My Self Directed IRA Journey

My Self-Directed IRA Journey

A few years ago, I started to truly see the benefit of investing in syndicated deals. I had invested in quite a few. Most were performing as expected and some were outperforming. I had decided to get serious about allocating a significant portion of my portfolio to these types of deals but with the cash I had available I was pretty limited on doing more deals in the near future. I was listening to as many real estate podcasts as I could find time for and I had heard ‘Self-Directed IRA’s (SDIRA)’ come up a few times. We had a fairly substantial IRA portfolio that was completely allocated to mutual funds, index funds and the like. I had never loved the stock market and definitely did not feel great about having a significant amount of money in the stock market. I am convinced that the stock market is nowhere near as safe of an investment as most tend to believe … but that’s a discussion for a different article.

This was my first step in playing what I now refer to as ‘games with money.’ I don’t mean that in a flippant way. I just think that when you can remove the emotions from how you deal with your finances and treat it like a game that you want to win, it can open up possibilities that you haven’t thought of before.

So I started to dig into what a SDIRA is, who the respected custodians are, how to go about opening up an account, what the fees were, etc. I found this to be a fairly painless process and I quickly had an account with funds that I could deploy to more syndicated deals. It felt like I had created money from nothing.

As a side note … it was interesting to get people’s opinions on putting the vast majority of my retirement portfolio into syndicated deals (or even real estate in general). Most responded with something like, “That’s pretty risky. I would diversify.” It’s interesting that most don’t seem to have an adverse reaction at all to having their entire retirement in a diversified stock portfolio. But the same people generally think it’s pretty crazy to put your entire retirement into a diversified real estate portfolio.

With my dislike/distrust of the stock market, I had a hard time seeing the money in an IRA as ‘real money.’ I viewed it as ‘maybe money.’ Maybe it will be there later. Hopefully it will grow. But maybe it won’t. I didn’t have faith that it would grow on a steady basis. I didn’t love the 4% rule. I much prefer creating cashflow to stock equity. You only truly make money in the stock market when you sell and that can be an emotional rollercoaster. I didn’t have a clue how much would be in it in a few years when I would want to access it to live off of. I know a lot of people who love the stock market and have their entire retirement in it and feel great about it. I’m not saying that they should do anything different. It just wasn’t for me.

BUT NOW!!! Now it felt like real money! This felt completely different. My goal is to create enough passive cashflow to live off of and this would create cashflow. By now being able to put this money into syndicated deals, I felt like I could much better predict and trust the future values of my investments.

Some initial pain points …

Fees

• It can feel like you are getting nickel and dimed to death. Some custodians have less transaction fees, but bigger monthly or annual fees. Some have more transaction fees. In my experience, there isn’t a huge difference in overall fees from one respected custodian to the next. The fees are what they are and they are fairly negligible compared to your overall returns. The more you invest, the more negligible they become.

Paperwork

• I am not a detail guy. I can force myself to grind through the details if I have to, but I hate it. Luckily I married a very detail oriented wife. I powered through the first few deals doing the paperwork myself and sort of making note of what all was required as I went along. After a while, my detail-oriented wife mercifully took over the paperwork and I am forever indebted to her (which I already was, so I came out way ahead on this thing).
• A lot of this paperwork can be viewed as ‘for your own good,’ especially early on. There are certain types of investments that are forbidden by SDIRA’s and much of the paperwork is to allow your custodian to assure that the deal does not violate any of the SDIRA rules.
• I now have a very good understanding of what types of deals are allowed and forbidden and I have converted my accounts to have ‘checkbook control.’ All this means is that I created an LLC within my IRA and I now have complete control of where and when the funds are distributed. There is no more paperwork and the process is much faster. With complete control comes complete responsibility, meaning that the onus is completely on me if I direct those funds to a forbidden type of deal, and the penalties for doing so can be very steep. If you are going to go with checkbook control, just make sure you understand what you can and cannot do.

Some wins …

• I have turned ‘maybe money’ into ‘real money.’
• I have turned stock equity that I had no faith in, into cashflow that I have complete faith in.
• I eliminated the biggest pain point by moving to checkbook control.
• This is money that we have never viewed as money that we would access for a purchase or living off of prior to retirement. As such, this is the easiest money to allow to compound and deals cashflow, refi and sell. The money just stays in the system and continues to snowball.

There are a few things that I didn’t’ touch on here

• Why I don’t mind investing in tax advantaged real estate deals within a tax protected entity (short answer is that I love the returns and trust the investment)
• What’s up with the UBIT tax (it’s not as scary as you might think).
• Who is the best SDIRA custodian? It’s eQRP, who isn’t really a SDIRA custodian, which is part of what makes them the best. (They completely eliminate any UBIT concern)

I will hit on those in more detail in a follow up article. Thank you for taking the time to read this and I hope that it help you in some way. I love to discuss all things syndications, so please don’t hesitate to hit me up if you would like to discuss further.