04 Jun Ep. 16: Patrick Hagen of The Entrust Group Talks Self Directed IRAs
In this episode, Adam invites his father and personal financial advisor, realtor Larry Kruse, on to help interview Patrick Hagen of The Entrust Group about self-directed IRAs.
Email questions to Podcast @HermannLondon.com
0:42-Adam gives updates on a wholesale deal, a condo he bid on, and welcomes a new realtor
2:00-Adam talks about the new videos on the Youtube channel
2:20-Inventory is low because everything keeps selling. Call Hermann London if you have a home to sell. 3142105115
2:48-Adam introduces his father, Larry Kruse, and Patrick Hagen of The Entrust Group
3:38-Patrick Hagen explains what The Entrust group does
5:22-Is a SEP the same as a self-directed IRA
6:13-Do people start with cash or move money between IRAs
7:48-Is moving money a tax event
9:45-Is this more attractive to people under 70 and a half years old
10:44-What is required minimum distribution (RMD)
11:39-When ROTH IRA and self-directed IRAs are taxed and their history
15:51-The Entrust Group are “educated order takers”, not financial advisors.
17:15-If someone loans money from the IRA for an investment, does all the money need to be returned to the IRA 20:15-Different ways to structure note investments
22:00-IRS has rules about investing with direct lineal family members and self-dealing
23:53-Loaning money out of the self-directed IRA and not being paid back (secured vs. unsecured notes)
26:48-Who writes the note
27:46-F.A.Q.s and THE BASICS about The Entrust Group
28:25-Not allowed to be compensated for providing goods and services within the IRA
39.46-How does The Entrust Group make money
41:39 Contact Patrick Hagen at 6366811312 or email PHagen@TheEntrustGroup.com
Adam-Welcome to The St. Louis Realtor Podcast. Today is episode 16 and we are excited because we have a special topic today which is going to be all about self-directed IRAs. We will jump into that in a minute. I wanted to give a couple updates on a few things we have going on. I’m working on a wholesale deal. My first wholesale deal. We’ve had Darren Hoefgen and Jeff Merkel on in the past and they kind of got me excited about wholesale deals so I’ve got one that I’ve got under contract. I guess I won’t reveal numbers on this one until the deal is closed but I’ve got it under contract and I’ve got someone who is buying it from me the very same day for a couple thousand dollars more. I’m very excited about that and I’ll talk more about it once it’s closed. I talk a lot about buying duplexes and the numbers for that and we are actually going to have a show in the future where I go into more detail the numbers for cashflowing property. I was excited that I found a duplex for sale. Unfortunately they were asking $135,000 and I offered $85,000 so I don’t know if I’m going to get the deal or not. I’m actually offering a fair price. They were offering an unfair price. I’ll keep you in the loop if that deal goes on or other duplexes and multi-family properties we look to buy. We’re excited. I met with another investor/realtor today that is considering joining Hermann London. We always like to get a good mix of different realtors working here with different skill sets and parts of town they cover and types of deals they are experts in. We are excited about that new realtor. Everyone knows our producer, Joey Vosevich, who is in the studio with us, but I wanted to encourage you to check out some of the great videos that Joey has been making on our Youtube channel. He made one about Lindenwood Park, we’ve started a whole new frequently asked questions video segment, and check out some of those videos. Lastly, I wanted to mention that it is kind of a weird thing going on where most of our listings are selling. Typically as realtors we like to have an inventory of listings and our inventory is dwindling because everyone is buying them off. If you or someone you know wants to sell their property, please have them give me a call at 3142105115. Of course if you know someone who wants to buy we would them to call us but right now we are definitely wanting more listings because they are all selling. Thanks for that but I’m going to jump into it now. We have two very special guests in our studios today. One is my father, Larry Kruse. The second is Patrick Hagen with The Entrust Group. I just wanted to introduce Larry. Hi, Larry. Larry-Good afternoon, Adam. Adam-Or, dad or whatever I call. The reason I wanted you to be on the show today is you are what I consider to be my financial adviser and obviously you are very financially savvy with your background in accounting. Many people might know now you are a realtor. You are the one that kind of introduced me to self-directed IRAs so I wanted you to be on the show to help us ask lots of informative and interesting questions of Patrcik Hagen. So, Patrick, how are you? Patrick-I’m doing great. Thanks for having me. Adam-Thanks for coming on the show today. So you work for a company called The Entrust Group? Patrick-I do. I’ve been with them for about 11 years. Adam-What is The Entrust Group? Patrick-We are niche business in the retirement plan space where