Diversifying Your Portfolio with a Self-Directed IRA

Tina Colson: Hello. So, again, Tina Colson, Equity Advantage, IRA Advantage. I’m thrilled to be here. And, also, this is just an incredible day for me as I’m starting out my new video career.

But we have a lot of questions for David today and I just wanted to start out by saying, a lot of us have IRA portfolios out there and our markets have not been doing so well all the time. And we get a lot of calls about how to diversify the portfolio so when we hit turbulent times, our portfolios remain at a steady pace.

So, David, what are the options that we can do on the IRA side with IRA Advantage?

David Moore: Sure, happy to answer that. And I think the biggest thing Tina just said is diversification. I think anybody in the financial services world’s going to echo diversification as really a secret to success and keeping you stable through such times. The thing is, typically diversification doesn’t flow into what maybe the Wall Street world considers alternative investments.

And I really think, we’ve talked about it before, but alternative investments, the oldest most time-tested investments are somehow termed alternatives when they should be the real thing. So, what am I talking about? I’m sure everybody out there is heard ads on gold and silver. Anybody staying up late at night or getting up early, you’re going to see that stuff and we hear the radio ad, so on and so forth.

David Moore: But diversification, really the thing about it is that if you look at diversification beyond Wall Street, what else is out there? What can you buy that’s going to be maybe more stable? And a lot of times the things that are looked at as a problem in an investment are actually a solution when we come to turbulent times. So, lack of liquidity, for example. Real estate, one of the big knocks on it from Wall Street’s side is, “Well, gee. It’s not liquid. What happens if you got to do this or that?

Maybe it even comes down to a required minimum district distribution with a retirement account.” But that diversification, getting things out and giving you some stability… As you’ve heard me say before, we don’t sell investments or give investment advice. We really just provide the vehicle to get people where they want to go.

David Moore: And, in times like this, real estate, one of those things that your bank… And even with gold, for example. Another quote unquote “alternative investment.” The problem with gold is it’s got to go up. You’re still betting that it goes up in value. And, you look at those gold quoted stock, not stock price, but the quoted prices on gold, and you go actually try to sell your gold for that price, it’s a different thing.

But real estate, you’re not banking on something going up to make you money. I mean, the income… If we’re talking about pulling money out of our pocket versus using qualified money, there’s two different things we’ve got to look at.

If we look at money out of our pocket, we’re looking at basis and gain. And then we do what? We look at Equity Advantage and 1031 exchanges. But if we look at qualified money, we’re typically not looking at basis, gain. We’re just looking at increased, decreased to values of what’s in there. And really diversification is paramount.

David Moore: And you look at diversification, most people are going to say about 2% of qualified money’s in real estate. That doesn’t really sound like much diversification there. But real estate is great because it doesn’t have to go up. You got somebody… If you’ve got debt on it, which a common misunderstanding with IRAs and real estate investment is, people say, “Well you can you leverage that?” Or a lot of people say, “Well you can’t.” And you can.

It’s just got to be non-recourse IRA, 401k compliant debt. So anytime if you’re looking at leveraging an IRA, 401k, you got to make sure, in a purchase sale agreement if you’re going to go buy it, most purchase sale agreements include a cooperation provision or something, a financial provision in them. But it doesn’t specify that it’s got to be IRA, 401k compliance.

So if we’re going to use that money to go do it, we need to make sure that’s there. But the big thing… I’m a real estate guy. I mean, and I joke that in today’s world I feel like I’m in the job is selling real estate to real estate people sometimes, which is crazy to me. But if you look at your ability to diversify, we can take any IRA, any IRA can be self-directed.

David Moore: We look at 401K plans, we’ve got some restrictions there. We’ve got to look at, if it’s current employer plan, what your age is. If you’re under 59 and a half, happily employed, we’re sort of stuck. If you’re older than that, we can do an in-service distribution, get access to that money.

But really, to diversify, and diversify into other hard assets, I think it’s really a critical thing in hard times. And the lack of liquidity in some of these assets is actually a benefit. It’s paramount to their strength. I mean, if you can’t… What’s the old saying about investments? “Don’t buy or sell on news.” And what’s everyone do today?

