527: Investing With Self-Directed IRAs

SHOW NOTES FOR EPISODE 527: INVESTING WITH SELF-DIRECTED IRAS

One of the top reasons people invest in real estate is because of the great tax benefits.  But did you know there are even greater tax advantages when you invest from within a self-directed IRA.  In today’s p0dcast, third-generation real estate investor and CEO of CamaPlan Carl Fischer provides a simple explanation of how you can invest from an IRA and the multiple tax benefits.

What You Will Learn

• How Carl learned about self-directed IRAs by accident
• Why real estate investors have over 20 different ways to invest through a self-directed account
• What the tax benefits are for real estate investors who use self-directed accounts
• Ways you can open a self-directed IRA when you have very little money
• Strategies for growing your self-directed investments
• How Carl only pursues investments at 15% returns and higher

About Our Guest

Carl Fischer

Carl Fischer a founder of CAMA Self-Directed IRA, also known as CamaPlan, headquartered in Ambler, PA.  He is also an active real estate investor and third generation real estate developer, having managed over 20 million dollars in real estate transactions. His real estate investments include commercial and residential properties, including real property, notes, and mortgages and are located in PA, NJ, NY, FL, NC, and WI.

He has been able to increase his personal net worth and control many endeavors utilizing self-direction tools.

Carl began his investing career in the 1970s when he was employed as a rocket scientist at Kennedy Space Center in Cape Canaveral, Florida and is a graduate of Cornell University

More About Carl

• He was born in New Jersey, moved to and grew up in Florida and always around real estate
• Carl was one of 12 kids in his family
• When he was 10 years old he would get to pick-up his parents “mailbox money” from the post office mailbox, grabbing the checks and making up the bank deposits
• His mom and his dad and his grandparents were in real estate – landlords
  • Each parent had their own property
  • His parents had two different landlord philosophies
    • His mother wanted to get to know each tenant personally
    • His dad was the complete opposite – he didn’t want to now them or run into them in the supermarket
• Being around real estate he learned a lot about it
  • He’s cut the grass at their properties
  • Fix septic tanks
• His dad would take the family to the Jersey Shore every summer for 3 months
  • He didn’t know this was something every family did
• He did construction in High School, making 2-3 times what the other kids were earning at McDonald’s
• He always knew he would do something in real estate later in his life
• He learned how to launch rockets but did real estate on the side
• He did find out, however, that you can make a lot more money in real estate than you can as a rocket scientist but it’s more fun launching rockets
• He went to Cornell University and studied architecture and structural engineering
• When he was in college, he was always the guy to rent the ski chalet where him and his college buddies would stay in Vermont for a ski trip
• Before he graduated college, he was already looking at properties to buy in Upstate New York
• When he moved down to the Kennedy Space Center, he was looking for properties again
  • When he started his job at the Kennedy Space Center, they said the Space Shuttle was a year and a half away (it was actually 3 and a half years)
  • He got to work on the R&D for the shuttle and met a lot of the astronauts
  • He didn’t like only having 2 weeks for vacation
  • He wanted 3 months on Jersey Shore
• In Florida, he started buying property and building house on the property
• He then started to rent them out for additional income

Another Business and Commercial Real Estate

• He started a mortgage business with a friend
• They were looking for office space
• What he found out was that, for what they were asking for rent, he could have bought the building and lived there for free, renting out the rest of the building to other tenants
• So he bought the building
  • That was his first commercial building
  • He ended-up liking commercial better than residential because…
    • The tenants would take care of their own repairs
    • And they didn’t call him about washers, dryers, garbage disposals, etc.
• He later learned about “Triple Net” leasing and liked that even more
  • He wondered why he didn’t buy commercial earlier
  • But then, he had a newspaper company lease from him for 7 or 8 years and that was good but, like other newspapers, they went out of business
    • He saw that it was not all roses
    • It takes a lot longer to fill commercial space than it does residential
    • Also, build-outs are more involved
• But, over all, he found real estate was really the best way to become financially independent
  • It’s a lot like an interest-bearing note
    • It works 24/7, 365 days a year, whether you do anything or not
    • Whether he’s working at another job (like launching rockets), or surfing in the ocean or fishing off-shore, that interest-bearing note continues to give me monthly income, just like the rents coming in every month
    • He also invests in notes!
      • His friend Dave Van Horn asked him one day, “Would you rather get a rent check or a mortgage payment every month in the mail?”
        • And Dave said, “At my age, I’d rather get the mortgage check because I don’t want to deal with tenants, toilets and trash.”
      • The drawback with notes is that you don’t get the equity appreciation you do from rental properties and the tax write-offs
      • If a person defaults on paying the mortgage payments, he just takes the property and adds it to his rental portfolio
      • The great thing is that they both produce cash flow