we specialize in what’s called self-directed retirement plans. We hold assets that other companies that do IRAs and 401k’s that generally won’t hold. Mainly things like real-estate, private placement, private notes, and precious metals. These are things that the IRS deems allowable but generally can’t do with your standard bank or brokerage company. It’s a niche that we’ve been doing for about 33 years. Adam-I think that answered all my questions. Basically you are saying the typical IRA is people just putting money into it but you guys do a different kind of IRA where it could be things that have value but are not just cash. Patrick-Yeah. An IRA is an IRA whether is is with us, Morgan Stanley, SmithBarney, Merrill Lynch, or whomever it happens to be with. The difference with us is we give our clients the ability to self-direct their own money so instead of taking their money and investing it for them and putting it into some products that we feel they should invest in, we basically say you can do whatever the IRS allows and we will facilitate it. Typically people come to us when they already know what they want to do and typically that is on an alternative investment like a property or a duplex or something like that and we provide custodianship to that asset. It is still an IRA. It is still governed by the same rules that an IRA provider abides by, but the difference is the flexibility of the institution. When you look at the limitations that most people have, it is not IRS limitations, it is institutional limitations. The institution that they have their retirement plan with won’t allow them to buy real-estate so you just need to find an institution that will allow it and that’s what we’ve been doing for about 33 years. Adam-Okay. I guess a lot of people don’t necessarily know what this is. Even I’ve gotten a little confused about it. I talked to other financial planners and when I try to talk to them about it I keep calling it a SEP. That’s totally different, right? Patrick-A SEP is a type of IRA. Self-directed is a descriptive term. Any type of IRA can be self-directed. It could be a traditional, ROTH, SEP, or simple. Those are all IRA types. You being self-employed, you probably have a SEP IRA. Somebody who works for a company may have a traditional or ROTH IRA. The self-directed piece is more describing the way the account is administered and less about the type of account. You could have a SEP with a brokerage firm or with us. The difference with us is you can buy physical property as opposed to your standard stocks, bonds, and mutual funds. Adam-Do people start with cash and put it into the investment with you and then take the cash out? Patrick-Let me give you a scenario on how this potentially would work. Let’s say you have an investor that has $200,000 in an IRA with a brokerage firm and they find that $85,000 duplex they want to purchase, they would set up an account with us, do an IRA to IRA transfer of the $85,000… Adam-Transfer it away from their Edward Jones account? Patrick-Exactly. That’s just done with some paperwork that they submit to us. We sign it and send it to the provider, and within a couple of days they will send the money to us. Now the account with us has cash and the client goes and directs us to get involved in the facilitation of that purchase for their IRA. The client determines what they buy, pay, who they work with, who is closing it, and all of that is determined by the client. We basically just sign off on behalf of the IRA. We’re the required middle man in the equation. The term for that is either administrator or custodian. Someone has to custody the asset. In our case, we are doing that without telling the client what to do with their money. Adam-If this guy that we are talking about has $200,000 cash, then would he put it into the self-directed IRA and then buy real-estate or is it more directed towards people who have the $200,000 ROTH IRA already that are switching it to a self-directed IRA? Patrick-Most of our clients have the existing retirement plan money. They have money that they’ve built over the years either through a job with a 401k or they’ve been tucking away money in an IRA or a ROTH or a SEP and they move a portion of that over to us? Larry-Is that a tax event when they move it? Patrick-It is not a tax event. It is no different than moving money from Fidelity to Vanguard. It is just moving from IRA to IRA. You are not limited to the number of times you can do it and it is not reportable or taxable. You are just shifting money from company A to B. In this case, company B is us and we hold real-estate whereas company A probably won’t. Adam-When you say a tax event do you mean a taxable event? Larry-Right. If you move that $100,000 over or pull it out from that one IRA to this self-directed IRA, does it become taxable? Patrick-The key there, and I think the easiest way to explain it is, you are still working under the umbrella of the IRA. Everything is transpiring under the IRA. It would only be taxable if you took the money out of the IRA, which is not what we are talking about here. If you want to pull the money out of the IRA and