 Williams and Honolulu. We are here with ThinkTex. The life of the land is in its real estate. Today I have Dan Bellardo from Horizon, oh I'm sorry, New Direction Trust Company. He is going to share with us about a self-directed IRA. Hi Dan, thank you for joining us. Hi Kina, thanks for having me. This is my first time doing this. It's going to be fun. We have a blast and you have some great information for people who might be ready to invest in real estate or have some other investments in different places that maybe you know took a hit over the last few months with COVID and everything that's been going on. So why don't you first of all tell us about yourself? Thanks. I've been in Hawaii originally from California over 20 years and my partners and I have had our business here next month will be 14 years. So it's nice to still be in business and growing the company and every day is a blessing when there's still business to be had. So I'm thankful for that. Our clients are our business and they get to choose what they want for their assets. So it's always a pleasure for me to work with the people that are here because you know I see them at the beach and the grocery store and it's nice. It's nice. Yes, yes that's how it is for me too. They become family because we're in such a small island you connect with them again and I like that. So a self-directed IRA is what we're going to look at today. I'm sure your company does other things also which I want to talk about but what is a self-directed IRA? Well we're going to go through a PowerPoint and I'm going to do it in a timely manner but a self-directed IRA is like any other IRA. It's a retirement account as special tax advantages and the self-direction portion is the client being the self of directing what the assets are. So let's go ahead and start the PowerPoint. New direction. Okay we're going to talk about real estate. Next slide. So we're custodians. We don't give advice and we don't sell any specific investments so we don't promote this over that. People are often used to having go see their guy and their guy gives them advice on what they should invest in. So we're opposite of that. We provide the vessel being the IRA and the clients choose what they want to be in that IRA and the number one asset is real estate. So next slide. So yes we've been over a decade. This is a little old slide because next month it's 14 years. I guess I should probably update that slide. Next slide. Okay so these are the things that we do. We provide the self-directed custodial services. So what does that mean? It means the IRS gives tax advantages to investing in a retirement account but you need to have a custodian to hold the assets. So we hold the assets and the tax advantages come from that. The client directs us what they want to invest in. So let me look at that slide again. There's some other ones in there. All right. So most of the time you're going to go to your guy at whatever brokerage firm that might be or lady not to be sexes and they're going to give you advice. They're going to give you advice on securities, what they sell, mutual funds and stocks. But if you wanted to do something besides that then you need a self-directed account because they're not going to allow you to hold that. So our top assets are real estate and secured notes, things like that. I'm sorry. You got to get right back to that slide though. There's two more on there. The educational model and client relationship. So the educational model is what I'm talking about right now. I'm telling people about self-directed IRAs and of course strong client relationship. This is a very long-term relationship most of the time. Clients are making investments for their retirement but they're most of them still working. So next slide. So this is it's a descriptive term. It's not a legal distinction. It's an IRA. So it's the same as any other IRA that you would get from a bank or any brokerage firm. Next slide. So most people have heard of these different types of accounts. The traditional IRA, a Roth IRA, a SEP, a simple solo case and HSA. So most people have either heard of these or have them and each of these types of accounts have different advantages and can be self-directed into the asset they choose. So we're talking about real estate. So typically a client would be looking for an investment property that either has appreciation or rental income. The property is owned by the retirement account, not them personally. So the money that comes in from rent goes back into their retirement account to give them a better retirement. So that's a good question. Are you able to lend money from your self-directed IRA to somebody who maybe wants to buy a rental or rehab a property? Yes, absolutely. That is our number two asset and those are promissory notes. Promissory notes are lending of money. And we don't write the note, but we do fund the note. So once it comes to my desk, it's already been negotiated between the lender being the IRA holder and the borrower who the lender has chosen to work with. So we're neutral custodians. We don't put people together, but the note has been negotiated by those two entities or people and they're going to say it's this much money, the interest repayment is this much, it's a promissory note for a year or five years or whatever they choose it to be. There are some small stipulations on that, but promissory notes are a very popular asset because they don't have to have the price point of entry that real estate here does. I mean, you can't just have $100,000 IRA and think you're going to go out and buy some real estate in Hawaii. I mean, it's not impossible, but you could certainly loan $100,000 to somebody that might be a flipper doing a rehab