Discovering Self-Directed IRAs

• Carl’s father passed away in the early 1990s
  • He was land rich, cash poor
    • He had a note that Carl didn’t know about
      • It was at a 28% default rate
      • Carl needed to pay it off
      • So he put an add in the newspaper looking for someone to lend money
      • He found someone to lend to him
      • He took one of the parcels of land his dad had and put it up as collateral
      • When he looked at the note, he saw that it was money from an IRA
        • As he was trying to settle his dad’s estate, he started researching more into IRAs
          • He called the IRS
          • He called the bank that did the note
          • He talked to the guy that gave him the loan
            • He got no information from any of them
          • He started surfing the Internet where he found the most information
          • When he found out you could do real estate tax-free or deferred, he couldn’t believe it
            • Further more, he found out he could lend money through an IRA or 401K without having to pay taxes on the interest you earned as well
            • This really appealed to him
          • Unfortunately, there weren’t any books or articles on it available
          • He’s a very conservative investor, so he went to his accountant, attorneys, bankers, and others in his network to see what they thought about self-directed IRAs and they were kind of skeptical about it

Setting Up a Self-Directed IRA

• Carl took two years to review and research the information before he made a move
• He was looking for any potential problems
• IRAs had been around since the 1970s
• He finally decided to set-up a self-directed IRA with an IRA company
• He lent money out of it to help a friend who was building a bay on his electrical shop
• The transaction went smoothly and he saw how it worked
• 9 months later, his friend paid it back
• He got the IRS form 5498
• A 1099 went to his IRA, he showed it to his accountant who said everything was fine and he didn’t have to pay any taxes
• As he shared the information with his friends at the Kennedy Space Center, a lot of his friends wanted to open one
• His friends asked him to just start his own company to manage IRAs, they trust him more

The Beginning of CamaPlan

• So Carl decided to start his own self-directed IRA company called CamaPlan
• His sister, who graduated from Villanova University, joined him to handle the back office accounting
• Carl’s focus was more on educating people about what they do and sales
• His company is different than some of the major companies like Fidelity, Vanguard or Merrill
• He isn’t managing your money – you manage your own money and select the types of investments you want
  • If you want to invest in rental properties, of course, you need to find your own properties
  • If you want to lend money out to people, you need to find the people to lend to – you can be the bank
• He is very conservative and he would rather that people can invest in things that give a better return and are more secure (like real estate) instead of stocks and bonds where you have no control
• He’s biased towards real estate because he grew up around it

Ways to Invest Through a Self-Directed Account

• Tax benefits
  • When you make a contribution toward your retirement plan, the government rewards you and doesn’t tax you on that money
  • And they don’t tax you on any of the money that it makes up until the point where you take the funds out
• IRA contribution limits are:
  • $6,000 per year for people under 50
  • $7,000 per year for people over 50
• 401Ks, SEP, Roth IRA
  • You can put up to $67,000
  • Or, you could put, for example, $66,000 in your 401 K and $7,000 in your IRA for a total of $73,000
• The difference between a traditional and Roth IRA
  • For example
    • You’re over 50 years old
    • If you put $7,000 in your retirement account every year for 10 years, you’ll have $70,000
    • You invested it and made $35,000
    • Now you have $105,000
    • If you took that out money at 60 years of age, you’d have to pay tax on that $105,000
      • But you got the tax deduction for the 10 years that you contributed
    • If you did it the same thing with a Roth IRA,
      • You wouldn’t have received the tax deduction for your annual $7,000 contributions for the 10 years
      • If you made $100,000 in your job and contributed $7,000, you would have to pay taxes on the full $100K income
      • If you did the same with a traditional IRA, you would be paying tax on $93,000
    • However, if you take the $105,000 out of a Roth IRA, you aren’t taxed on the $105,000 and you receive the funds tax free
    • With a traditional IRA, you would be taxed at say 40%, and you would only get about $60-65,000 back
  • Other ways to invest with less money
    • You can even get a non-recourse loan through your IRA to buy “subject to” properties for a small amount of money
    • With owner financing
    • You can partner with people
    • They have an article that shows 20 Ways to Fund a Deal if you have limited money
      • There are lots of other resources at their website – CamaPlan.com – as well