buy real-estate, then you are looking at a taxable event, but if you keep it in the IRA and you shift it from company A and company B, with company B being Entrust, then you can hold that real-estate and keep it all tax differed. Functionally, it is no different than buying a stock within an IRA. It is just an alternative asset class. Adam-It makes sense that they don’t want to be taxed on it because that’s the whole reason they put it in their IRA in the first place, right? Patrick-The whole point of retirement plan investing is you can make investments tax deferred, or in some cases with a ROTH IRA, tax free. That is going to be true whether you are buying mutual funds or real-estate. The difference here with us is a lot of our clients know and understand real-estate. They believe in real-estate. They like the fact that it is not tied to the stock market, and they like the fact that they can see it. You know that duplex you were talking about? You can drive by it and kick the side of the building if you want to. You can physically see it. With a mutual fund, there is a lot of stuff wrapped up in there and you get someone on Wall Street managing it. Some people like that and understand that world. Some people don’t. The clients that come to Entrust typically already know real-estate, they just need someone to partner with to do it through their IRA. Larry-The other thing that I was wondering about is would this be the most attractive to someone who is under that 70.5 year threshold because at 70.5 you have to take a portion of your IRA out? Patrick-A couple of points on that; generally people get around that 70.5 age, they are looking for a little more liquidity so tying it up in a brick and mortar property may not be the best thing for their planning. There is nothing wrong with buying real-estate in an IRA for a recipient to have, you just have to plan ahead. You need to make sure you have enough liquidity somewhere to take those RMD requirements. It could be that a client has a $500,000 in a brokerage account and has $50,000 with us. In that case, they can leave that $50,000 intact and take their distribution from the other account. I suppose if you are approaching 70.5 and you are looking to put all of your money into a self-directed IRA, it is definitely a good idea to leave some money on the sidelines because if you don’t take the RMD, you get taxed pretty heavily on that and you don’t want to get into that. Adam-What’s RMD? Patrick-Required minimum distribution. Essentially, with a pre-tax IRA, with anything other than a ROTH, the IRS picks an arbitrary age when you have to start pulling money out, and that age is 70.5. Basically they say this is all tax-deferred and it is growing tax-deferred your entire life. At 70.5 we want you to start taking the money out because when you take the money that is when you start paying Uncle Sam the tax bills. Adam-Even if you are 70 years old? Patrick-At any age when you take money out you are going to pay taxes, unless it’s a ROTH. The ROTH IRA which came out in 1998 is the kind of inverse of a traditional IRA. With a ROTH IRA you are looking at post-tax dollars that go in and it grows tax-free. With a ROTH you don’t have to take RMDs and you don’t have to pay taxes on the growth of that investment. You can think of it as a traditional being tax-deferred, and with a ROTH, if it is qualified, it will be tax-free growth. Adam-So if I, as a realtor, sell a house and I make $1,000, if I wanted to put it into a ROTH, I would pay the government probably $300 and I would put $700 into my ROTH? Patrick-Yes, With a ROTH IRA, you are capped out at $5,500 a year. If you are over 50 you can put in an additional $1,000. That’s money that is after tax. That is net take home pay that you are putting into your ROTH IRA. If I wanted to put $5,000 to my ROTH, it doesn’t come out before taxes, it comes out after taxes. I get paid my salary that’s already taxed and then I put that money into a ROTH IRA. Once it is in there, it grows tax-free and it is taken out tax-free as long as I’m 59.5 when I pull the money out. Adam-But if I made that same $1,000, I could give Entrust that money and do whatever I want with it, buy real-estate and all that stuff, and then when I eventually want to take money out of my self-directed IRA, that’s when I pay taxes on that? Patrick-Correct. If it is a traditional account, that’s kind of the standard model. Back in 1974, when they created these IRAs, the idea was, well first off, they were trying to supplement pensions because they realized companies were moving away from pensions, so they came up with IRAs which was an incentive for people to set aside money for themselves to live off of and so they came some tax advantages. When you put the money in it grows tax-deferred. The thought being that when you retire you are in a lower tax bracket. You pull the money out and it’s cheaper to pay the tax bill there. The ROTH came out in 1998 and it was kind of a game changer. It is literally one of the only ways to buy real-estate tax-free. If you are buying a property through a ROTH IRA and you have a return on that investment, as long