or you could co-invest with those people and be attendance and comment to own a percentage of that investment. So even with smaller IRAs, there are ways to invest in a real estate transaction. Okay, so a lot of people who are borrowing money to flip houses pay an interest rate back at a 12 month interest rate. Where does that payment go? Can say I had $100,000 in a self-directed IRA and I loaned it out, can I then keep the interest that I made for myself or does it go back into the IRA? It goes back into the IRA. So the individual retirement account is for investing for your retirement. That's why there's tax advantages. If you want the money from the interest that comes back on that loan, it would be a distribution out of the IRA and at that point it becomes taxable. And if you're under 59 and a half, there's an early distribution penalty that's not going on right now because of the CARES Act. So it is taxable at that point. But yes, you could, but you're not able to take a direct payment from the borrower to you directly because the lender is not you personally. The lender is your IRA. So it's compounding the interest. If you had a 10% interest on that and you got $1,000 back of interest, now you have more money in your IRA to make another investment that you haven't paid taxes on. Now, if you want to take a distribution, it is your money. So you can take your money out, but you haven't paid your taxes on it yet. So at that point you do pay your taxes on it. But it's better to do it when you're retired in a lower tax bracket than during your earning years. So someone would like to start a self-directed RA to lend out of. I'll let you keep going with your presentation. Sure. Let's get back to the next slide. So the IRS obviously rules the IRAs. So they get the question a lot because people haven't heard about investing in real estate with their retirements. So the irs.gov under their FAQs says IRA law does not prohibit investing in real estate, but trustees are not required to offer real estate as an option. That just means that if you're with Fidelity or Schwab or whoever you're with, they don't have to offer that because that's not their business model. It is our business model. So that's why people that want to invest in alternative assets like real estate with their retirements, they need to have a self-directed IRA. Next slide. So this is the timeline. So you don't have any immediate benefit from it because you haven't paid your taxes on it. So when somebody has $100,000 in mutual funds, they don't ever think about having personal benefits from that $100,000. They're not going to go live in the mutual funds on the weekends. But when it's real estate, people see it. It's a physical asset. So when you're making money and you're earning, you're giving your annual contributions to your IRA and then you're investing it. You get the tax deduction for making those contributions, which adjusts your income down and you pay less taxes on it. Then the IRA investment grows, whether it's appreciation or rent or both. And then when you're retired, you start taking money out as distribution. And let's say you had $100,000 IRA and it grew to $500,000 when you're retired. You haven't paid taxes on that money yet. So you pay taxes on it when you take it out. So if you're retired, then you're in a low tax bracket and you have a half a million dollars in an IRA, you can say, I need $50,000 a year from my IRA. And that will be earned income. That will be income you put on your tax form. And that's when you know your tax bracket and how much you would pay on that. So I'm going to back you up a little bit and you talked about, can you live in your investment? We can buy real estate. So I guess that would probably be a big question some of our viewers have. Can I use my self-directed IRA to buy my house that I want to live in? Or does it have to be an investment property? It needs to be an investment property. It needs to be an investment that you're not having personal benefit from. So if you wanted to live in the house that your IRA bought, you couldn't live in that house as long as the IRA owned it. So sometimes clients buy a rental property and they think, okay, we're going to retire in 10 years. So in 10 years, that's going to be where we live. But for the next 10 years, we're going to get 10 years of rental income going back into the IRA. And when they want to retire and live in that house, they take an in-kind distribution. So let's say it was $100,000 and it grew into $500,000 over 10 years, and it's worth $500,000. But that's where they want to live. So they're going to have to pay income tax on that distribution, which is a very large amount. It'll show you had $500,000 of income that year. So you better be all prepared to pay taxes on income of that $500,000. But it is something that people do. But hopefully, all of those years of rental income is going to give you plenty of money to pay the taxes on the property. All right. So what if someone did want to start a self-directed IRA? There are caps on how much new money you can put into your IRA every year. So sometimes people say, I just sold a property. I have an extra $100,000. I want to reinvest it. Can I put it into my IRA? No, you cannot put $100,000 of personal money into an IRA in one year. There are caps, but there's not caps on growth. So however much the investment grows to be, there's not any cap on that. But everybody starts a retirement account sometime. So if it's going to be your $6,000 a year contribution, then you're going to get that deduction when you file your taxes that you made a contribution to your IRA. And that's really nice. And your tax person is probably going to say, oh, good for you. You made this