People miss out on investments, deals, and life-changing opportunities because they don’t want to get started. Chris Seveney and Jamie Bateman welcome Derreck Long, the Quest IRA Specialist at Quest Trust Company. Derreck shares with Chris and Jamie how Quest Trust helps people use their retirement accounts to invest in real estate assets. When you look at any investment, figure out if it’s a passive investment or not. Do you want to know tips on what to do next? Then this episode’s for you. Tune in!
Listen to the podcast here:
Simple Tips On How To Invest Using Quest IRA With Derreck Long
Welcome everybody to another episode of the show. We have Derreck Long of Quest Trust with us. We will be talking about anything to do with self-directed IRAs and other retirement accounts. Jamie and Derreck, how are you guys doing?
I’m doing great, Chris. Thanks for having me on here. I’m excited.
We are excited to have you on. It’s been a little while since we’ve spoken and we tried to get you but little scheduling conflicts. We are glad to have you on. Derreck, why don’t you tell us a little bit about Quest Trust?
We’re a self-directed IRA custodian. I know a lot of guys out there have heard of all the other IRA custodians. Honestly, all of them are almost good. There are very few bad ones out there. We try to help people use their retirement accounts to invest into some real estate asset. This could be a rental property, fix and flip, a syndication like an apartment complex, senior living, storage unit or something along those lines but anything around that area.
Quest focuses mainly on real estate. For a lot of you guys out there, if you’re interested in self-directed IRAs or solo 401(k)s, give us a call. That’s what we’re here for. I’m glad that we got here, but whichever custodian you guys choose is probably going to be a good one. There are not too many bad ones out there.
As somebody who does some syndications and as an investor with many different IRAs, there are some that are a lot more painful. They might not be bad, but there are certain levels of pain that you may have to go through depending on if you have two of the same investors and you send the same documents over to them, one of them gets approved and the other one wants all this or a different form filled. That drives me a little nuts but I haven’t had that with Quest or with my investors. Quest is one of the largest, is that a correct statement?
It’s a common misconception. The reason a lot of people think that in your shoes is because you’re used to real estate in a real perspective. A company like Equity Trust probably has somewhere right around $27 billion to $30 billion under management costs. We only have about $2.5 billion. However, the real difference is that Quest only focuses on real estate. This is why you don’t have those problems you mentioned. We only deal in real estate assets. We don’t let people do gold, silver, cryptocurrency, invest in small business or something like that. The other companies are Walmart. They want you to do everything. We focused on the little area.
We’re not going to get into what is a self-directed IRA. There’s plenty of information out there. We want to talk about some case studies in certain avenues of IRAs where people have used them in the past or other different options they have. Before we dive into that because you mentioned all the different varieties, we will briefly touch base on this episode about some of the proposed current legislation that’s out there now that you can briefly touch base upon. Also, give some people some follow-up of where they can get more information on it because we could spend three hours on that.
You’re 100% right, there were a lot of videos, not just Quest but other IRA companies and attorneys. They’re giving out so many classes on these, completely free to use, so check it out. The $3.5 trillion bill that’s been proposed and there are about 1,300 different bill proposals. The ones that you want to look at are ones between 138301 through 138315.
In there is they want to eliminate what self-directed IRAs can invest in and one of these being syndications, which now seems to be one of the best places if you’re an investor to park your funds. You can invest into someone that’s raising capital to build up something. We have a lot of classes on that, what you could do if you want to make your voice heard or what would happen if the bill passed. That’s what that bill is talking about.
It may not even pass, we may be wasting our time, but to be clear, because I haven’t dug into it nearly as much as Chris has, which is true for many topics. It’s not only proposed changes for accredited investors. It’s anyone with a self-directed account that it could affect. Is that true?
Yes. It’s not just for IRAs, that also involves solo 401(k)s and QRP plans. It doesn’t matter how much you make, whether you’re the guy working at Walmart or the guy with $10 million in his retirement account. If that bill passes, it will affect everyone at every level.
It seems like they’re trying to fix something high at the top from what I was reading, but maybe potentially throwing the baby out with the bath water. Go ahead, Chris.
The component was the Peter Thiel issue where he took short amount of money and invested it in PayPal or whatever it was. Now it’s worth like $5 billion, which the proposal does from what my understanding get rid of that, but what they did as typical of governments is what could be done with a needle is they used a sledgehammer. There’s a component of the bill, a few portions of it that people probably were like, “That’s fine,” but all the other stuff you throw in here is like, “Wait a second here.” You’re not only affecting those people.Be educated on what you bet. Click To Tweet
From my understanding, people who use a self-directed IRA to have checkbook control with an LLC to go buy a rental property, they can’t own an LLC with their self-directed IRA is one of the components. We’ve got syndications out there. If we have people who uses that, they would have two years to get out of that deal. For most of our funds, that’s not a big deal because they’re usually 2 to 3 years long, most apartment syndications that are 5 to 7 plus years long, that’s going to create some havoc in my mind.