as that money is flowing back to the ROTH, you are never going to pay taxes on that. Adam-You can have a self-directed ROTH? Patrick-Absolutely. A good chunk of our clients have ROTH IRAs. If you have a rental property that makes $1,000 a month, that income is $12,000 a year. If you did it outside of the IRA it would be taxable. If you did it in a traditional IRA it would be deferred. In a ROTH IRA that’s $12,000 of free income that is coming into your IRA. Adam-There’s not a limit to what you can put in your ROTH? Patrick-There’s a limit to what you can add to it. There is not a limit to what you can do with it once it is in there. Adam-So you are saying that’s money that is already in there? Patrick-It’s already in there, right. You could have millions in your IRA if you have grown that over time. You are only allowed to add $5,500 per year, but you can grow what’s in there as much as you can. If you make an investment that grows $12,000 a year in income, that’s fine. That can flow back to the IRA. It’s just like if you bought a stock or index fund in 2009 and sold it today, you would make money. That’s fine to make money within an IRA. You are just capped at what you can add to it each year. Adam-And you have to keep all that money in the IRA? Patrick-You will want to keep it all in the IRA. Once you reach 59.5, if you want to pull it out you can without paying a penalty but generally speaking, people invest in their IRA to continue investing in their IRA. Whether that is to continue investing in real-estate and do multiple deals or whether one or two deals with us and get it back to their brokerage account and put it back in the market, but yeah, you generally keep it under that umbrella of the IRA until you need the money at some later point in life. Larry-What percentage of them are ROTHs? Patrick-I’m kind of pulling this out my ears here, but I’d say somewhere in the range of 40% of our accounts are ROTHs and that’s increasing. What really impacted that is in 2010 they lifted the income limit for ROTH conversions so prior to 2010, if you made more than $100,000 you weren’t eligible to turn a traditional into a ROTH. It is called a conversion. They lifted that in 2010 so anyone can convert regardless of their income so we saw a lot people who historically make a lot of money that wanted to be in a ROTH that couldn’t because of the income limitations, get into a ROTH IRA. We’ve seen a real influx of ROTH accounts and I’d say about 40% of our account holders are ROTH. The other 60% make up some type of pre-tax account, like a traditional or a SEP or some kind of qualified money. Adam-If I called you and I said I wanted to invest $10,000 with you per year, would you say let’s put the first $5,500 into a ROTH and the rest into something else? Patrick-We’re not a financial advisory firm. We are not a fiduciary in the relationship. What I joking say is we are educated order takers. You are going to tell us what to do and we are going to do what you tell us to do because you told us to do it. If you asked me what the contribution limit is and how that works, I’d be more than happy to answer any questions. If you called me up and asked what you should do with your money or how much should you contribute or what chunk of money should I move over, I’d tell you to call somebody else. Frankly, it very rarely happens, but by the time they get to us they already know what they want to do. Adam-You deal with informed investors. Patrick-My average prospect call is from someone who says they heard about what we do. They love the idea of buying real-estate with an IRA. Their money is out at company A and they want to move it over to us to do this deal. They’ve already found the deal or they’ve got their eye on the deal. It’s a lot more transactional than sitting down and talking about a five year plan and putting together thoughts. It’s more about how can we get from where you are now to where you want to be, which is owning and holding real-estate within your IRA. Adam-I have a question from my friend Mark who told me to ask you this. I have to give a little pre-story first. One of our realtors, Darren Hoefgen, borrows money from people and uses their money to purchase real-estate and then he gives them a return. When I last met with Darren, he used to look for the rich guy with $1,000,000 laying around to loan him some money but now he is looking for people who have money in their IRAs. I guess they could put it in their self-directed IRAs to loan him money and then he could use that money to buy real-estate and then he’ll give them a return. For this question let’s use the example of 10%. If someone loans me money from their self-directed IRA and I pay them a 10% return, can they keep that 10% return and then they have to give the money that they loaned me back to their IRA or do they have to put all the money back into the IRA? Patrick-Everything is going to flow constructively in and out of the IRA so if that IRA comes on board with us and they loan money to you, first off, that is definitely something that we see quite a bit. We see people doing hard money loans, private placement, real-estate, and