So, with the real estate, it’s one of those things where you’re sort of stuck with a little bit. You’ve got to find somebody to buy it if you’re going to get rid of it. But if it’s debt free property, how’s it go away? Even in a bad time, how’s it go away? And it is resilient.

A debt-free piece of property can’t go away for a retirement account unless you just don’t pay the property taxes. And how long does it take for that to go away even in that situation? So the lack of liquidity gives you stability. And in hard times what happens with stability?

David Moore: So I think self-directed accounts are… You’ve heard me say it before, it’s not a legally defined term. It’s just a term that describes an account that allows you to go do what you want to do. And in hard times that lack of liquidity with hard assets can actually give you a lot of stability.

And when you’re looking at the real estate, you’ve got a situation where, if it’s not leveraged, if it’s an income property, somebody’s paying your debts… Or not debt service, paying you in that situation. And it’s helping you get where you want to go. Appreciation is one of those things I was taught never to bank on.

But, at the end of the day, most every investment you’re banking on appreciation. Real estate, you don’t have to, which is just an amazing, amazing thing.

Tina Colson: So real estate is such a great asset in many ways. But I understand that there are other ways that we can use a self directed IRA as well. In, again, a turbulent time, if there’s a business that’s struggling, is there a way that we can gap the bridge with their struggle? Now, if they have a nice IRA portfolio, can we do a self-directed IRA or somehow work in a means to carry their business over until there’s better times ahead?

David Moore: Yes, to both. I’m smiling because I’m thinking about the answer and how long it’s going to take. So, we talked about hard assets, precious metals, tangible assets, real estate, so on and so forth. We didn’t talk about the other piece that really a lot of people do, especially when we’re in hard times or a time where we’re not seeing much money available through traditional channels.

We have many, many people that come to us to make loans, buy notes. And if you look at a lot of different industries right now, a lot of the development work that’s being done is private money these days, just because the red tape that’s been put in place since the last crash, honestly.

And so we look at what people want to do with this money. And making loans… A lot of times, even if you look at like a real estate investment, you look at debt or equity. What do you want to be today? And you can be one or the other with a retirement account.

If you take an IRA and go out and you become the equity in a property and it’s got leverage on it, an IRA’s going to have tax exposure on the income or gain attributable the leverage. If you’re the debt component on it, you don’t have that. You don’t have the tax exposure there. The other thing is, in a hard time, being that debt component is pretty attractive thing, if you’re a first. And I guess my position on that is, never be anything but a first and never for anything more than you’d be happy owning the asset for. That’s what’s really important there.

David Moore: But bottom line, diversify, diversify, diversify. And, really, a self-directed account’s going to allow you to do that. If we’re talking about IRAs, we’re probably going to say… Sort of interesting. We had a conversation about this this morning. But if you look at a retirement account and you look at… If I take a solo 401k or 401k plan to go buy real estate self-direct stuff, the cost of a failure with a 401k plan is very small. It’s just the money involved with the indiscretion.

Where an IRA, you commit a prohibited transaction, you in effect blow up the entire account. So, if we’re talking about diversifying, we’re talking about Wall Street world and the self-directive world. If we’re talking IRAs, I would probably suggest that we keep the Wall Street money with your Wall Street financial advisors.

Keep it there, don’t move it into the new account and just use what you want to use in the self-direct capacity with a new custodian, so on and so forth. If we’re talking 401k plans, there’s no need to break that or segregate that up. We’d move everything in the new plan, then open up the Wall Street account.

David Moore: But I hope this has helped answer some questions. Hopefully, it answered more questions than it had opened up. If you’ve got questions, I’ll put this out. If you’re home these days and you ask questions on stuff, please reach out. Let us know if there’s a question you’ve got. We’ll address it in a video, take care of it.

Tina, thank you for joining us today.

Tina Colson: Thank you.

David Moore: And it’s been great as always. David Moore. Tina Colson. Equity Advantage, 1031exchange.com. IRA Advantage, iraadvantage.com. Thank you.