You addressed it right. What people don’t understand is that the whole Peter Thiel issue is a once in a lifetime thing where he did grow a Roth IRA to $5 billion. However, the way he did it nowadays would be considered a prohibited transaction. It would not pass any IRA custodian, but he made this investment such a long time ago that those same rules weren’t in place.
He got away with something that he did back in the late ‘90s to early 2000s. Since then, the Tax Code has changed over the last several years. You could do that same type of investment purposely. We’re going to go ahead and put this portion here. It would affect those individuals that have well over $10 million in a Roth, but the rest of it doesn’t make sense.
I know we don’t want to stay on this topic for too long. What are you all doing at Quest to prepare besides educating people? Are you making any changes internally?
I got to meet with Elizabeth Warren and her staff and Ron Wyden and his staff, who both run line being a Senator up there in Oregon, who was one who was pushing hard for this bill. There’s this Warren staff who was pushing but they weren’t as pushing as hard as Ron Wyden’s staff. It was nice that I got to be part of the lobbyists that got to present the cases for all of the self-directed IRA custodians across the board on this issue.
Not only as working at Quest, you also are a real estate investor as well, correct?
Yes, which helps me to understand what most clients are going through.
You own portfolio notes. I’m curious to hear a little bit about how you structure your portfolio with your investments and with your IRA and so forth.
The first thing is before I do look at any investment, I try to figure out if it is a passive investment, or is it some that I might have to be a little bit more active. I own three rental properties. I consider a rental property, fix and flip or anything like that more active, because if something does happen, like if the AC unit breaks or something, I might have to whip out my credit card real quick to fix something.
Any active investments I own outside of an IRA. For two reasons, A) Active investments I like to know that I can be hands-on. Remember, in an IRA, we can’t be hands-on. B) You get a lot of tax deductions with these active investments. It could be depreciation, expenses, HOA fees and all this other stuff. Inside an IRA for non-active investments, mainly notes or syndication, I want to do an IRA because I’m not trying to live off the passive income of the $100 or the $200 that I might get a month.
My real thought process is, “In five years, this deal pays off and I get a big check. I’m going to let the tenants pay down the loan on the rental property. I’ll sell the house and make a big check.” I’d rather have those deals that are more long-term thinking be done in an IRA where I get to avoid all the taxes on the earnings. That’s how I look at it. It’s like, “Is it active? I’m doing it over here. Is it non-active? I’ll do it over here.”
Do you mind diving into your story a little bit more as far as your personal background and how did you get your first rental property and to where you are with your portfolio?
My dad is a big-time real estate investor, and so was my uncle. I was the black sheep. I said, “I’m going to go start a restaurant.”
That’s low profit margins. That’s a tough business from what I’ve heard.
It’s very tough but they let me do it. They let me fail. It was a good thing because you have to have some failure to get to the next level. I realized I didn’t want to deal with a lot of day-to-day things, so I started in notes but I didn’t know how to create a note. I bought my very first note from a hard money company.
What’s nice is if you guys are interested in doing of notes, that’s the best way to go about it because it doesn’t matter what’s hard money company that’s local to your area. They can sell you a note and they’ll gladly sell it to you. They’ll give you a due diligence packet. Here’s the borrower, the credit score and the contractors. I can use this now to structure the rest of my personal notes as I go through this. From there, I went through that.
Was it a brand-new note though? It wasn’t originated previously. I bought one like that at least. Do you still own that note?
No. Most of my notes that I buy or generate myself are only 6 months to 1 year. We’re pretty sure. I love that it comes down to me being younger. My dad likes to do the twenty-year notes, but I like to see all the money come back.
That’s the opposite. The younger people wouldn’t mind holding notes for longer, and the older people are like, “I want it shorter,” because where you’re on at life, you want to get that money faster. It almost be opposite, but it’s funny because as you get older, it’s like, “I don’t mind the twenty years getting that payment stream coming in the door.”
A lot of it comes down to what you do on a day-to-day basis. My dad doesn’t want to sit here and fill out paperwork, so he’s like, “If I can have something one time, get a twenty-year note and I’ll only get 6%, I’ll do that.” I’m like, “I want my 12%. I’m going to sit here. I’m going to work it.” Eventually, you’re like, “I don’t want to work anymore. I’m tired.”