all kinds of different alternatives. Let’s say the client comes on board, they lend you money at 10%, and you make the payment. The payment is going to go back to their retirement fund because the retirement plan owns that known investment. Just like if you bought a stock and the stock paid dividends, that same principle is going to apply. It is all going to flow in and out of the retirement plan, which is what the client wants because the return is going to be tax-deferred, or if it is owned by a ROTH account, tax-free as opposed to taxable to the individual. Adam-Okay. I like how you said it. Basically the retirement account owns that money that they are lending me so that retirement account benefits from the interest. Patrick-When you look at the actual note document in this hypothetical that you put together, in the note, the lender would be the IRA. So if it is John Smith lending you money, it would be The Entrust Group for the benefit of John Smith IRA loaning you money at 10% and you are making payments back to John Smith IRA. Larry-In this particular case in which you are holding John Smith’s account, he gave the investor $100,000 and they earned 10%, John Smith could leave that $110,000 with you, correct? Then you could do another deal and another deal with that money? Patrick- It all depends on the structure of the note and we leave that totally up to the clients. Larry-The money doesn’t have to go back to its traditional investor? Adam-It could. I could pay him back and he could give me the same money right back. Are you saying that it doesn’t have to? Patrick-It depends on the note. There are different ways to structure note investments. Sometimes I give you $100,000 and in a year you give me back $110,000 and then we do a totally separate deal. Sometimes you see rolling notes where they build in language that says basically this can continue to earn interest without being paid back, so I loan you $100,000, I’m continuing to earn 10% but not necessarily paying it back in increments of dollars. From our perspective, because we are not advisers, we don’t tell people how to structure their note. If a client comes on board with us and says they want to loan out money at 10%, here’s the note document, fund this investment, we are going to fund the investment. If it was 5% or 10% or secured or unsecured or rolling interest or whether it is going to pay out monthly, that is all determined between the lender and the investor. We are just plugging in for the IRA side of the equation. Larry-I remember from when we talked before in you class, you mentioned that the rules are pretty severe for someone self-directing their own IRA as far as how their accounting has to be and who can live there and all that stuff. When an investor gives $100,000 and he earns 10%, is the accounting for all that per IRS rules simple? Patrick-The thing the IRS is primarily concerned about is that they make rules that basically say you can not invest with direct lineal family members. If it is your IRA you wouldn’t be able to lend money to your son. They don’t want you to do what is called self-dealing which is doing a transaction from your IRA with either yourself, kids, parents, or spouse. Those people are called disqualified persons. Basically you are doing business with unrelated people, but the nature of what you do, as long as you are not buying collectibles or life insurance, you can do whatever you want. I’ve had people buy houses, lend money, buy stock in private companies, and oil & gas investments. We’ve seen all kinds of unique things that people do with their money. As long as it is not a collectible or life insurance product, it is technically doable. That family member thing is probably the biggest thing to be aware of. Adam-They want it to be an arm’s length transaction, basically. Patrick-Essentially, yeah. I don’t want to think on behalf of the IRS but I think their thought process there is they are giving you special tax-deferred treatment on that retirement plan. They don’t want you to double dip. If you bought a property in Columbia but rented it to your daughter, now you are getting the benefit of using your IRA money but also giving your daughter a free place to live. That would be the type of thing they would want to avoid. The thought being that if you are dealing with unrelated people, supply and demand kind of nets out that you are going to do what’s best for you and you are going to do what’s best for me and it is just a cleaner way to do a transaction. I assume that’s why the rules are the way they are. That’s totally secondary to the fact that the rules are what they are. You are talking about IRS code drafted 30 years ago. Adam-If I wanted to loan money out of my self-directed IRA and I loan it out at 10% or whatever the note says and they buy a piece of property from it with the money and for whatever reason they don’t pay me back, is that when secured versus unsecured come into play? Patrick-Right. When you draft a note, just like with any note, it is either going to be a promissory note secured by a promise to repay, or it is going to be secured by something like a mortgage, a