Phase 1 - Pre-Account Creation (Why Real Estate/RealCrowd)

Podcast - Build Your Future By Unlocking Your IRA

Tyler Stewert
September 14, 2021
Podcast - Build Your Future By Unlocking Your IRA

Mat Sorensen discusses how to unlock your IRA and gain a whole new level of access to real estate, crypto, and other asset types with your retirement account.

About Mat Sorensen

Mat Sorensen has been at the forefront of the self-directed IRA industry for over a decade. He’s a CEO, lawyer, best-selling author, podcast host, national speaker and expert on self-directed investing.

Mat is the founder and CEO of Directed IRA and Directed Trust Company. Directed IRA handles all types of self-directed accounts – Traditional and Roth IRAs, HSAs, Coverdell ESA, Solo 401(k)s, and custodial accounts – typically invested into real estate, private companies, IRA/LLCs, notes, PE/VC Funds, and cryptocurrency. Directed Trust Company is an Arizona-regulated trust company serving clients nationwide.

Mat has advised thousands of clients with self-directed retirement plan investments and has established IRA/LLCs, partnerships, private offerings, corporations, and other investment structures involving self-directed IRAs and 401(k)s. In addition to account owners, his clients have included trust companies, financial institutions, insurance companies, hedge funds, investment sponsors, and third-party administrators.


Connect with Mat

Learn About Directed IRA

If you'd like to learn how Mariner Wealth Advisors can help you build a roadmap for your real estate investments head to RealCrowd's sister company, ReAllocate, to learn more —

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Adam Hooper (00:03):
Hello and welcome. I'm RealCrowd, CEO, Adam Hooper, and this is the Real Estate Investing For Your Future Podcast. Here we explore the latest in commercial real estate trends, insights and investment strategies that passive investors can use to build real estate portfolios that last.

Disclaimer (00:20):
All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions, to gain a better understanding of the risks associated with commercial real estate investing. Please consult your advisors.

Adam Hooper (00:42):
Our special guest today is Matt Sorensen, CEO and attorney at Directed IRA & Directed Trust Company. Matt has been at the forefront of the self-directed IRA industry since 2006. He's also the best-selling author of the Self Directed IRA Handbook, An Authoritative Guide for Self Directed Retirement Plan Investors and Their Advisors. Boy, that's a mouthful, but it's a great read. In today's conversation. Matt discusses, what you need to know to invest your IRA money into real estate assets. I hope you enjoy today's conversation with our guest, Matt Sorensen. Well, Matt, thank you so much for joining us today. We were talking before we started recording and it's been over two years since we had you on the show last. So thank you for coming back and sharing what's going on in the self-directed IRA and 401(k) space today.

Mat Sorensen (01:33):
Yeah, I guess I'm a second time caller or guests on the RealCrowd Podcasts not long time listener, second time caller on the RealCrowd Podcast.

Adam Hooper (01:42):
There you go. So before we jump in, why don't you tell us a little bit about your background, what you guys do, how you help people access their retirement funds and then we'll dig into the conversation.

Mat Sorensen (01:55):
Okay. Yeah, so I mean our company Directed IRA, that's my company. We help clients use retirement account dollars to invest in alternative assets. The number one being real estate, crypto's, the number two out there now, at least in the current market, but real estate still dominates and that's the most popular alternative asset. It's the tried and true thing for our clients over the years. So we basically help clients use IRAs, 401(k)s, HSHS, any type of retirement account where they don't want to just buy stocks, bonds or mutual funds, but they want to invest in, let's say a real estate deal.

Mat Sorensen (02:30):
And so that's our business. We don't help them find the deal or sell them investments. We just are like a Schwab, so to speak for the retirement account to say, "All right, you go decide what you want to buy. We're not your advisor, but we're going to handle your account, make sure the rules are followed." And so that's what we do. And I got into that in 2006. It seems so long ago as a lawyer, the first client of mine that asked me if he could use a Roth IRA to get an option on a piece of real estate. So yeah, that's what I do.

Adam Hooper (03:01):
And now again, I think we want to get to more of the practical, what does this actually mean for investors and how can they tap into that? But it's been so long since we've had you on, let's do a little bit of setting the foundation of what does that actually mean, right? What is a self-directed IRA? How does how's that different from a traditional who can use that? Just maybe take us through 30,000 foot on what that means.

Mat Sorensen (03:26):
A self-directed IRA is really a retirement account that can invest in any asset allowed by law. And a lot of people are surprised to hear, "Wait, my IRA could invest in a private fund that owns a large real estate deal, or it could buy the single family rental down the street, or it could own an Airbnb property?" Yeah, your IRA can own that. The problem is the financial services industry, when retirement accounts came out, the Morgan Stanley's or Merrill Lynch or Fidelity or whoever it is, they realized, wait a second, people are putting lots of money into these retirement accounts. They love the tax perks. They love the tax deductions on the traditional accounts. They love getting the money out tax-free on the Roths and Americans just started saving in those accounts more than any other place.

Mat Sorensen (04:14):
And so if you're in the financial services industry, you want to handle those accounts and what are you going to let those accounts invest in what you already sell? I mean, those financial services companies already sold stocks, bonds, and mutual funds. So surprise when you open an IRA account there, what are they going to let your account invest into, what they sell? They already do that, that's their business. So now you've always been able to buy real estate with an IRA. So a self-directed IRA is just like a industry term. It's not in the tax code, retirement accounts, all retirement accounts have been able to invest in real estate let's say, the problem was the institutions that handled the accounts restricted you on what you could buy. So if you are a Fidelity, they're like, "Well, we're a financial services company. You can buy what we sell."

Mat Sorensen (05:00):
If your IRAs at New York Life, they're like, "Well, we're an insurance and annuity company, your IRA combined annuity." So you needed to use with these "Self-directed IRA custodians," which is what we are, where we provide accounts. And we have 30 competitors, but our company Directed IRA, is number one baby. And we provide those accounts to people who are like, "All right, I want to invest in a real estate deal. I want to invest in a little LLC or limited partnership doing a deal. I want to buy crypto or the next startup" or whatever someone's interested in.

Adam Hooper (05:37):
I guess maybe what's changed, I guess, since you said he started in 2006, right? It's been a couple of years since we've been on, how has that changed? I think from our perspective and where we sit, it's still an awareness thing. Right?

Mat Sorensen (05:49):

Adam Hooper (05:49):
I think it's just making it known that people can do this. And then there's some parallels with our industry and what we deal with on the sponsor side of what does it mean to raise capital through a platform or online, there's still an education process. So I'm just curious, maybe how have you seen the awareness of this changed since you got started and are there any technical or fundamental changes to that model or to the business over the last decade, handful of years?

Mat Sorensen (06:16):
Yeah. The industry has grown significantly. The amount of people doing it in 2006, may have been in the hundreds of thousands to now that we have millions of people with self-directed accounts and it's still 2% of the retirement plan market maybe, but that's a $30 trillion market, there's no more cash to be invested in anything and then U.S. retirement accounts. So if you're someone raising money for deals, you need to know these rules because it's more likely the people you're talking to are going to have money in a retirement account than they are in a savings account. And so this is where we've been taught as Americans to put all your money and save for the long haul, just max out your 401(k), throw money in an IRA.

Mat Sorensen (07:02):
And so 30, 40 years down the road now, actually 50 almost since ERISA was passed and IRAs and 401(k)s were created, I mean, 50 years down the road, it's just, that's where all the money is. And so what's happened to, there's been a couple of just structural things that have made it grow. One is the baby boomers have moved and left jobs and have huge retirement accounts. So they've got 500 or 300 a million plus in 401(k)s, and now they've left that employer. They built that up with over the years and they can roll out of that 401(k) to an IRA. See a lot of people, let's say you're 40 years old and you got a 401(k) at your work that you've been at for 10 years. And you're like, "A right, I got a few hundred grand in here. I'm bored with buying mutual funds. I'd like to invest in a real estate deal."

Mat Sorensen (07:49):
The problem is that 401(k) locks you down to whatever investment options they have and you can't move the money to a self-directed IRA until you leave or retire, or you can hit retirement plan age of 59. You can roll it out to. But so we've had a lot of people to have job changes, but have large accounts grow. That's been a huge shift. That's created large self-directed accounts to invest in alternatives, plus just the internet. I mean, people just learning, they can do it. The financial services industry controlled the conversation. And so even today, we still run a cloth across clients who call their financial advisor and we're like, "All right, I want to invest in this." And the financial advisors freaks out on them that this is insane and they don't, they should do it. And that financial advisors even if they're an RIA, they got a little work to do.

Mat Sorensen (08:39):
Because it's more difficult to execute that type of deal than it is to like click a button and buy Apple. So I think the financial service industry is crapped on it, but what's happened is the demand from investors in the clients forces it to grow because they want to invest in this stuff.

Adam Hooper (09:00):
And so if someone has, like you said before, right? The bulk of America's capital is in retirement accounts. If someone has funds that are in a savings or in a taxable non-qualified account, should they be prioritizing one or the other? I know, obviously we can't give tax advice on the show here. But generally, how do you see that decision-making process of if there's multiple sources of funds, who were the benefits of doing it through they're qualified by their IRA or 401(k) rollover versus a taxable account?

Mat Sorensen (09:36):
We always look at it and I think it's not an either, or I really do. I mean, because even myself, I think on myself, I invest my personal funds into real estate. I invest my personal funds in the market. I invest in the crypto, I'm doing different things there. I do the same thing with my retirement account. Some people say, and I don't agree with this. Some people say, "Well I want to invest in real estate with my personal funds, because I want all the tax benefits." Well, if you're a high-income person making more than 150 grand a year, the only way you're getting tax losses that could offset your other income is if you're a real estate professional. And so from the tax standpoint, a lot of these real estate losses, people seem to chase on their personal funds, which I get. It can be good.

Mat Sorensen (10:26):
They never see it anyways because in a retirement account what happens is if my IRA buys real estate, it doesn't pay tax. So there's no depreciation loss, but a lot of people are fixated on that and say, "What I want that depreciation loss to offset my personal income." Well, this is in your retirement account. It doesn't hit your personal tax return. So there's no depreciation loss, but remember there's no tax either on the income. So I mean, the thing about it this way, if I bought… The way the retirement account rules work you buy Facebook stock for $100,000 and you sell it for $150,000 that $150,000 gain goes back into your retirement account. You pay no tax on the 50,000 gain.

Mat Sorensen (11:07):
But when I buy a house, the same thing I buy, let's say I bought a real estate deal. I don't care if there's a duplex, I don't know, for 100 grand. And I sold it for 150. Well, that 50,000 gain goes back into the retirement account you don't pay tax on it either. So you get the same, no tax when you're making money and growing the account. In the retirement account than you do with stocks, as you're buying real estate, same deal for stocks.

Adam Hooper (11:32):
And are there other downsides to doing it through a self-directed account that you might not have in a taxable?

Mat Sorensen (11:42):
Well, in a retirement account, one thing you got to look for is if there's debt involved. And so this is for IRAs but so any IRA or even HSA, this is traditional or Roth, when it's investing in real estate that's leveraged with debt. There's a tax on profits from the debt, and it's called UDFI unrelated debt finance income tax. So when I said earlier, if I bought a property for 100 grand and I sold it for 150, if my retirement account bought the property with cash, or I invested in a partnership, let's say an LLC with a bunch of other people, and we didn't have debt on it. We sell it for 150, there's no tax on the gain. But if I brought debt into the deal and let's say, just so I can do the math, I'm going to keep it at 100,000.

Mat Sorensen (12:32):
I realize this may be a million or 10 million, so let's say I can do the math. Let's say it's $100,000 purchase, but you put in 40 grand from your IRA or you and other partners and people in the deal. Other investors essentially put in 40 grand to buy the property. And then you go get debt for the other 60,000. Let's say you then sell it for 150. There's a $50,000 gain. And you get to write off any expenses of course if sellable, let's say it's a net $50,000 gain. Well, the IRS looks at that and says, "Well, 60% of this deal was dead. It was not retirement plan dollars. It was not capital invested. It was debt. And we're going to tax the debt that leveraged the IRA's purchasing power." So if their IRA put in 40 grand and got a loan for 60, they look at that as that 60,000 was not retirement account dollars. You don't get tax free treatment on profits from that.

Mat Sorensen (13:29):
So on a $50,000 gain, you have to take into account the debt that you put into it, which was 60% of the deal. So 60% of that 50 grand would be subject to this UDFI tax. So that would be, I think, 30,000 in that example, and then the UDFI tax on a sell of a property is the capital gains rate. 20%, 20% of 30 grand is six. So you'd end up the IRA. I should say, not you, the IRA would end up paying six grand on it. So that's probably the biggest downside is properties leveraged with debt that your IRA is investing. Now, despite that we have plenty of clients that invest in leveraged deals like that because the total return is better than the next best thing their retirement account can invest into.

Mat Sorensen (14:19):
If they say, well, Matt, after that return, I can get on the deal. Even paying a little bit of tax 20% capital gain, let's say on only the piece that's debt leveraged, I'm still ahead of the crappy mutual fund I've been in. So we want to look at the net return at the end of the day, because the goal is to just get the biggest retirement account, right? The larger account at the end of the day. So you just kinda got to run the math, do the numbers, so to speak on what you think your total return is going to be. And that's when I think someone should look at using their retirement account to do this, it's not like, should I use personal dollars or retirement account dollars? A lot of times people's personal dollars are frankly more tied up than their retirement account dollars.

Mat Sorensen (15:04):
And they have a lot more leeway to use those retirement account dollars. So what I tell those clients is we're not financial advisors, but I just tell them just from a basics. Well, what else is your retirement account invest in? What's an invested in now, or what's your next best investment you would make? If this real estate deal is a better deal, even if it's leveraged with debt and you've got to pay some UDFI tax from the IRA, are you ahead of the game? And if so, then that's an investment you should consider.

Adam Hooper (15:32):
And that's something that we've seen too is that the time horizon of retirement funds generally align well with typically a longer term lens in real estate investments, right? If you don't need to touch that money for 10, 15, 20 years you can lock a lot of value in real estate by holding it longer term. That's generally how more investors look at the asset class is on a longer term horizon, which tends to track well with not needing to touch those retirement dollars for usually a longer period of time.

Mat Sorensen (16:02):
Exactly. And I think sometimes with personal funds investing in a real estate deal, unless you've got a significant asset based, a lot of times people run into issues where they're like, "Crap, I need to sell this interest." Well, it's in a private deal. That's a real estate deal. That's illiquid. It's not like you can just get out of it in six months, if you want to. So you're right. I think the retirement accounts have that long-term hold trajectory anyways, we're investing for the long haul. We're using the money for later in life in retirement. And it does align well with more of a long-term strategy of real estate.

Adam Hooper (16:38):
And now you mentioned the capital gains issue. You we'll I guess, somewhat timestamp this recording here late in April in 2021, rumblings coming around of cap gains going up. Certainly we've seen up to as high as almost 40%, right. That's a pretty substantial increase.

Mat Sorensen (16:56):
Oh, my gosh, I know.

Adam Hooper (16:59):
I would say. Have you seen much of a reaction yet? Or I guess how do you guys look at that? I mean, obviously tax policy always changing depending on administrations. How much of that plays into this decision making process and have you guys seen any reaction or I would assume that would increase desire to do these kinds of investments in qualified accounts with retirement money rather than being subject to who knows what that cap gains rate might be in the future?

Mat Sorensen (17:26):
Yeah. And in addition to that, Biden is proposing getting rid of the 1031 exchange. [crosstalk 00:17:36].

Adam Hooper (17:35):
That's been on the docket for 20 plus years.

Mat Sorensen (17:38):

Adam Hooper (17:38):
No, we'll see.

Mat Sorensen (17:39):
They're preparing that up. So it's like, people are thinking, "Oh, it's a 40% rate. I'll kick the can down the road by doing a 1031 exchange." No, you are not, these are going to go at the same time. So I mean, if his proposal passes, so yeah, I mean, there's obviously from our clients, because our clients, for the most part, our account holders that are investing in real estate with their IRA. They do it on their personal side too. But it is going to make retirement accounts that much more valuable because the dollars you have in a retirement account, you do not pay capital gains tax when you're buying and selling real estate assets or stock or private companies or crypto, whatever you're doing. There's no capital gains tax as you're making money and selling and getting gains. So if that passes it'll frankly, make the retirement account much more valuable than your personal funds.

Adam Hooper (18:40):
And so now I guess for listeners that maybe they have a retirement account didn't know that they could do this. What does that process look like? And maybe what are some of the questions they should be thinking about? If they, want to explore this, right. Just maybe walk us through what that typical, first engagement with a new client, "Hey, I've got this money in a 401(k), or I've got it in a traditional IRA, want to do something different with it." What does that look like?

Mat Sorensen (19:08):
The first thing they'll do is they'll need to move their account because let's say you're at Fidelity. And you call it fidelity and say, "Hey, I want to invest my IRA into this LLC or this limited partnership, or I want to buy the duplex down the street," Fidelity is going to be like, "Nah, you can't do that." And that's not because retirement accounts can own real estate that's because retirement accounts at Fidelity, can't own real estate, unless you're an ultra high net worth client with a 50 million relationship or more. And so for most people, but always be like, no, sorry, you can't do it. So you'll have to move your account. And let's say, this is an IRA, or maybe an old employer 401(k), you could move the account or a portion of it to a self-directed IRA at a company that allows you to make alternative investments like real estate, like a private fund.

Mat Sorensen (19:56):
And so that's what our company does is directed IRA. So we're a trust company. We're a licensed, regulated financial institution, audit by the banking department, have to do third-party CPE audits, like being a company like ours is pretty tricky. It's not like you just go get an LLC from the state. So you would go to institution that allows for self-directed accounts. And there's like I said earlier there's like 30 companies in our space, but our company Directed IRA really do feel is the best because we know what we're doing and have the best service, but so you'll go, you'll tell Fidelity, "Hey, move my money over to this new IRA account I have at Directed IRA." And then we receive the funds here in an account. And then you instruct us to say, "All right, directed IRA. I want to buy the duplex on one, two, three green street, or I want to invest in X, Y, Z, that's buying an apartment building."

Mat Sorensen (20:49):
And then we'll take that money from your IRA per your direction and invest in the deal. And we'd obviously want documents on the fund that you're going into, or the real estate documents if you're buying the real estate directly for yourself with the IRA. So it's really it's kind of like a three-step process where we say, open the self-directed account at where you want to be to go to this alternative investment, two, get your funds over to it. So you've got to tell Fidelity or whoever has your funds now, TD, whatever, "Move my money over to my new accountant at Directed IRA," and then three it's instruct us to where you want to invest it. And then we process the investment.

Adam Hooper (21:30):
And then does that look differently for a 401(k) versus IRA, or is it pretty similar?

Mat Sorensen (21:35):
Yeah. The only thing that's there's a couple of catches on 401(k) is one if it's a 401(k) where you still work, many times you're going to be stuck. So those people typically can't self-direct unless they already hit retirement plan age, some 401(k)s allow for what's called an in-service rollover, where you can move out a portion of the funds while you're still working there. But for the most part, if you're 40, let's say with a 401(k) and you're still working there, that money is locked down. So that's one catch for 401(k) people. The other thing is on IRAs, we are going to actually, let's say you have an IRA at Fidelity. We're going to actually request the funds to financial institution from fidelity to say, hey, our client Adam's requested to roll over 200 grand from his IRA, with you to the IRA with us, and you sign an authorization with us and we process that to get it over. In a 401(k), you have to instruct them to send the money to us. Otherwise it's the same.

Adam Hooper (22:38):
Perfect. When it comes time to actually make the investment, if they're investing in a partnership or maybe they're buying their own property, what does that look like? Is there anything different when it comes time to actually make the investment out of one of these accounts versus a typical process for taxable money, a savings account?

Mat Sorensen (23:00):
Yes. You're going to have to work with the custodian. So let's say it was us Directed IRA. So you would have us process the paperwork. So let's say you're buying real estate or investing in a fund. The first thing is who's the buyer on the contract, or who's the subscriber investor on the subscription agreement? It's not Adam Hooper, it's directed trust company, FBO, Adam Hooper, IRA, that's the buyer on the property or the purse or the account subscribing on the investment. And so the first thing to keep in mind is you're not buying this. Your IRA is.

Mat Sorensen (23:38):
And then the second thing is your IRA custodian is going to actually process the money and fund it and is going to get the investment income. So as returns are being paid out, that's going to go to your IRA account. And there's spots in the subscription where typically you'll indicate "Here's where to send my payout," or if you're buying a property directly, you'll generally have a property manager that knows, all right, "I got to send payments to the IRA." And many clients actually that buy property, that buy real estate with an IRA, have their IRA on an LLC. 100% of the LLC owns real estate. That's called a checkbook IRA. We'll see probably another conversation, but in practice, the biggest distinction is IRA owns it. Things are going to go through the IRA. It's not you're signing and approving things, but your IRA custodian actually signs off on the documents for the investment.

Adam Hooper (24:29):
And I'm assuming that's incredibly important to get set up correctly from the outset, right? I mean, is there anything like in a 1031 exchange, if the investor actually touches the cash, then that becomes taxable, that can below the exchange, are there similar rules in, and again, I guess maybe an add on that, the concept of prohibited transactions, maybe touch on that a little bit too?

Mat Sorensen (24:50):
Yeah. So with retirement accounts, there's the number one rule is called the prohibited transaction rule. And this basically means that you can't touch the money and you can't invest in stuff for yourself or for your spouse, parents, or kids. And so essentially what that means is let's say I own real estate personally, my IRA couldn't buy real estate from me personally, that would be prohibited, the IRS doesn't trust your IRA transacting with you, nor with your spouse, kids or parents. But let's say it's obviously I'm buying real estate from a third party, or I'm investing into a private fund. That's pretty straightforward because as songs, it's not my fund. I'm engaging with third parties. And so yeah, so the other thing is you can't buy real estate for personal use. So it's not like you're buying a real estate you're going to live.

Mat Sorensen (25:41):
This has to be investment real estate. Rentals, investing in a fund that's renting it out or leasing it out, or whatever their strategy is. It's just not for your personal use. So there's more to that, I mean, even my partner and I have a podcast just on self directed IRA is called the Directed IRA Podcast. And I got to the number one book in the space that sold 30,000 copies called the Self-Directed IRA Handbook. There's more to know on that because some people like, well, Matt, "I want to do a deal with my IRA and myself. Can I do that?" "Yeah, that's a little complicated. So if you keep it clean and easy though, now I'm just investing in this fund. I don't know anyone over there. It's not my me or my family, or I'm buying property from a third party. You're going to stay away from those rules and not have to know too much on them.

Adam Hooper (26:32):
And then again, we'll put links in the show notes to both podcasts and the book, a great resources for anybody that's interested in the space for sure. Is there anything else that we should touch on from the investor side of this before we switched over to the manager side and begins in terms of how to unlock this capital that people, maybe didn't know they could even do this with?

Mat Sorensen (26:52):
Yeah. The only thing that I'll say is like, self-directing your IRA, it's really the most underutilized tool out there for people. I think our retirement accounts it's odd that they became the largest concentration of wealth, but it became the laziest money for people. People have just gotten.

Adam Hooper (27:12):
[inaudible 00:27:12] forget it.

Mat Sorensen (27:12):
Yeah. And that's what the retirement industry wants you to do. Right? They're like, "Well, we got this, don't worry. You're in a mutual fund and you're getting feed to death, but we got it." So I think what's happened is, and even the next generation, I mean, it's funny how many millennial clients we have the self-directed IRAs. I'm actually very surprised they're very in touch with their money and in the sense that they're not okay, just like dropping it into a fund and forgetting about it.

Mat Sorensen (27:41):
And so we've seen, I don't know if it's generational or what, but we've seen a lot of interest in it from my generation to, I'm 40, whereas my parents' generation, they're in their late '60s, they're a little more, I mean, we have plenty of clients in that bracket, but they've been a little more just traditional, the said and forget it type mentality. So I think there's just been a lot more engagement on it, but it's one of those things that it's like, I tell people it's like playing a new board game. When you start self-directing your retirement account, it's not rocket science, but you do need to learn the rules.

Mat Sorensen (28:19):
And so it's just like playing a new board game. You just need to learn how to move the pieces, what you can't do when, when you do this, you get that. And so once you learn that, it's the same game over and over again. And so just, yeah, it takes a little bit of getting up to speed on how the rules work. But then, like I said, it's just like playing the board game next week. You already know the rules. So you just do it.

Adam Hooper (28:42):
As for the demographic trend that you mentioned there, interesting. W within our space, right? I think a lot of the more comfortable with technology younger, forward-thinking, younger demographic tends to be what we see on the marketplace and we've got like you have up and down the spectrum. I think that's a trend that maybe this is segwaying into from the capital raiser side, right? The real estate manager side, getting in front of some of these demographic shifts. And certainly we've talked about before this transfer of wealth, I think it's something like 20 or $30 trillion over the next couple of decades is going to transfer from the baby boomers down to millennials.

Adam Hooper (29:25):
Very different buying habits, very different investment behaviors and how as a capital manager, asset manager. How should they be thinking about this space or tapping into some of these trends that are happening that capital raising is going to look very different in 10, 15 years and it does today. And I believe, I think and obviously you have some conviction around that as well, that retirement is going to be a larger part of that. So what are some of those things that they are paying attention to as we look at that shift of getting access into some of this capital from a manager perspective, and what are the things you are thinking about?

Mat Sorensen (30:01):
Here's one big one that I think just goes on noticed, inherited retirement accounts. So when you talk about that 20 to 30 trillion, that's going to be, or I don't forget the number you mentioned there, but this amount is going to be transferring over to the next generation. Just think of your own parents. What do they have, what assets do they have? And the typical American that's going to be passing on wealth to the next generation has some equity in a home. Maybe there's a life insurance policy, or they keep maintaining it until later in life. And there's probably a retirement account and you can inherit a retirement account, right? And still invest it for another 10 years now. And so we're seeing a lot more inherited accounts, too. We're seeing those continue to grow because that next generation has been passing along and their heirs are like getting their retirement account.

Mat Sorensen (30:52):
Well, you can self-direct an inherited retirement account. So I'll bet a large chunk of that wealth passing onto the next generation is retirement accounts. So when I think for anyone raising money or that's managing assets and needs capital, I think traditionally what they did was they were like, "Well, let's just go to a big pension fund. That'll cut us a $10 million plus check and we'll just get," because they're active in the alternative asset space. Well, okay. I mean, but particularly for smaller fund operators, the pension funds aren't cutting them checks, but it's the same strategy of why was someone going after the pension funds on our alternative asset or a private fund? Because that's where the money is. Well, it's also individually and accounts and sure you may need to do it at 5,000, $250,000 at a time, whatever your minimum amount is.

Mat Sorensen (31:50):
But the concept's the same in that. This is where the money is. People do view that for the long haul. It's not like they're going to be calling you next year because they want to buy a bigger house or something, they know this money is for the long haul. And so I just think it's a very overlooked place to go is retirement accounts. And some people are intimidated by it. Some people have some bad information on it and so they just don't think that people will be interested. But I think it's one and I've seen it from people we've worked with, we've seen so much success. I mean, we see the accounts come through here and what gets invested. I can give you some examples, but we see significant growing interest in this space. It's the whole reason we got into it ourselves.

Adam Hooper (32:38):
Yeah. And think we see a pretty even split, I think between managers that are willing to take self directed funds and those that for one reason or another, maybe just aren't aware of how they do that or what that means for them when they're trying to raise capital through the marketplace. So maybe can you give us a 30,000 foot or from a manager's perspective of what does that look like to accept these funds? Is there anything that they need to do differently? Is there anything they need to do to accommodate working with a custodian or trust company that might be outside of how they would typically handle non-qualified money?

Mat Sorensen (33:14):
Yeah. I think there's two things that you'll want to have in your offering docs and two things from a legal tax process to know. The one is UDFI that we talked about earlier. So most offering docs, if they take retirement account dollars are going to have a section in there unrelated business income tax or unrelated business taxable income and UDFI, and this is a little disclosure you need to have in there that basically says, "Hey, if you're a retirement account investor, we may have this tax, you're going to need to work it out with your tax professional, just so you know you've gotten the disclosure." And it's on the account investor to know what they're doing. And then they got to determine how to deal with that tax. But the fund doesn't pay the tax. It's not a consequence for them, so it's just for the investor.

Mat Sorensen (33:59):
And then you got to let the investor make up their mind of, "Okay, is this fund still a good deal?" Given they may be using debt to leverage their investment and I might have to pay some tax on the UDFI at some point. So that's one consideration and that's a real one. The second is if 25% or more of the assets are "Plan assets," there could be fiduciary liability or fiduciary responsibility you have with the funds. However, in the real estate space, there is something called the REOC or real estate operating company. So let's say I end up raising 40% of the money from retirement accounts in my fund. Well, I have to deal with this plan asset rule that says you're a fiduciary. However, if I'm a REOC, which means 50% or more of my assets are invested in real property and held for investment, not like I'm going to immediately sell it that same year, but it's held for investment, I'm exempt from that responsibility.

Mat Sorensen (35:04):
So I think in the real estate space and in the venture capital space, they have a venture capital operating company. And they have an exemption out of it too. And so we see a lot of IRAs go that way. So from a fund manager, if you've ever been told, "Oh, you're going to have fiduciary liability. There's a plan asset rule." They're like, "No, I'm a real estate fund. I'm going to have 50% or more of our assets in real estate." You're going to be exempted out of that anyways.

Adam Hooper (35:32):
And are there other, I know annual statements, value reporting requirements. Is there anything from an ongoing basis that a manager would have to be concerned with?

Mat Sorensen (35:41):
Yeah. So typically an IRA is going to need to have an annual fair market value so that they want an indication of what's my IRA worth? Now I'll say this just because I see the industry and before I started my own company, I was outside counsel for almost a third of the space. And so as an attorney, the IRS has basically said unique or hard to value assets, like a private investment that you'd have to use their best efforts to update your account value every year. So now what every IRA custodian us included is going to do is tell their customer, "Hey, what's your account value. You have this investment in ABC limited partnership, what is that worth?" And we generally want them to tell us, it's worth X, Y, here's what it is.

Mat Sorensen (36:31):
But they only know if the fund manager tells them. But that could just be a letter that says, "Here's what the fund, our estimate of what the fund is worth right now." And that can be used to update the value. It's not like you got to go get a full blown appraisal or something like that, testing to what the value is. So you will have some questions from IRA account holders, asking for the valuation on an annual basis. They can get away with not having it for a few years. But eventually at some, you're going to need to be able to produce again, even if it's just on a letter.

Adam Hooper (37:07):
And now you brought a point earlier there too, of as a manager, having some of these clauses and disclosures in your offering documents. Is there anything else that as an investor, looking into some of these deals, if they're going to place qualified money, retirement money into some of these deals, is there anything else in the documentation or in the setup or any conversation that they should be having with a manager of making sure that they're all on the same page with what that might take going forward?

Mat Sorensen (37:35):
Yeah, it depends on everyone's situation, but the first one would be the debt that we've talked about is there debt deal or not? And actually 401(k)s solo 401(k)s, which many of those get self-directed to, those are exempt from that debt, actually the UDFI tax on debt. So IRAs are subjected to it 401(k)'s or employer-based plans are actually exempt from that tax. So just a little side note. If one's a little older that's sometimes, we have many accounts people in their '60s and '70s and if they have a traditional account, they may need to start taking required minimum distributions when they hit 72.

Mat Sorensen (38:11):
So if someone, a little older that has a traditional account, Roth accounts are exempt from these required minimum distributions, but they may need to make sure they're getting some income from the fund or have other retirement account money to satisfy their required minimum distribution. So when you hit 72 and you have a traditional IRA, let's say up to a million bucks or a 100,000 doesn't matter, you're going to have to take about 3% of that out as a distribution when you hit 72, and then it starts going up over time to here, maybe taking six or 7% out, but somebody have $100,000 account. I need to get 3,000 out that year as a distribution.

Mat Sorensen (38:50):
So if the fund is not distributing profits and I invested every penny of my account into that deal, I could have a problem from a requirement of distribution standpoint. So that's one thing an investor should be thinking about if they're older, using traditional funds, because Roths are exempt from RMD. Otherwise it's just the typical due diligence from the investor standpoint is look at the deal, look at the returns that are being discussed, do your own numbers and make your own analysis as to it. Don't just trust the fund sponsor blindly, but look at it and come to your own conclusions.

Mat Sorensen (39:24):
And then if it's better than the next best thing your retirement account can invest into or what it's already in, then you should be investing, right? I mean, why wouldn't you not? The thing I would say though for a fund sponsor, if I could mention for them back on their consideration is, we had a it was a hedge fund, not real estate, but they basically are a hedge fund that invest in different index funds in and out and have their own little proprietary trading strategy. They'd had individual investors for years and done pretty well at it. They had a good track record, had a thousand plus investors. And they've been at it for five to 10 years. They'd been shy about using retirement accounts and they ended up opening up their next fund to retirement accounts.

Mat Sorensen (40:19):
And all they did was went to their existing database of people who had already invested with them and said, "Hey, you can invest in this one. And by the way, the next fund we're doing, if you want to use an IRA, you can." Almost half their dollars came in from retirement account. And they were so shocked because this was just their existing database of people. And, I mean, we ended up working with them and setting up hundreds of accounts for people investing into their funds. So I think for a lot of people that raise money, it's like, don't think about going to someone else necessarily, it's your existing database of investors or prospective people that have looked at you and considered or invested with you to say, and did you know you could use your retirement account in this offering?

Mat Sorensen (41:06):
And because there's just so much money socked away there that frankly, a lot of people are frustrated with the returns they've got, I can't tell you how many people I talk to that are like "The market's up, but why isn't my account? What the hell? Or it's like, I hear the market's up, 15% this last year, but my account's up five." It's like, well, when you peel away the onion and all the fees and everyone else, you got involved in that account because you want it to just be set it and forget it. That's what happens.

Adam Hooper (41:34):
Yeah. And now I guess, so to that example, you just brought up there, the timing thing from an investors perspective, you have to sounds interesting. When should they be doing this? Is it when they find an ideal investment, then start that process, is this something that they should set up? If this sounds interesting, get it set right now. So they can act when they see that investment, how do you feel about the timing or this getting this setup to a self-directed?

Mat Sorensen (42:00):
It depends on what they're doing. If someone's going to invest into… they're looking more for a private fund that can be done in two to three weeks. So we can get an account set up next day with us some just go online. We have an online DocuSign app for it, but then you got to move the money over. Let's say it's at Fidelity. Well, Fidelity takes three to five business days to get your money over here. Then you've got subscription documents you're doing this. There's a little bit of process on it. But you don't need to get it over here and set up and just sit here and cash until you find it. You could stay invested in something if you want. We do see many people open up an account and just wait until they have an investment.

Mat Sorensen (42:42):
And they transfer funds over when they have the investment. What I do recommend though, for someone, if they're going to do their own deal with directly to buying a single family rental, or they got a large account, they're doing a smaller multifamily deal or commercial, whatever is get that structure set up with at least the amount of money you need to get the property under contract and make an earnest money deposit. Because especially in this real estate market right now, if you're doing the deal yourself and it's not investing in another fund, you're tying up the contract, you're doing all the work and you got to move fast.

Mat Sorensen (43:14):
So you need the account going, if you're using an LLC in the process where the IRA owns, LLC you'll want that setup and you want to fund it, you don't have to fund it with everything to buy the deal, but you want to fund it enough with enough money to just get a down payment or make an earnest money whatever's going to be required to get the deal under contract. And then you move the rest of the money over when the deal is ready to fund and close.

Adam Hooper (43:37):
Okay. And then fees. I know that's one of probably the biggest complaints that we get from people when they're looking at doing these in self-directed with custodians is just fees. Generally they seem quite a bit higher than most people would like to pay as with most fees. hat are your thoughts there? I mean, have you guys seen fee compression in the space as more people get, as it becoming more competitive? What's your general, how do you see fees playing into this and how should investors consider that when they're looking at different options?

Mat Sorensen (44:09):
Yeah. I mean, we've seen fees be a concern. One of the reasons I started my own company doing this was I was just really appalled by the service that was provided. Someone was trying to do a deal and they were tied around with forms that seem like these custodians were operating in the 1990s, still what their process and procedures. They didn't have e-sign capability. They were just like super old school. And the big companies in my space still are sadly.

Adam Hooper (44:40):
That's right for me, I guess. Just recently we're allowing for electronic signatures, right? For the longest time up until a couple of years ago, you couldn't even getting electronically sign your accounting documents. Right? It had to be a wet signature. So hopefully getting with the times with some of the other providers out there too.

Mat Sorensen (44:56):
Yeah. And so we embraced certainly the e-sign for authorizations to invest and things like that account opening. We treat it like… What would we want if this was our account? And I self-direct my own account here. And so we're always very focused on making it easy for the client, but the fees has been a big rub. Many of the bigger custodians in our space have a fee based on the size of your account. And someone with a $300,000 account or more is going to be paying like 700 bucks at some of these places. We see clients moving over there to pay a panel $1,000 a year for their self-directed account. That's insane.

Mat Sorensen (45:35):
Our annual fee is 295 bucks. And every time you make a new investment it's between 50 bucks and 100 bucks to process the investment, we don't have any per asset fee or an account based on the size of your account is just a 295 annual account fee. Now, if you want to wire something, it's 35 bucks more checks are free, so there's some little fees there, but with us, once you buy something, you're paying 295 a year.

Adam Hooper (46:04):
And do you see more going towards that flat fee, kind of a structure?

Mat Sorensen (46:08):
Some but not necessarily more. You still see a lot of trying to hold on what they call the total asset value, TAB in our space. And it's really from the financial services industry carry over of an assets under management type fee model. And so I just don't think it works because frankly it dissuades some of the larger accounts, which are the accounts we love. Because it's like, well, we know they're going to pay for three to four times more for a million dollar account somewhere else. And they're going to pay here, where we love those accounts. They're usually savvy customers and know what they're doing. So yeah, I just think when we built our fee model, we built it for the customers we wanted, we wanted to attract the right customers still obviously make sure there was some profit in our business model, but I think something over 500 a year, I don't know, that seems a little high for me, why they would need to charge that much a year, because once you've made the investment, there's not a lot going on, right?

Mat Sorensen (47:07):
There's some tax reporting on your account. There's some statements being done. When you set up your account and making a mess and there's a lot of work, there's a lot of paperwork and process and procedure to get it funded. But once it's sitting there and maybe there's some income coming in getting deposited, I think 295 is a pretty reasonable fee for the customer and for the company.

Adam Hooper (47:26):
Good. Anything else that you want to touch on with either the manager side tapping into this capital or the investor side, looking to tap into their retirement accounts?

Mat Sorensen (47:38):
What I just see on the manager side is let the investor decide where they should put their money. I think of some managers have taken the stance of, well, "I think it's just better they invest their personal dollars." Okay. And maybe some people are like, "I can raise enough money from my network which is individual dollars. I don't need to tap into retirement accounts." Well, remember there's not any fiduciary liability to you. So if someone's preached to you that, don't worry, you're a real estate operating company, 50% or more of the assets that the company holds is real estate. You're exempt from that anyways. And I just say that what then decide? There's so many people out there that have retirement accounts that are dying to do this stuff. They have a high level of interest or that when they find out about it are gonna be so excited that they can do that.

Mat Sorensen (48:26):
Because they've worried about their retirement account have been annoyed with the performance of it. And they're like, "Finally, I can invest in this stuff that I've used my personal dollars for, because I was interested in with doing it with my personal dollars." So let them make the determination of what's right for them. I mean, I think fund sponsors aren't advising them on what to do with their money anyways, there's giving them the opportunity, let the investors decide, but remember there's $30 trillion out there in retirement accounts. And for someone that needs to grow more and wants to raise more capital, it's where the money's at.

Adam Hooper (48:58):
Agreed. Well, Matt, I think that's a great spot to end today. Want to let listeners know how they can find out more about what you guys are up to?

Mat Sorensen (49:07):
Yeah. Go to, is our site accounts can be set up online within a 24 hours. We have our podcast there, It's also on all the podcast channels, iTunes, Spotify, Stitcher, we're everywhere. And then yeah, just let us know if we can be of service. That's our expertise. We have a lot of resources, FAQ's white papers on our side. We actually have a white paper on real estate. I think we're really breakdown five to six pages on how retirement accounts can invest in real estate. That could be a good resource.

Adam Hooper (49:43):
Perfect. And we'll have links to all that in the show notes. So Matt, with that, we'll wrap it up really appreciate you coming on today. Hopefully we'll make it less than two and a half years next time before we get you back on the show. Thank you for sharing everything with us today.

Mat Sorensen (49:57):
Okay. Thanks out on my pleasure.

Adam Hooper (49:58):
All right, listeners, that's all we've got as always, if you have any comments or feedback, please send us a note to podcast at And with that, we'll catch you on the next one.

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