One of the things I want to jump back that was mentioned because you hit upon this, I have this conversation a lot with investors and it’s almost challenging because as somebody who syndicates, I always joke I’m not a great salesman. When people ask me, I’m like, “I’m not a financial advisor. I can’t give you advice.” What I do with my portfolio a lot of times is the money that’s in my regular bank account, I put that towards more traditional real estate because I get the depreciation, the tax benefits and my retirement money.
I go to notes because we’re in a 30 plus percent tax bracket and there’s no depreciation on notes. That’s growing tax free, so it’s better to use that money from that purpose is, because I do know some people do use IRA money for real estate as well when they have cash aside. I’m like, “You should talk to other people about it because it’s how you structure it when you write it down on paper.” It’s interesting to see losing out on that depreciation essentially. It goes over time.
That’s why I sit right in the game. I like the passive stuff in the IRA. I don’t have to deal with on a day-by-day basis. You can go and think of rental properties passive until you have to evict a tenant.
Being an investor and also part of Quest Trust as well, what are the biggest mistakes that IRA investors make? The top three mistakes you see people make.
The top mistake is having to deal with syndication. Anytime I say syndications and this holds true for any IRA custodian. It’s the guy who uses IRA, invest into a multifamily deal, storage unit, senior living facility or something like that. They get the K-1 at the end of the year and they’re being told they have to pay a bunch of UBIT tax. The first thing to understand is 95% of the time, that tax does not apply. The main thing that I always try to stress to people is if you are going to syndication, you want to be educated on what UBIT needs. You don’t bring on UBIT, you bring on a small subdivision called Unrelated Debt-Finance Income or UDFI.
We’re talking about this. People throw the term UBIT around like it’s equivalent to UDFI and it’s not. They’re related or UDFI is a subset of UBIT, but they’re not the same thing.
They’re not because one of the biggest advantages doing a syndication outside of an IRA is you get a lot of tax deductions along the way. When we do an investment in an IRA, I’m not going to pay any taxes on my earnings that I don’t get to take any tax deductions. When you’re already bringing in the UDFI as a tax to the IRA, the IRA gets the claim of all of those taxes that you’ve mentioned. It can even backdate it to the very beginning of the investment.
It also only has to pay the taxes once real profit is made, which is normally at the very end of the deal. You might get some dividends along the way or something. That’s not profit, especially when you look at the K-1. What’s funny is a lot of people that get scared, “I forgot I have to pay a UBIT tax,” if you look at the amount you’ve got to take to deduct from there, you probably don’t owe anything and probably got some bad information.You want the syndicator to sign IRA documents to show that they're ready to invest with you. Click To Tweet
It’s interesting because I had a call from an investor who invested in another syndication that they were borrowing money, so it falls under UDFI. Their CPA was telling them they all owe this money and taxes and so forth. I said, “Before you run with that, talk to another tax advisor,” because a lot of times, it’s like any business like doctors or case attorneys. Divorce attorneys are not good at real estate.
You don’t want to go to a divorce attorney for real estate. You want to make sure your tax advisor understands real estate and retirement accounts because this one didn’t and they were getting very bad advice. They’re going through the typical playbook of the Tax Code, which is tens of thousands of pages where wherever it says one thing, there are three things that contradict it. I’ll call it case, not law, but there’s historical evidence of how to do things that this person I don’t think knew.
That’s a perfect example. The first thing I tell people is UBIT applies to any non-taxable organization, churches, charities, nonprofit organizations and even hospitals. Your CPA, they’re probably calculating it as if your IRA was a church, “You’re not even following the right stuff.” You want to make sure they understand what they’re doing. We teach a whole class on that. That’s completely free to everybody.
I did sell some partials to somebody for this very reason. I’m like, “I don’t think it’s a problem for you, but here you go.”
What’s another one? I’m curious because there’s a lot of these. That is a common one that I see.
The next one is understanding what checkbook control needs. Checkbook control means that the IRA has a checking account away from the custodian. What happens is the IRA has to establish an LLC, a trust or something like that separate entity. I always say the IRA is going to be the sole member and the owner of it. Someone else has to hold the checkbook. What’s funny is there’s a lot of debate on this topic.
The debate comes down to who can hold the checkbook. Can you yourself hold the checkbook or should someone else hold it? In Quest, we firmly believe that no someone else should be holding the checkbook, that you hold that checkbook yourself. For those of you who might go, “My custodian lets me do it.” It doesn’t mean it’s right.
You can google IRS publication 4975. You’re going to want to read subsections C, additional section E. It will state right there in black and white right on the IRS Tax Code that the fiduciary can never deal with any income or assets at a cash balance level for the IRA directly or indirectly. If you’re caught doing it, the IRS will take away your entire retirement account. That’s a scary thought.
For solo 401(k), those are typically checkbook control. Are those different?