car, or deed to trust. The difference being that when things go south on a promissory note, you are left with a piece of paper that says I promise to pay you back. With the secured note, just like a bank, you could foreclose on a property so you would have a deed to trust or a mortgage on that property and if you needed to you could go take back your collateral. Adam-And from your experience what do you see more, secured or unsecured? Patrick-Secured, primarily, because an unsecured note by nature is a little bit riskier. I will tell you this, the people that do unsecured lending get a better return. Risk and reward. If you are doing a secured real-estate note, the borrower is going to realize that they gave a secured interest in that property and potentially pay you a little bit less of a return. An unsecured note is kind of like a credit card versus a mortgage. A mortgage is like 4%. My credit card is like 10% because it is riskier because there is no house backing up the credit card. Same type of thing. We have seen everything. I see some deals that look like really good deals. I see some deals that maybe I don’t understand why they are doing it, but that’s part of the nature of self-directed. Adam-Dad, when you were talking about having a rolling loan versus a loan that is paid back each time, maybe that’s why they would give back the return on each loan so that it would be secured on one piece of property versus counting on you being a great investor. It sounds like that’s what more people are doing. Patrick-Yeah. Most of our clients are lending money or doing it secured by real-estate because they are working like a bank. If you walk into a bank and ask to borrow $100,000, they say great, what’s the collateral that you are going to pledge. Most of our clients that lend through an IRA look at it the same way. They are underwriting what the collateral is, the loan value based on that collateral, the rate of return they are going to get, and potentially how credit worthy they think the borrower is. It essentially is hard money lending. Private lending may be a better way to put it but just running it through the retirement plan instead of doing it with personal cash. Adam-Who writes the note? Patrick-We don’t do it because as a self-directed provider we can’t really provide the substance of the investment. We’ve got to basically take what the client gives us and facilitate it. We look at it to make sure it looks good. Adam-You don’t want to be involved. Patrick-We don’t. It creates a liability for us to be honest with you because if we were to show someone a sample note document and then the deal falls apart and there is a hole in that note document for whatever reason, that could create a liability for us. Most of our clients work with a title company or an attorney to draft a note. I seen DIY people do it themselves and draft it up on a piece of paper. Whatever you and the borrower are comfortable with we can facilitate. The good notes are really the ones that are attorney or title company prepared because they are a little more inline with what you would see a bank provide. Adam-I want to tell all the listeners that you provided us with an FAQ document and and understanding self-directed IRAs document that we are going to put on our website where we post the podcast. I was reading something in your FAQ section, and as a guy who owns a property management company, I like, but as a guy who thinks they can do their own property management, I don’t necessarily like, what is up with not being able to manage your own property if you buy real-estate through your self-directed IRA? Patrick-You don’t want to be compensated for doing anything within the IRA. I like to use the term oversee. It is perfectly fine to oversee the investments held in the IRA. Where we draw the line on management is write me a check, I’ll put it in my management bank account, and I’ll send the money back to Entrust. That’s a little bit too close because then you are co-mingling funds. The other side of it is if you read the code in detail it says you should not provide goods, services, or facilities between yourself and your retirement plan. So what is that? Whatever the IRS deems it to mean. It could be argues that being a true property manager on behalf of the property that you IRA owns is providing a service to the retirement plan which could be a problem. Standing behind the painter and telling him to paint the wall blue is fine. Negotiating the rent with a tenant and picking the tenant and booting them or whatever the situation may be, it’s all going to fall on your shoulders. It’s your self-directed IRA. You control everything. You just want to make sure that the money and the paperwork flows constructively through the retirement plan. The reason I put that in the FAQ is we don’t want the people thinking that the tenant can write them a check, they put it in their bank account, and then them send us a check and say that’s from the rent. That would be too close. We need constructive receipt of the money and how it flows. Adam-Okay. If we were the property manager, would we write it directly to Entrust for