally.”

That’s another good play for people. They do want to be involved. They know real estate is the way to go. They might still dabble in the stock market. It is keeping in mind that if you’re leaving an employer, switching jobs or let go for whatever reason, you have the opportunity to roll that into an IRA that does allow you to get into the market.

You’re correct. When someone leaves an employer, they can roll their money over into a self-directed IRA. That’s a very simple process. It’s a matter of opening an account. That process only takes minutes. That’s like opening up a bank account. Initiating a rollover from another employer 401(k), that’s a simple phone call that one would make to their employer plan administrator. In Equity Trust, we have services where we help customers do that. We don’t advise on, “Should you sell this stock or buy this stock.” We simply will help facilitate that process to help that individual roll over their money into a self-directed IRA so then they’re in a prepared position to be able to direct their funds.

CWS 249 | Self Directed IRA

Self Directed IRA: When someone leaves an employer, they can roll their money over into a self-directed IRA and that’s a very simple process. It’s just a matter of opening an account and that process only takes minutes.

 

I’m glad you brought up timing because it does take a little bit of time to roll the money over into a self-directed IRA. If somebody is lining up an investment opportunity, whether it’s in a private credit fund, a property or a private loan deal, they have to make sure their account is set up and funded well in advance. I always let people know as well that they don’t have to move all their money into a self-directed IRA. Maybe they still want to have some exposure to the stock market, mutual funds, bond funds or ETFs.

They can continue to work with maybe a financial advisor or a wealth management consultant over here and then they can roll over what they want to get started with their self-directed alternative asset or private market investments. If they want to move more money over to a later date, they can do that. If they want to move money back to the public markets, they have the ability to do that. This whole concept of self-directed IRA gives people a lot more freedom and options as far as what they have the opportunity to invest in.

A self-directed IRA gives people a lot more freedom and options as far as what they have the opportunity to invest in. Click To Tweet

You mentioned this briefly. Unless it’s prohibited. There is a lot of flexibility within the self-directed IRA space. However, what are some of the things that are not allowed?

In 1974, a law was passed that created these IRAs and other retirement plans. It was called the Employee Retirement Income Securities Act of 1974. The law is exclusive rather than inclusive. The government only tells us what we can’t invest in, not what we can invest in. What we can’t invest in with our IRA is collectibles. It is things like artwork, rugs or antiques. It is those types of investments.

CWS 249 | Self Directed IRA

Self Directed IRA: We can’t use our IRA to invest in collectibles like artwork and antiques.

 

I haven’t heard that one before.

It’s interesting you bring that up. Artwork I have seen out in the private markets has become quite popular. They are investing in art credit funds or art debt funds. There are actual individual funds that own art. You can’t do that with an IRA because it’s considered a collectible. From there, the tax code tells us that we cannot transact our IRA with certain persons.

They call these disqualified persons under 4975 of the tax code. Those would include ourselves to our IRA, our children, our grandchildren, our parents, our grandparents and any businesses that we own and operate. For example, if I own a piece of real estate, I can’t put that in my IRA. My IRA can’t buy it from me. I can’t take money from my IRA and loan it to myself.

What you find is that a lot of these laws are common sense laws. These IRAs are super highly tax-privileged accounts as we’ve been talking about. The government isn’t going to allow us to benefit ourselves in the here and now. We need to make investments for the benefit of the IRA and the benefit of the IRA only.

Let’s shift to equity. There are a lot of different options out there when it comes to custodians. What separates equity? What are things that if you were looking at different custodians for the first time, you would say, “These top five things are the things that would evaluate?”

Being in the industry for many years, I’ve seen the industry evolve. What I saw occur years ago is a lot of growth in this industry. The reason why is because we were in the Great Recession and real estate went on sale. A lot of people took a lot of losses in their 401(k)s. A lot of people were displaced from their careers and occupations during the Great Recession. What came out of that is people were able to roll over their 401(k)s and start buying real estate because real estate was on sale.

The industry grew in a very rapid way. Our company benefited from that. We’ve been around since 1974 so we were positioned well to be able to be part of that growth. What also happened is there were a lot of individuals out there that saw dollar signs and opportunities and thought, “I can get in the self-directed IRA business. I can open these accounts and create a business.”

That may have worked well for a little while but what we find is some of these companies can’t weather the storm. A lot of them didn’t weather the storm very well in the pandemic. They weren’t tooled properly. They didn’t have disaster relief or remote work systems in place. The service was abysmal at that time. We were fortunate to be able to weather the storm very well.