Biggest Mistakes Investors Make With Self-Directed Accounts

• Before you invest in a self-directed account, you need to have your team in place (accountants, lawyers, etc.) and let them know what you want to do
• For example, if you have a 401-K and you take a distribution to roll it into a self-directed account
  • The people handling the 401-K plan will take 20% out
    • If you took, for example, $100,000 out, they would take out $20,000 and leave you with $80,000
    • If, instead, you said to them to transfer it directly to the self-directed account, they would transfer the full $100,000
• Another mistake people make is, for example, if they want to buy a home for yourself or a second home
  • It can’t be a home that would benefit you directly, like just a home for your own pleasure
  • However, if it is an investment property, like a rental home that you will rent out to others, that would be acceptable
• Another issue may be you want to buy a home for your kid who may be living in the home while he going to college
  • This is not acceptable because it benefits a family member directly

Successful IRA Investment Strategies

• He knew someone who had $500,000 in a traditional IRA
• Back in 2009-2010, they found a house that was listed for $550,000 that they bought for $350,000
• They though they had a good deal
• But the house went down to $150,000 in value
• They moved the account from a traditional IRA to a Roth IRA
• So now, instead of paying taxes on $350,000 (when they bought it), they only paid taxes on $150,000
• But what they actually did was to take a loan for $75,000, so they only had to pay taxes on the $75,000
• In 2015, they had paid off the loan with the rental income they had made since the purchase
• In 2018, they sold the house for $420,000, but now it was in a Roth IRA, so they didn’t have to pay any taxes on it
• To make it even better, when they sold it, they carried the mortgage from the buyer at 7% with a 5-year balloon payment
• Other successful strategies include:
  • People who have bought discounted notes and paid back, instead of in 10 years, in just 2 years
    • Bought face value $40K note from the bank for $10K
    • 2 years later they sold it for $40K

Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years

• Carl is big on diversification
• He recommends that real estate investors try out a self-directed account with a lower amount to just test it out and see how they like it
• There’s at least 20 different ways to invest as a real estate investor depending on the funds you have and your skills
• You could use an old 401-K, a traditional IRA or Roth
• You could roll-over a little or a lot
• Try it out and see if you like it
• When he started, he liked having the control on his investments
  • He knew his renter
  • He knew the person he was lending money to
  • And he knew and liked the returns he was getting (he tries to keep his returns to at least 15%)

Current Business

• He enjoys helping people
• He became a fan of self-directed account by using it as part of his real estate investing strategy
  • He can make the same amount of money in half the time without having to worry about the taxes
• He wants to continue with CamaPlan
  • It’s a family business
  • He wants to keep growing the business
• He has personally slowed down on buying real estate
  • He said he was going to stop buying real estate 5 years ago
  • He has since bought 6 investments
  • Because he hates to earn only a half a percent in the bank when he knows real estate can bring him 15%
  • He looks at all the other investments out there and always falls back on real estate
    • He doesn’t just buy rental properties, he buys:
      • tax liens
      • mortgages
    • He’ll lend money
• At this stage of his life, he wants to spend more time with his kids and grandkids
  • He wants to help them and provide direction for their future
• He also enjoys fishing

Rap-It-Up

• Favorite real estate book: Think and Grow Rich by Napoleon Hill
• Favorite business book: Keep It by Joe O. Luby III
• Most valuable web site for success (other than your own): Amazon.com
• Favorite app: BiggerPockets.com
• Favorite quote: “Early to bed, early to rise, makes a man healthy, wealth and wise.” –  Ben Franklin
• If you lost everything – all your assets – and had to start all over, knowing what you already know, and you only had $1,000, what would you do to launch your real estate investing business? I would go out to my network and see what opportunities were available.  He would seize one of those opportunies and use it to jump-start him into the next phase of his investment career. There’s lots of opportunities out there.

How to Reach Carl

• Website: CamaPlan.com
• Call: 215-283-2868
• Email: info@CamaPlan.com

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