Yes. When we talk about the solo 401(k), I like to say this is the true checkbook control account. The publications from the IRS, they clearly state that the 401(k) holder is allowed to hold their own checkbook. This is why these accounts are so powerful. If you qualify for a solo 401(k), there’s a strong argument that you should have one because that whole talk that we did about the UBIT, UDFI and all that stuff, 401(k)s are exempt from it. You didn’t have to worry about it. That’s nice.
I have a solo 401(k) and even if you’re not making your businesses and making tons of money, it’s good to have because I rolled over from another one. You don’t have to worry about UBIT, UDFI and you got the checkbook control. If you start making money, then you can take 20% or 25% of your profits and put them in up to $53,000 per year. It’s not the $6,000 per year type thing for an IRA.
They are awesome. You can take humongous tax deductions with them. You can lend yourself money. All that being said, they’re also cheap too. Most custodians charge you an annual fee with an IRA, but in Quest, once we set you up a 401(k), there is no annual fee, transaction or other fees that come with it. It’s one and done. That’s how most custodians do it.
Quest does set up solo 401(k)s?
All the time. It’s probably the most popular account we set up.
For some reason, I don’t know why. I didn’t think you did honestly. I learn something new every day.
We always like to set up the IRAs, the IRAs we make more money on.
It’s like the financial advisors when you have your money, “You can’t take your IRA and move it somewhere else. You can’t self-direct that.” One of the things that I’m always curious about is the signatory, signing the document. If I have a syndication, I send it out and then someone’s like, “I’ll sign the subscription agreement but it says it’s an IRA.” Doesn’t somebody at Quest have to sign that document?
Yes, but if you’re a syndicator, the best thing is there are two sides of it. We’ve got to first look at it from the syndicator standpoint. The main reason you want that person as a syndicator to sign those documents is that shows that they’re ready to invest with you and have made their commitment. As long as it has the right IRA name, address and tax ID number in that type of stuff and they sign it, we’re okay with that. We understand the syndicator needs something from them. This doesn’t mean that we don’t need to sign it as well. If they’ve signed it already, that’s okay.
Most of the time, the syndicator wants that because that’s your commitment. Still, send those documents over to Quest. We’re still going to review them 24 hours to 48 hours. We’ll get them signed and send them back to you. Most of the time, it’s all done electronically anyway. Don’t be afraid out there if you’re the syndicator and you’re like, “I need this guy to sign it now.” That’s all right because that’s your commitment. That’s why you want them to sign it. I don’t think that’s the end of the deal. Make sure they still forward that over to their IRA custodian. That should hold true for any self-directed IRA custodian you’re working with.
We’ve alluded to the fact that there are differences between the different custodians with how they operate. You say you’re okay with this, maybe you’re not okay with that. What are you responding to when you make those decisions? Is Quest audited? Is it more of a business decision based on potential lawsuits, or what guidelines are you following? I know you’ve already pointed to some IRS documentation. How are you making those decisions as to what’s acceptable and what’s not?
By the client’s signing the documents for you, that doesn’t initiate the wire. We do. That’s why it doesn’t matter. If they sign it for you, that’s great for you because that gets it in your books. That gets you their commitment. Once we sign it though, and most of the time what we usually do is you send it over and your client and our clients already signed it, we’re probably going to white out where they’ve signed and put our signature there, to be brutally honest.
Because we are the actual signer, that’s the documents that we’re going to send back to you with the proper signature and your wire. When we get audited, the IRS doesn’t see that the client signed the original documents. What do they see? The ones that we sent back to you. That’s why it doesn’t matter. Usually, you still want them to sign it because you need their commitment.
In general, it’s a potential IRS audit, are there state licensing issues?
Nothing like that. You got to think of when the wire goes out. The wire doesn’t go out until you get our signature. The fact that they signed it in advance, it is what it is. It’s not going to affect us. That should hold true for any custodian.
Two of the biggest errors or challenges I see on the syndication side is, first, we always look to get a W-9 from the investor. If they’re using their IRA account, put everywhere. I’m like, “Do not put your social. Put the EIN number,” because what happens is this goes to investors. They fill out that form that goes to our accounting CPA. From their perspective, when they’re filling out the tax forms, they’re looking at the W-9. If Jamie Bateman put Jamie Bateman at XYZ and Social Security Number 123456789, that’s what they’re filing for the taxes.
Whereas Quest, I used to have it memorized, your EIN income tax time. People should be putting that EIN number down. The other one I see is on a lot of these syndications, a Reg D ones, you have to file a Form D which is with the state that says, “This investor’s investing in the state.” A lot of them will say, “I’m in Texas because that’s where the IRA is,” but it’s because I asked my attorney.
I go, “What should it be?” It’s like, “It’s a place of their residents. Granted the IRA is through Quest, but it’s where they reside.” That’s another thing I see a lot of times people putting like Texas. I’m like, “Don’t you live in California?” It’s like, “Yeah, but it’s with Quest.” I’m like, “No,” so we also file the right forms.
What I tell people is when you get the operating agreement or subscription agreement from your syndicator, before you feel any of it out, call Quest. The reason why is we use a non-automated line. You call and someone’s going to answer. We have trained professionals that is their job all day long. The only thing they do is review operating and subscription agreements. That’s it. They know what they’re looking for and what they’re doing. Knowing that, I charge you a fee.As COVID hit, there was a massive shift towards syndications to where it's about 50% syndications, 40% notes, and only about 10% actual physical real estate. Click To Tweet
If I’m going to charge you a fee to do the deal that get your money’s worth, call us and say, “Can I email this over? Can you walk me through it?” We’ll stay on the phone. We’ll tell you what goes. Where exactly word for word what to type, what tax ID number, what state because we already have your account. We see that, “You came from California. Put California” I tell people to get their money’s worth. Don’t be afraid to call and it should. I wish it worked that way with every custodian. Some of them are good about that. Not all of them.
How many employees does Quest have?
At any point in time, 110 to 115. We have some interns and all that.
Everyone’s going through this crunch of trying to find people to hire. It is painful now. I’m not expecting hard numbers on this, but generally speaking, if you look at the investments that Quest has under its umbrella. What percentage are in syndication and versus a whole note or something outside of syndication?
If you were to ask me this question in 2017, it was probably about 25% to 30% real estate, some syndication, and the remaining about 50% was all notes. All that being said. In 2020, right as COVID hit, we saw a humongous shift towards syndications to where it’s about 50% now syndications, 40% notes and only about 10% actual physical real estate like those fix and flips or rentals.
The syndications could be of notes or real estate.
When I say a note, I usually mean the IRA holder is the lender. That’s it.
How much of that is, do people have sitting on the sidelines doing nothing?
At any point in time, understand this number fluctuates. For us, Quest is somewhere right around $420 million to $430 million.
Out of how many billion?
$2.5 billion roughly.
Why do you think that shift occurred? The 2020 shift or 2017 to 2020. Any idea?
I grew up and my dad taught me, “When you get older, you want to own your own home. You want to have that white picket fence. You might want to move in your wife and the little dog Muffy, have kids and grow up.” Kids aren’t that way anymore. When I was a kid, living in an apartment was crappy. Nowadays, when you look at some of these apartments that are reasonably priced, they’re two-bedroom, two-bath and granite countertops. They have an island. They’re nice.
Kids nowadays don’t want to own their own home because they don’t want to have to deal with maintenance issues. They don’t want to have to deal with trying to get the credits, save up a bunch of money and put a big down payment. A lot of kids, when I say kids, I’m talking from 18 to 28 timeframe, they don’t even want to own a home. They don’t ever see themselves owning a home. Why would they? They appreciate having these nicer apartment complexes. That’s one of the biggest shifts we’ve seen. On the other side of the fence, other syndications are senior living facilities.
We now have the Baby Boomers coming out of nowhere. They need senior living facilities to live in. There’s not enough of them. Those are blowing up everywhere. This also means that all these older folks that are moving out of their homes, selling their homes and moving to a senior living facility, they have a lot of junk. Guess what happens? Storage is being built. You saw the shift. You have the kids wanting to go to apartments. The older folks want to do the senior living facilities and then all the junk in the storage units. It fit perfectly.
You throw the other mix. You’ve got the families who haven’t gotten any bumps in pay over the years. Housing has gotten so much expensive. Where are they now? A lot of them are in trailer parks, which several years ago, in my mid-40s, growing up with the stigma on trailer parks is it’s the worst place in the world. Similar like apartments, I rented apartments and stuff. Apartments weren’t nice 25 plus years ago. I built apartments, so trust me, I know. The same thing now, there are some trailer parks that are out there and all brand new.
They’re not terrible.
Those are mobile home parks. It’s totally different. Mobile home guys will say that, “It’s not a trailer park. It’s a mobile home park.”
You’re right. That was the big shift we’ve seen.
It sounds like you’re saying that Quest portfolio, it’s a reflection of the larger market conditions and patterns across real estate, notes and everything, not so much changes to IRAs, legislation or what Quest is doing in particular. You have a microcosm of the larger piece of the pie.
If you have asked me in 2006 to 2007, what was Quest’s biggest asset in our portfolio was real estate, physical real estate? People owning rentals, owning and doing fix and flips. 2008 crash happens, we want notes and be passive. That was our biggest portfolio for the longest time. Now, we’re seeing the syndication side of it. It’s real estate, it change with the market.