We have nearly 500 associates. We’re set up to be able to work remotely when we need to. We have physical offices in Cleveland, South Dakota and Denver. What’s happened over the years is there’s been a number of companies that have had to sell, whether they go into receivership or there are some other type of financial situation and then they get bought by another company. We’ve been fortunate to acquire about thirteen different trust companies over the years.

The reason why I say all this is because when you’re looking for a custodian, it doesn’t have to be Equity Trust. I’m not here to sell Equity Trust. Find a custodian that has been around for a long time and a custodian that has some size. We’re fortunate to have over close to $40 billion in assets under custody and administration. We’ve been doing it for many years. We have competitors out there that are sizable as well.

I always encourage folks to find a company that has size and stability and that is in it for the long haul. Find out who is their ownership and who is their ownership made of. Our ownership here, the Desich family, has been doing this for many years. They’re very passionate about our business. Our company founder who is still the chairman of the board, Richard Desich, some people call him the inventor of the self-directed IRA. He’s wildly known as the pioneer. I encourage folks to find a company that has stability.

Number two would be one-on-one personalized support. We were talking about the model that we have here. It is where you work with a single point of contact to take you through the account open process and then you have a single point of contact that takes you through the investment process. We have found that to be very important to our clients. That’s the communication that they’ve provided to us. “We like this model of having a single point of contact,” whereas in some other firms out there, to even talk to someone, you have to schedule a pre-planned call. You can’t even call in. You have to go into a calendar system and schedule a call.

Unfortunately, service, I have found to be a challenge in the industry. We’re not interested in going in that direction of artificial intelligence where a robot can answer every question. These are alternative assets in self-directed IRAs. I don’t think an artificial bot is going to be able to answer a lot of the questions that our customers have. We try to take that approach in our business. Lastly is education. We have a lot of videos on YouTube and other sources. If folks want to learn more, it’s easy for them to find education on various topics that relate to self-directed IRAs.

That segues well into if people are interested in opening an account or getting in touch and speaking with someone at Equity, where would they find you? How can they do that?

It is easy to find our website. It is TrustETC.com. Do an internet search for Equity Trust Company. We’re easy to find. You could also go to our YouTube page. Search Equity Trust Company on YouTube and you’ll find all sorts of videos. You’ll find very similar content you guys create. It is educational and informative. There’s no hype, flash or Lamborghinis driving around in the background. That’s not who we are as a firm. I know that’s not who your organization is either. That’s why we appreciate so much being able to do these types of things together. You can go to our YouTube page and find a lot of good education that you can take advantage of.

On our website, you’ll find our toll-free number. You can call in and speak to a live representative. We call them IRA counselors. They’re here to educate you. We don’t sell investments or give advice. You know that you’re talking to someone that is here to educate you and answer your questions. If it makes sense for you to proceed and open up a self-directed IRA, we can help you with that. If not and you want to go on the traditional path, that’s okay too. We are willing to be able to be there as a resource for individuals.

John, thank you so much for joining us and sharing your insight and knowledge in this space. For those reading, if you enjoyed the show, please share it with a friend, subscribe or leave us a review. Until next time. Thank you.

 

Important Links

 

About John Bowens

CWS 249 | Self Directed IRAJohn Bowens is one of the most sought-after and respected educators in the self-directed IRA industry. As Director, Head of Education and Investor Success at Equity Trust Company, John draws from his 20 years in the real estate industry and his experience as an active real estate investor. In his travels across the U.S. and virtually, he has trained 60,000 investors during more than 400 workshops and classes, spreading the message about the power of building tax-free wealth and leaving a lasting legacy by investing in what investors know best. In addition to thought leadership in the industry, John has also directed teams in both the front-office and back-office operations with Equity Trust, focusing on the custody of various alternative assets, including but not limited to, real estate, notes, private equity, precious metals, and much more.
John contributed to the book “Self-Directed IRAs: Building Retirement Wealth Through Alternative Investing” with Equity Trust Company Founder Richard Desich, Sr., and has appeared on several national real estate and finance-related radio shows, including the Rich Dad Radio Show.
He received his bachelor’s degree in Finance from Ohio University. John holds the Certified IRA Services Professional (CISP) designation through the American Bankers Association.

 

You May Also Like…

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *