949-392-1999
NOTES FOR EPISODE 397: SELF-DIRECTED REAL ESTATE INVESTING
Find out how you can generate great tax savings and deferrals by investing in real estate from within your own self-directed investment account. In today’s episode, real estate investor and founder of Sense Financial Services Dmitriy Fomenchenko shares insider investment strategies that yield great returns and tax advantages through self-directed real estate investing.
What You Will Learn
- The true definition of self-directed investing
- What is self-directed investing with a checkbook all about
- Various types of self-directed accounts
- What are the limitations of self-directed accounts for real estate investors
- How you can deduct up to $120,000 off your taxes within your own self-directed investment account
- How you can open a self-directed Solo 401K account while working a full-time W-2 job
- What are the limitations of a self-directed IRA account
- Other types of passive real estate investing you can do through a self-directed account
About Our Guest
Dmitriy Fomenchenko
Dmitriy is the founder and president of Sense Financial Services LLC, a boutique financial firm specializing in self-directed retirement accounts with checkbook control. He began his career in financial planning and real estate investing in 2000. He owns multiple investment properties in various states and is a licensed California Real Estate Broker. Doing more passive investing – private lending, multifamily syndication.
Dmitriy founded Sense Financial Services to help his clients maximize their returns on investments while protecting their hard-earned money. He is very passionate about helping families and individuals achieve financial freedom by following proven Biblical principles of financial planning and investing.
Dmitriy resides in Southern California with his wife and 13-year old daughter. He is an active member of Kindred Community Church in Anaheim Hills, CA where he serves in men’s ministry. In his spare time, he enjoys studying systematic theology, spending time with his family and visiting new places.
Dmitriy’s previous podcast appearance: 131: Investing Power of the Self-Directed Solo 401-K
More About Dmitriy
- He is still investing in real estate
- Shifted his investment strategy more toward passive investments
- Still very focused on helping people with their IRAs and 401Ks
What Does Self-Directed Mean?
- The term can be misleading
- When you deal with a brokerage like Fidelity or Schwab, they say they can set-up a self-directed IRA for you, but it’s not truly a self-directed account because you can only invest in what they are offering
- But those offerings are limited to stocks and mutual funds
- The true definition of “self-directed” is that you should not have limitations as to what you can invest in (except as required by law)
- Options should include real estate, private lending, and multifamily syndication, for example – you can’t do that through Schwab or Fidelity
Different Types of Self-Directed Account
- Most familiar: self-directed IRA
- An IRA account is opened with a custodian that does not put limitations on investments
- You can use your IRA to invest in real estate and other alternative assets
- The role of the custodian is to hold assets of your IRA
- If, for example, you buy a single family home as an investment property with your IRA
- The custodian takes title to the property – i.e. “ABC Trust, custodian FBO (for benefit of) John Doe IRA (then the account number)”
- You cannot get this with an LLC
- If you generate rental income in the IRA, the rent checks have to go to the custodian
- A Special Purpose Single Member LLC
- A self-directed IRA on steroids
- IRA LLC
- Checkbook IRA
- No custodian
- the LLC is owned by the IRA
- The client becomes the manager of the LLC
- Once this structure is created, the custodian is instructed to invest in the IRA or, technically, to buy 100% of the LLC units
- the IRA balance is transferred into the checking account
- You can buy any kind of investments “in the name of the LLC”
- You, as the manager and IRA account holder, have 100% control over the LLC
- IRA Limitations and restrictions
- The same rules apply to both types of IRAs
- IRS requires all IRAs to have a custodian
- The custodian holds a single asset on an IRA – an LLC
- The LLC is controlled by you and you can buy and grow multiple assets in the LLC
- You don’t need a custodian for every single transaction
- And a transaction is as easy as writing a check
- Disqualified Persons
- Account owner and immediate family members
- Spouse of account owner
- immediate kids and grand kids of owner and their spouses
- Owners parents and grandparents
- Vertical family members
- Account owner and immediate family members
- Non-disqualified People
- Horizontal family members
- Extended family members
- Brother
- Sister
- Uncle
- Nephew
- Cousin
- Horizontal family members
- Disqualified people cannot contribute
- If you are the owner and want to use a real estate broker to help you find a property, you can use vertical family members but you can use horizontal family members
- Examples of disqualified transactions
- You are a real estate agent
- You want to buy a property in your self-directed IRA
- The IRS says a disqualified person cannot provide services to the plan
- The agent cannot act as the agent for the purchase of a property for themselves – you would have to hire another agent who would not count as unqualified
- You cannot receive compensation as a result of a transaction that benefits you
- Your father is a handyman
- You cannot hire your father to do work on your property that you purchased trough your IRA
- You cannot pay them
- Your daughter wants to rent from you
- You cannot rent your property within your IRA to your daughter
- She is disqualified
- If you want to fly out to visit or fix the property
- You cannot pay your travel expenses from your IRA for this trip
- You are a real estate agent
Rental Property Operational Functions
- All rental property income must go back into the IRA
- If you have a property manager…
- Rents will go to the property manager
- The property manager will draw expenses out of the income for the property (i.e. repairs & maintenance,utilities, lawn care, etc.)
- A check will be made out to the custodian for the remaining net rent proceeds
- Or the custodian will have to pay mortgage, insurance, property taxes,
- However, custodians can charge transaction fees
- For incoming rental income
- To write special checks for mortgage
- Rental income is not considered an “IRA contribution” so there’s no limit on how much rent can go into your account
Solo 401-K
- Not for everyone
- Anyone can set-up a self-directed IRA
- All you need is earned income or balance in another IRA
- Solo 401K
- Can also be self directed
- Retirement account designed for “self-employed” individuals or who own a small business without full-time employees
- Requires presence of legitimate self-employment activity or business without full-time employees
- IRS defines “full-time” as 1,000 hours per year or 20 hours per week
- You can have part-time employees and still qualify as long as it meets the hourly qualifications
- Offers great benefits
- Does not require a custodian
- Does not require LLC for checkbook control
- It is set-up as a trust, with you as trustee – giving you checkbook control
- No transaction fees
- Great tax advantages
- You can contribute up to $62,000 per year (compare that to $6-7,000 for an IRA account)
- If husband and wife are running the business together, you can double that amount
- You can contribute up to $120,000 of your income – thus sheltering that amount from taxes – moving you into lower tax bracket
- You can contribute up to $62,000 per year (compare that to $6-7,000 for an IRA account)
- You can work full-time at a W-2 job and still qualify if you have a “presence of legitimate self-employment activity”
- Examples:
- Real Estate Agent – you have full-time job but hold a real estate license and sell a house on the side once or twice a year
- House Flipper – you flip one or two properties a year
- 1099 and or Schedule C Income – you could get income for a side hustle where you get 1099 income on the side
- Rental property income – Is NOT considered a business. It is passive income
- You must show that you make a profit
- Google “IRS hobby vs. business” to get IRS requirements
- Examples:
- You can borrow against your solo 401K
- You can’t borrow against a self-directed IRA
- There is a loan provision
- Can borrow up to $50,000 or 50% of the balance, whichever is less, for any reason
- It would be a 5-year loan
- Amortized payments
- You can have a Roth IRA inside your Solo 401K
- You can have two types of money in the plan: Roth and Pre-tax
Other Real Estate Investments for Your Self Directed Account
- There are other great passive real estate investments for your self-directed accounts
- You can use your self-directed account for private lending
- Dmitriy lent money out of his self-directed account
- The loan defaulted
- He became owner of the property and it was worth more than the loan
- Now he rents it out and is rental income earns twice what he received when he received the loan payments
- Private Lending is a good way to use self-directed account
- Low risk (of course, do the proper due diligence)
- It’s passive
- It’s secured by real estate
- Double-digit returns
- Real Estate Syndications
- You can get great returns
- Great tax advantages
- You can use your self-directed account for private lending
How to Reach Dmitriy
- Website: Sense Financial
- Phone: 949-228-9394
DISCLAIMER: Many of the above strategies take knowledge and have a higher degree of risk. You need to do your research and/or work with someone who is experienced to reduce your risk.
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