your client? Patrick-I would say it all comes down to if you own or control Hermann London, then I would say by definition Hermann London is going to be a disqualified entity in the same way that you, your kids, parents, or spouse are going to be disqualified. You want to be careful about having transactions that are going to be involved with your IRA and Hermann London. Adam-I guess I meant if I was managing a property for some random person. Patrick-Right. He owns property and hires you as the management company. That rent check from the tenant goes to you, you are going to have your pool of money, and then when you settle up, it is going back to his IRA at Entrust. You are going to send us a check at the end of the month or quarter and say here is the excess gain that we have. Adam-That makes more sense. Larry-I think the whole issue to me is that it is pretty robust from the standpoint that you can be involved and stand back as an investor and remove money from the IRA and be actively involved with the rehabbing. It can get get complicated or straight forward. Patrick-If you hire an unrelated third party property management company, that’s a nice clear line in the sand between you and the deal. You hire Hermann London and they do all the stuff. That’s pretty clear. Some of our clients want to do it themselves but they’ve got to be careful about what they are physically doing. We will give guidance but at the end of the day it all falls back to the code and it was drafted in 1974 and it hasn’t changed in 30 something years. When I give presentations for the real estate investments clubs, they always want me to give a clear line in the sand. Can they paint the wall? Can I re-do the garden? There is no line in the sand. If the IRS audits you, it’s whatever they feel a good service or facility is. Two extreme examples to kind of drive home the point. Let’s say you buy a property that has a beat up roof, unfenced yard, and unfinished basement, you would be ill advised to fix all that stuff personally because that is very definitely a service you are providing to the IRA. Now if you show up on a Tuesday morning to pick up the rent check and you see a bag of trash in the yard and you throw it in the dumpster, that’s not really providing a service, that’s just keeping your neighbors happy. If you don’t pick it up, who will. The best analogy I’ve heard from my old boss in Colorado is, you can stand behind the guy that’s doing the work, point your finger and tell him what to do, but don’t actually pick up the hammer and do it yourself. Tell someone to knock down a wall, pay out of your IRA, but don’t pick up the hammer yourself. Adam-That’s so interesting. Even if you don’t pay yourself, it is still a service. Patrick-It is. There are two reasons why that is problematic. One is that goods, service, facilities that I talked about earlier. The other is that you don’t want what you are doing to be considered as contributing value to the IRA because the only way to make a viable contribution to a retirement plan is in the form of cash. You write a check to your IRA custodian for the IRA contribution as documented. You can imagine that if you had a beat up house built in 1954 and then you gutted and fixed it and now it’s worth $10,000, your sweat equity is increasing the value of that property. Uncle Sam would look at that as a contribution. You did something and now you have a higher value. That’s problematic. People bring up the question, how would the IRS know if I knocked down a couple walls? We don’t get into that. That’s Uncle Sam stuff. The limited amount of time I’ve had with dealing with clients that have been audited, which doesn’t happen very often, but I’ve seen a few, has kind of created a healthy fear of the IRS. They accuse you of being guilty and you have to prove you are not, and on your own dime. If they ask you to prove you didn’t work on the property, really the only way to do that is to show invoices otherwise they’ll assume you did that work. Adam-And those invoices have to be from not your father, brother, or wife either. I can’t hire my dad to go and paint the wall either. Patrick-You mentioned brother. Brothers are technically okay to do business with because if you look at the code, technically it doesn’t go horizontal. It just goes vertical. It is just lineal ascendants and descendants. It is parents, grandparents, children, grandchildren, spouses of your children, and your spouse. Adam-Basically what you are telling me is I can start telling my brother Nick to start doing some work over at my properties. Patrick-Start doing the work. Exactly. Because you can’t have anyone else in the family do it. Larry-And he has to invoice you. Adam-He does have to invoice me but it doesn’t have to be fair market value and then I could work on his IRA property. Patrick-One of the things that I tell the DIY people that get bummed when they find out they can’t do the work themselves is you are not completely shelfing all of your real-estate knowledge. If you know the best roofer, plumber, floor guy, or painter, you are still going to hire the best guy and maybe even get good deals if you’ve