contribution and adjust your income down and maybe put you into a lower tax bracket. Okay. All right. So most of our clients have old 401ks or other IRAs at other locations with other companies. Maybe they had a job that they quit or they got fired or let go in these situations. They can do a rollover. So they don't have to start at square one of starting an IRA with no money at all already and doing a $6,000 a year contribution. They could rollover their 401k or their other IRA. And there are no caps on that. So if you've worked for a company for 20 years and something bad happened and you had to be separated from that company, hopefully your company 401k of 20 years would be a substantial amount of money that could be rolled into a self-directed IRA. And in that situation, hopefully if they want to buy a piece of property, they would have enough money to buy that piece of property rented out and have that rental income going back into their IRA, which obviously gives them a better retirement. So what about we do have a lot of military here on Oahu and I know I have some military viewers and they get a TSP account. Right. Is that something they can also rollover into a self-directed IRA? It is. It is when they have access to their TSP funds. So TSP, the Thrift Savings Plan is kind of strict. They have their rules, but it's a government plan. So yes, when you retire or you leave the military and you have access to your TSP, that is the time to roll it in to an IRA. And if you want to invest it in real estate, then you need a self-directed IRA to do that. Okay. So what are some other benefits of a self-directed IRA? You know what you're investing in and you're not investing in anything that you don't want to invest in. So sometimes people own mutual funds that have companies, mutual funds have many companies that make up the fund. Maybe there's something in there that they don't agree with politically or in other ways. They may not like gun manufacturers and their mutual fund holds stock of a gun company. So with a self-directed account, you know you've made the decision, you've done the due diligence, and whether you're lending money as a promissory note or buying a piece of property, you've made that decision and that's why our clients are typically very happy with their results because they've done the due diligence. They found that property. They got a good price for it. It has a tenant paying rent. It is appreciating. So if you were to sell the property in your IRA, I mean if you sold the property individually, you would have capital gains or you need to do a 1031 exchange so you don't have that. With the IRA, you can buy and sell it whenever you choose. You bought a property today at $100,000 and somebody comes by in a month and says, I'll pay $150 for that. You could sell that property, then $150 would go back into the IRA. Now you have $150,000 in there that you just used to have $100 and you could make a reinvestment into something else. So that is the compounding of interest. You haven't paid the taxes on that. So you're getting all of those benefits, which is really big. Yeah. So you're saying we just did a show. Our last show was doing the Delaware statutory trust, which was a way to sell property and then invest the funds into a trust who then invested in real estate for you. So it's a 1031 exchange without the real estate. So with a self-directed IRA, I can sell a piece of property that I've purchased with my self-directed IRA and avoid the capital gains taxes. That's correct. Wow. Okay. There's no timeline if people under that situation personally of the 1031 exchange have some stress on the timeline ticking. So as it gets closer, they need to find another investment quick with the self-directed IRA. In that example, if they bought it for $100,000, they sold it for $150,000. Now they have $150,000 cash in their IRA. They're not under any obligation or timeline to make their next investment. So if it takes them six months to find the next investment, there's not a problem because the cash is FDIC insured in the IRA. It's not growing because it's not owning an asset at the time, but you're also not losing anything. So that's nice when you have somebody that wants to buy something and they don't know what their next investment's going to be yet. What do I do now? Well, you go find that next investment, whether it happens today or a year from today, it's really up to you. So yeah, that is a great option. And again, I work with a lot of investors, as most people know. So I wonder if it's possible for an investor to just continue to use funds in a self-directed IRA to do their fix and flips, as long as they're okay with the profits going back in to the self-directed IRA. Is that something... I know you have experience with investors also. Yes, and it can be. Typically when it's a promissory note, that's when they're funding the flip. So the flipper needs money to fix up the property. They had enough to buy the house, but they don't have enough to fix it. And so often the self-directed IRA asset is the promissory note for that. If they themselves are the flippers, they can't have their IRA be part of that project specifically. So that would have the personal benefit. You would have your IRA would be helping you with your personal investment on this flip, but certainly it can be other investors, other flippers, for example. So did we talk about are there risks with the self-directed IRA? There are risks, but I find that since the clients have done their due diligence, they know often my clients have personal rental properties and understand how that investment works. They bought a house, there's a tenant, they pay the bills, what's left over comes back to them. That goes back to their personal taxes that year. It's the same relationship except it's with retirement money. So in this time that we're living in, it is a little difficult as far as not having a tenant, the tenant not paying rent, those are situations that whether it's in an IRA or not in an IRA, owner landlords are facing these types of situations. So I would say that it's a new type of a risk. It's not something that has happened previously, but it is something. What if AOAO, your monthly maintenance fee is $500 and the tenant's not paying the rent? Well, you can make annual contributions to your IRA to cover that up to $7,000, for example. So there are limitations on that. Okay. So while we're talking about the risk and now the way things are today, we know there are some people out there who have their investments in stocks and in mutual funds and they lost money. So what would in your opinion be the safer investment, a self-directed IRA or if you're still leaving your money in the stock market and mutual funds? Well, because I run a company that's self-directed IRAs, I would have to say self-directed IRAs, but the control factor, you have control over the asset. You cannot make those mutual funds go up by picking up a hammer. So you can buy and sell and hold. Those are your decisions, but when you have a solid asset like real estate, chances are it's not going to ever be worth zero. It may not grow as fast as it used to, but if there's no tenant in there for a month, you haven't really lost anything in the big picture. There's still a house sitting there. When mutual funds, when there's a roller coaster of the market, you can't make the market go where you want to. But when it comes to a self-directed IRA, you do have control over that asset. All right, so let's go back to picking up a hammer because I do want to be clear with our viewers. You could buy a property that needs work with your self-directed IRA, and our very first show is actually on a burr, a buy, a rehab, a rent, and a refinance. So could you use your own self-directed IRA to buy a house that needs work, put the rehab into it, rent it out, and refinance it, and still using your self-directed IRA? Well, there's typically not financing for it. It's typically a cash deal. So there's not a reason to refinance later. But yes, the IRA can buy the property, and you as the IRA owner are making all the decisions. Do you want to paint the room, not paint the room, redo the lawn? But the flip, the improvements that money needs to come from the IRA as well, or the IRA could borrow that money. Okay. It's the benefits back. But you personally are not able to put in the sweat equity to improve the assets. You can't pick up the hammer, but you can hire the guy that picks up the hammer. And that guy needs to be paid by the IRA, not you personally. So people often are like, well, I had $100,000. I bought a house for $100,000. How do I do the improvements? Well, is there a tenant paying rent? If there is, wait for the rent to build up a bit and then do an improvement. Can you make your annual contributions to add new money to the IRA? Yes, you can. Add some money. You were going to do it personally, and it was going to be a $7,000 improvement. Well, make a contribution. Or have the rent build up. So it is possible. And most people, when they buy real estate, there's something needs to be done. So what other, do you do other things besides self-directed IRAs at your company? We handle just the self-directed IRAs. But as far as the assets go, there's many, many different assets. So there's real estate, precious metals, promissory notes, private stock. If you want to buy some non-publicly traded stock of a company, you need a self-directed IRA to do that in a retirement account. Timber, all kinds of, the clients are in control over the assets. So when they come to me, sometimes I say to myself, well, that's kind of a crazy investment, but they've already done their due diligence. And I'm just now hearing about it, and it's legal to do. And if they are the self, and that's what they want to invest in, that's what we're going to do for them. So, yeah, so right here on a side note, I am a real estate proponent. Robert Kiyosaki is saying gold, silver. Are you seeing an increase in investments in that? Not with the Hawaii clients. I say more on our mainland clients, but the clients here in Hawaii really love real estate, and that is our primary asset. And yes, gold is very popular, but when it's owned in an IRA, you don't get to keep the gold in your house or your safety deposit box. It has to be in a depository on the mainland, and we have a certificate saying there's bars of gold in that depository owned by your IRA. That might still be a good investment, but it takes the fun away of owning precious metals and touching your gold. All right. Well, thank you so much. This was so great information. And if anyone wants to get ahold of you to learn more about this, they can contact me, and they can also contact you. We put up the last slide for just a moment. There's my contact information. So thank you very much, Kina, for having me. It's just really a fun afternoon. Yes. Thank you so much for some great information. Yes. All right. Thank you so much for joining us on The Life of the Land is in its real estate. I will be back in two weeks, and we will have a guest who's going to help those of you who think you cannot afford to buy a house. She is from 101 Financial, and she's going to teach us how to, one, pay off your house quickly if you own one, or how to save to help you buy a house. So I will see you all in two weeks. Again, thank you, Think Tech Hawaii for having us, and it was great to see everyone today. Thank you. Thanks, Dan.