I’ll jump back to the $400 million out of $2.5 billion that’s sitting there collecting dust essentially. Is it right around 15% to 20% over the years, or has it gotten a little higher because of COVID?
It’s gotten lower. You have to first understand that there are two sides of that. The number I’m going to say is inflated. When I look at it, it might sell for $30 million, but what happens is all these people are doing these syndications. Remember, we started to see a lot of those happened 2018 timeframe. We’ve already mentioned that a lot of them last about five years. What’s happening is a lot of those are paying off and all these people are getting these big chunks of money. They’re looking to do another investment. It’s usually a temporary hold.
We’re seeing this revolving money coming in from deals paying off, but it’s going right back out for a brand-new investment. At the same time, a lot of people are still stuck in those single-family homes and they don’t want to be. Once they sell them, they get this big lump of cash. They’re scared. Why are they scared? They’re like, “I don’t want to deal with the landlord stuff.” I keep hearing all these syndication things, but how do I know it’s a good one? How do I do the due diligence? How do I know that this is okay to put my money on? Do they sit on it? The worst thing you can do is sit on your money. It loses value every day.
One question I had is, let’s say I had $100,000 in an IRA and I’m like, “I’m investing $100,000 in this syndication so forth,” but all of a sudden you had fees or other things. What if your account is at zero and you put all your money out there, what happens then?
You got to cover the fees from a debit card or credit card. I tell people your fees should never make or break an investment decision. If you want these deducted from your account, and your example you do $100,000, move over $101,000. That extra $1,000 will cover your fees for probably the lifetime of the investment.
I’m curious about those numbers and the shift in syndications. If this new legislation jumping back that passed, where that shift would go and so forth. I know there are other types of funds that I’ve heard could still invest in and there’s always Wall Street. Back to notes and some of the other aspects of notes, that’d be interesting because that would cause a shift in regards to people’s investment strategy. I’m guessing they would probably be almost more money sitting on the sidelines while people try and figure out what they’re going to do. Do you think so?
Potentially, that’s assuming the bill that’s been proposed passes. However, experience tells us it’s not going to pass that way. If we look back in 2018 at the Seller Finance Coalition, if you guys don’t remember what it was, Congress said no long can anyone do any owner financing or seller financing. It’s all taken away. It’s gone. This bill is very extreme.You have to do your fair market value. Click To Tweet
Everyone raises their complaints and address their thing. Congress came back and they addressed the bill and they cut it out, “If you’re going to do seller financing, you can’t charge 18% interest.” They go through this whole spiel of it and everyone almost agreed upon that and the masses keep moving forward. If I think of the bill has been proposed, I said bills 138301 through 138315. That’s a lot of bills in the middle.
One of them, the Peter Thiel one that deals with the RMDs and the $10 million aspect that takes care of the Peter Thiel problem, is the very first one that’s been proposed. This will fix about 97% to 98% of all the problems Congress thinks and is seeing what’s wrong with self-directed IRAs, solo 401(k)s and QRP plans. That means that the rest of those bills I mentioned covers everything else that we’ve talked about. It seems like they’re going to do, “We give you all this stuff.” They look like the good guy. That’s based off experience.
One thing popped in my head that we were talking about that because I know they’re also looking to give the IRS more money and so forth. Have you ever known someone to get audited, or have their IRA audited? What’s the process? What happened? What are some of the penalties? Some people almost joke about it and say, “They’re never going to come after me because of this or that and so forth.” I’m curious what the process is, what could happen and what are some of the risks?
First off, you have to understand between the IRA and the solo 401(k). We’re going to put the solo 401(k) and the QRP plan to the side for a minute and talk about the IRA. The IRS for custodians, it doesn’t matter whether you’re a Vanguard, Fidelity or Charles Schwab, they have reporting requirements.
Depending on what the asset is, the IRS makes you select this IRA holds and it gives a transaction code. There’s one for stocks, one for mutual funds, one for physical real estate, one for gold and silver, one for notes and one for what they call a private entity or syndication. If you guys are used to raising capital now, you know you have to do your Fair Market Value, those FMVs.
I was going to get to that because that’s a point of confusion, for sure. People don’t know how to value their notes or assets. Can you touch on that briefly? Is it the principal balance of my note if I own a whole note?
It’s going to depend. In 2016, you didn’t have to do those evaluations, but in 2017 the IRS said, “You need to start doing these evaluations.” We have all these codes and they added one extra code. The extra code they added was an IRA that owns its LLC where it’s its own manager. That scared a lot of people that have that checkbook control account. Why did they do that is because it seems like they’re starting to get more and more information on self-directed IRAs. If you’ve never been audited, audits run three years behind.
We’re in 2021, so if I was to get audited, I’m not getting an audit in my 2020 taxes. I’m not even being audited for my 2019 taxes. Most likely, I would be being audited for my 2018 taxes. If we follow the timeline of it, we’re right here in 2021, right after they had those new fair market values put in place for 2017, and now we get this new bill that is seemed to be targeting a lot of these fair market value. When people say, “I’ve never been audited. I’m not worried about that stuff.” It’s coming. You don’t see it from the custodian side.
You’ve seen it and you might’ve been annoyed because of those fair market values, because of the extra direction of investments. All that being said, if your IRA owns the property, the syndication and the note directly, you’re a lot less at risk. The reason why the IRA custodian signs all those documents and charges you a fee is we’re putting our name at risk, not the clients. This holds true for anybody. What happens on those checkbook control accounts? That’s not us, that’s you. You have fun.
If I was an IRS agent and you mentioned how they want to bring in more auditors and they want to give the IRS more money to do those types of things, do you target the custodian that puts their $2.5 billion company at risk, or you target the guy that has $1 million that has that checkbook writing ability. Where do you start looking?
One of the things I was curious if you knew a little bit about is I know some investors were doing some stuff in Wayne County, Michigan, which Quest put the brakes on. I was hearing third hand something about the county was putting especially on contract for deeds where you as the note holder also are entitled to the property. They’re going after Quests or something.
There are several counties out there that most custodians won’t let an IRA holder hold specific investments. This is because the county has rules and regulations against trusts, not IRAs. Your IRA is considered a tax-exempt trust. All these rules and bills they have put in place are for trust. This holds true also in Las Vegas. Pretty much what would happen is let’s say that the property taxes weren’t paid, the city can not only go after the IRA holder, but can go after the IRA custodian.
That’s not just property taxes. What if it was an HOA area? If your yard is growing up and now the HOA is charging you fees, they have the right to go after both parties. IRA custodians don’t want you to hold investments there and most of us won’t allow for it. It’s not just Michigan. You might’ve heard about that one, but it’s also in Las Vegas, there are certain counties in California and a couple of counties out there in Wisconsin that do it. It is what it is. That’s why.
Was it Quest IRA? Did you change your name? Is it related to this or not?
No. The trust title and the IRA title don’t mean anything for the clients or you guys. It’s amongst the custodians. It means that you have more than $2 billion in assets. That’s all.
Do you mind touching on the history of Quest real quick before we wrap up? You don’t have to go through every detail of it, but why was Quest started and when was that? Bring us up to where we are now.
It was started as a joke on a drunken night. What’s funny is H. Quincy Long, the gentleman that started Quest to date is probably one of the smartest individuals I’ve ever met. His IQ is up there right around the 170 frame where you no longer can measure it. To put that perspective, Stephen Hawkins was in the 170s.
When he reads Tax Code, he reads it once and memorizes it. If you ever listened to the guy speak, he’ll blow your mind. It’s crazy. One of his best friends was the CEO of Intrust. The CEO called Quincy and said, “We’d love it if you’d start your franchise out there,” and they were doing this over a bottle of wine. They were joking playing chess with each other over the phone. Quincy agreed to it and it costs $10,000 to start a franchise of Intrust. That’s what we did.
When was that? What year?
Not that long ago, $10,000, that’s not a lot of money back then. I’m thinking, “Was it started in the ‘70s?”
It started off as Quincy was going to be the only client. Here comes Nathan, his brother, “I want to be a client with it.” We got real estate investors that want to do it. It blew up. By 2007, we were the number one franchise of Intrust, so much so that we were out producing all of their other franchises combined. Quincy made a decision to buy them out and that’s when we became Quest IRA. We ended up with so much under management, many accounts open up, many clients and employees.
Eventually, what happens is at a custodian level, which is the IRA level, you’re regulated by a company called Mainstar that is overseen by the Department of Labor and IRS. When you break that $2 billion mark, you now are considered a trust company instead of Mainstar overseeing you, which is overseen by the IRS or overseen by the IRS directly. That’s what happened in 2018.
Was there a unique reason why the name Quest was given?
It was Quincy’s quest for wealth. That’s what he says.
What’s his role now?
He is still considered our CEO and our Chairman of the Board. He doesn’t deal as much in the day-to-day operations anymore. You got someone like me that I’ll go do the Congress meetings, so why would he do it? He’s like “I don’t have to do it. I’m not doing it,” and still clip the paycheck.
That’s very interesting as a twenty-year-old company because a lot of times nowadays, people think, “There are so many major players and it’s impossible to start or get up on the ground running. It was a niche market focused on real estate.” You’ve got the equities at a world who are big but they’ve got all these other investments arms where you stuck to real estate.People miss out on investments, deals, and life-changing opportunities because they don't want to get started. Click To Tweet
Within the note space that I’m in and a lot of real estate, Quest is probably the name that rolls off the tongue the most frequently out of all the companies. From figures, probably close to 30% to 40% of the money that I’ve raised has come from IRAs or retirement accounts. Out of that 40%, about 3/4 of it are people from Quest. Derreck, we typically like to ask somebody a Note and Bolt, which is a lesson learned, something to be weary of or something along those lines if you’ve had one for anyone out there. You’ve already given a bunch already through this episode, but we didn’t know if you had another one.
The biggest thing is I always tell people and I like to end on a good note but it’s a scary note. It’s always get started. You have no idea how many times I see people miss out on investments, deals and on a life-changing opportunity because they didn’t want to get started. It doesn’t matter which self-directed custodian that you choose to build with. I’m biased, I work at Quest. You can find a good company that’s in your local area that you like to work with.
Set up a self-directed IRA, and the minute you do a real investment, whether it’s a note, a property or a syndication, the profits and the life-changing aspects of it are insane. I have more letters, calls and all these are gifts from individuals from people telling me, “Thank you.” They’re like, “I wish I would’ve started this sooner.
I wish I would have done a self-directed IRA. I wish I would have known about syndications. I wish I would have known about notes. I wish I would’ve realized I could use that 401(k) that IRA for this stuff.” If there’s anything out there that you don’t want someone to miss out on, it’s to get started. It doesn’t matter where you are.
The stars are never going to align fully and there’s always going to be a reason not to get started, something that’s not perfect. You got to take that first step.
As we’re talking with IRAs, one of the things I’ll mention to people who do raise money from IRAs is a lot of times the investors I find need some assistance dealing with the custodian and need some help with the paperwork and stuff. Make sure that you are willing to work with them on that and give time because you can’t send something at 4:56 PM on and be like, “I need this wired tomorrow.” That’s not going to happen.
I know some will have 24-hour processing, but there’s a lot that from their standpoint, checks and balances of making sure paperwork filled out and the get audited as well and so forth. It’s not something that gets funded like you can run to the bank and wire money. It takes some time, so recognize that and make sure you communicate with the investor and assist them if there are certain forms and things have to get filled out.
There are certain aspects on some of these forms, depending on the type of deal, they may need the information on, or sometimes they may need to know who the servicer is on a certain note and so forth. Be willing but also understand that it’s not something that they can just snap a finger and sit home like some of us can and wire money or ACH money directly from our account. Make sure you allow for that time. One thing I thought was interesting was you mentioned people are paying fees. It sounds like people don’t take advantage of the services.
Derreck mentioned that, it’s like, “We are paying you a fee if I’m a client of yours.” Pick up the phone and call. At least research a few different custodians. I liked your approach, Derreck, that there are other good custodians out there. It’s not like you’re the only game in town. It’s true for the note space that we’re in.
There are many decent servicers. There’s not one best. It’s a friendly space. Pick up the phone and call, talk to Derreck or his staff, picking their brain as far as what is Quest good at and what they are not good at and do that with a couple of other custodians before you make a decision. I’m throwing in a bunch of Notes and Bolts here. You can have more than one custodian technically, right?
You can. Many times, you want to have more than one custodian. It could be for things like levels of asset protection, or it could be different investments. Remember, at Quest, we only deal in real estate. There are companies that only deal in cryptocurrency.
A quick question popped my head. Is there an FDIC limit per account on IRAs or similar?
Sort of, but most of the time the reason people are so concerned of FDIC is you’ve got to understand that only affects your cash balance. Any self-directed custodian should be fully licensed and have full FDIC insurance. That insurance is up to $250,000. If I have $1 million sitting here at Quest, I’m doing something wrong. I should be investing that $1 million. What’s nice is on the self-directed side versus the public side.
Let’s say I had that $1 million in a mutual fund and fidelity goes under because that’s where the mutual fund was held. Only $250,000 of it is insured. However, at Quest, you have $1 million you haven’t invested into a bunch of property, and Quest goes under. You still own the property. It’s not like the property disappeared. It’s not a paper asset. It’s a real, physical and tangible. I can touch, feel and see it. That’s the key there. A lot of times with FDIC insurance, you got to remember it only covers the cash balance. Few people keep cash with those self-directed custodians.
Derreck, it’s been a pleasure. Thank you very much. If people want to reach out to get more information about Quests, where’s the best place for them to go?
Either email me at Info@QuestTrust.com, or you give me a call. It’s 855-FUN-IRAS, which is a non-automated line.
Thank you all for joining us on this episode of the show. As always, go out and do some good deeds.
About Derreck Long
Handle all questions about Self-Directed IRAs and investment options for clients and prospects. Establish business relationships with like-minded companies.