got a relationship with them. That’s supply and demand. Larry-I’m thinking about the different alternatives or how movement can go in and out. In the example where you invest $100,000 and get the $10,000 back, by IRS rule you don’t ever have to take that money. That $110,000 could sit there with you forever and it wouldn’t earn any money. Patrick-It could. We don’t really do anything with it. There is no problem with it sitting there. It is an FDIC insured money market and it will sit there as long as you want. Generally speaking, clients want to get their money working for them. If they are done with us and they move over money and do a deal, the deal goes well, and they get their money back and say Entrust has been great but I’m ready to go back to the market, then we close out the account. I don’t have any hard feelings when I close out an account. They don’t need our service anymore. It is very much of a need-based niche business that we operate in. We are holding the stuff that other companies don’t, and frankly, we don’t do the stuff that other companies do. Larry-In the $110,000 example, after six months they find someone else they want to invest with, if they invest $50,000 to someone else, that $60,000 could sit there. Adam-Or they could leave that $110,000 to sit there for the the rest of their life and not earn interest. Larry-Earning .1%. Patrick-You talk to any financial adviser, they will tell you not to sit on cash because cash is going to be eaten away by inflation. If an investor was done doing alternative investments, we wouldn’t actively tell them to move their account but if they asked me what I think, I’d say there are plenty of people in the St. Louis market that could wealth manage for you. You can definitely find someone to take that money over. Larry-Do most people when the investment works out move their money back? Patrick-It really depends. A lot of my clients are real-estate people. I’m not convincing people to buy real-estate. I’m basically convincing people that have money in an IRA that already want to buy real-estate, that they can do it through the IRA. My average investor is somebody that comes on board and says they have been buying real-estate for 30 years, love it, know it, and are not really comfortable with the stock market. They want to put money in real-estate but want to do it through the retirement plan. They are already thinking about if deal one pays off, where is deal two and three. Sometimes they do deal one, it’s done, and they move it back to Scottrade and they are done with us. Larry-Let me ask you an embarrassing question. How are you making money on my putting $100,000 in with Entrust. Patrick-We charge fees to hold investments. Standard admin fee is $300 per asset per year. You move money over, buy one property, you are paying us about $300 a year. You buy two properties, about $600 a year. We have transaction fees to acquire the real-estate which can range anywhere from $100 to $175. We then have a setup cost of $50. You can do the math in your head. I’m not dealing with one or two clients. I’m dealing with a lot of volume. We have a lot activity. A lot of transactions. It’s a different volume than wealth management. Your wealth manager is going to take you out to lunch, ask about your kids, talk about the Cardinals. We are more transactional in nature. In my own office here in St. Louis, anywhere ranging from 10-16 accounts a week are signed up. That’s every week and it adds up. Adam-We kind of have to wrap it up here. This will now be our longest show. I want to give you a chance to give your contact info. Patrick-I encourage people to call us because of the niche that we operate in, there’s just not a lot of information out there about what we do. I spend a lot of time talking to people about it and I enjoy it. I get excited talking about it. My direct dial at my office here in Chesterfield is 6366811312. If you want to check out our website it is TheEntrustGroup.com. My email is PHagen@TheEntrustGroup.com. Adam-Anything that we forgot to ask? We could talk forever. My dad and I love talking about this stuff. Patrick-I think the only thing is if this is something you are interested in, call us and we will talk about it. There is a learning center on our website. There is a lot of information on there. If you think you are going to buy a property though the IRA, plan ahead. If someone is going to close on a property in a week and then ask us how to use their IRA money, at that point it is too late. You need to get the account set up, move over some money, and put the contract in the name of the IRA, not your name personally. We can open an account in one day, get the money over in a couple days, and pull the trigger whenever you are ready. We’d rather be proactive than reactive. Adam-Perfect. I’m glad you came on. Thank you very much, Patrick and Larry. Larry-Thank you. It was very interesting Adam-We might want you on in the future. Maybe I’ll give you a call. Patrick-I’m local. I’ll be here. Adam-Thanks very much and we look forward to having you on a future podcast, The St. Louis Realtor Podcast. Thank you very much. Take care.