Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - Investing in Real Estate with a Self Directed IRA and Solo 401k

Tyler Stewert
September 7, 2021
Podcast - Investing in Real Estate with a Self Directed IRA and Solo 401k

Mat Sorensen, Partner at KKOS Lawyers, joined us on the podcast to discuss how to invest in real estate with a Self Directed IRA and Solo 401k.

Mat is a partner at KKOS Lawyers, and serves clients nationwide from its Phoenix, AZ office. Mat’s practice areas include self-directed IRA law, business entity formation, tax law, real estate, and securities law.

Mat is the best-selling author of the First and Second Editions of The Self Directed IRA Handbook: An Authoritative Guide for Self-Directed Retirement Plan Investors and Their Advisors. The Self Directed IRA Handbook, Second Edition was released in May 2018 and First Edition was the #1 Hot New Release on Amazon/Kindle in January 2014 in the retirement planning category, and #3 overall Best Seller in January 2014 in the same category. It has sold 20,000 copies and is the most widely used book in the SDIRA industry.

Mat’s practice has a particular emphasis on self-directed retirement plan law. Mat has assisted over 1,000 clients with self-directed retirement plan investments and has established IRA/LLCs, partnerships, private offerings, corporations, and other investment structures with self-directed IRAs and 401(k)s. Most of Mat's clients are self-directed retirement account owners structuring investments in real estate, into IRA/LLCs, or into private companies. Mat's clients also include trust companies, financial institutions, insurance companies, hedge funds, and third party administrators. In addition to his legal practice, Mat also serves as an instructor for the Retirement Industry Trust Association's (RITA) Self Directed IRA Professional certification program. RITA is the premier national association representing the self-directed retirement plan industry.

Mat regularly consults self-directed retirement account owners on IRC 4975 and the prohibited transaction rules applicable to self-directed retirement account investments, on UBTI and UDFI taxes, and has successfully represented SDIRA owners before the IRS Appeals Office and the U.S. Tax Court

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Tyler Stewart - 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. Hey listeners, Tyler here. Before we start today's episode, I wanted to quickly remind you to head to to enroll into our free six-week course on the fundamentals behind commercial real estate investing. That's Thanks.

Adam Hooper - Hey, Tyler.

Tyler Stewart - Hey Adam, how are you today?

Adam Hooper - Tyler, I'm great. Again, I feel like I found myself saying this a bunch. It's a sunny day in Portland, so all is well.

Tyler Stewart - I love it, yeah.

Adam Hooper - Who else is joining use from another sunny climate today?

Tyler Stewart - Oh, we have Mat Sorensen from Arizona.

Adam Hooper - Ah yes, so Mat's back for another episode. I had him on about a year ago. Last time was a kind of a high-level overview of self-directed IRA investing, how to build the teams, some of the specifics around that, but today we went in for a deep dive on self-directed IRAs and solo 401Ks.

Tyler Stewart - And within the first 10 minutes of the interview, listeners will learn how to save $16,000 on $100,000 investment.

Adam Hooper - Pretty impressive. Yeah, courtesy of the new tax bill.

Tyler Stewart - That's right.

Adam Hooper - Yeah, so we'll talk about that. We talked about the IRA LLC, which Mat prefers to call that versus a checkbook IRA, how to set those up, how to setup a solo 401K, who they're right for. We talked a little bit about crypto. Just a right amount of that, and then we finished it up with what are some of the best questions that investors should ask when they're looking to setup a self-directed account.

Tyler Stewart - Yeah kind of did the full overview of self-directed IRA investing and solo 401K investing, and then dug into the details as well.

Adam Hooper - Yeah and Mat gave himself a little self-plug for his book you can find on Amazon. He's about to release a second edition of that, which you'll hear about in the episode, links in the show notes. So I highly recommend that book. It's a great reference resource for anybody that's looking at getting into the self-directed world. So I think with that, we should probably get to it.

RealCrowd - This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit to learn more about how we provide our members with direct assets to commercial real estate investments. Don't forget to subscribe to the podcast in iTunes, Google Music or SoundCloud. RealCrowd, invest smarter.

Adam Hooper - Mat, thanks for joining us again here. Glad we can have you back on on a hot day down in Arizona.

Tyler Stewart - Yeah, man. It's scorching in Phoenix already, so I'm not ready for summer, but I'm excited to be back. Second-time guest on the RealCrowd Podcast, quite an honor.

Adam Hooper - Yeah. So it's been, what, a little, almost a year, I guess.

Mat Sorensen - Yeah, just over a year.

Adam Hooper - Yes over a year since our last time we had you on. What has changed in the self-directed IRA world in the last year?

Mat Sorensen - A few things. First, there's three trillion more dollars in retirement accounts this year that when we talked last year. So--

Adam Hooper - It's a big number.

Mat Sorensen - Yeah. $28 trillion in retirement accounts. For any of you who haven't heard about self-directed retirement accounts, power retirement accounts can invest in real estate, that's the one thing I think you should realize is that's where all the investible capital is in the United States right now. There's $28 trillion of it. If you don't know how this money can be invested in real estate, you're really missing the boat and this is whether you're raising money for deals and you want other people's retirement accounts to invest in your deals or you're looking at how to invest your own little slice of the 28 trillion. It's a big topic. So the money keeps continuing to grow. People continue to throw money into their retirement accounts, and yes, it can actually be invested in real estate deals. There was of course tax reform too, you know?

Adam Hooper - Mm-hmm.

Mat Sorensen - I mean that was a huge huge thing that happened at the end of 2017. It did have some things that affected self-directed retirement accounts in a positive way, actually, which we can talk about that, and then I would say the last thing is is it's becoming more popular. Self-directed retirement accounts year after year become more and more popular. There's more and more accounts. There's now over a million accounts that are self-directed. The industry that I work in ran their own numbers amongst competitors and there's over a million total accounts right now of people...

Adam Hooper - Wow.

Mat Sorensen - already self-directing.

Adam Hooper - And so, now, before we get into some of the, again, the tax bills and the specifics of self-directed investing, I think it would be appropriate to take a quick second to talk about you're releasing a new edition of the book. Is that correct?

Mat Sorensen - That's right. I'm glad you asked.

Adam Hooper - Yeah give you a little opportunity to plug there.

Mat Sorensen - Yeah, the second... Yeah you have the second edition of The Self Directed IRA Handbook. That's my book. It came out, the first edition was out in 2013. It sold 20,000 copies. It really is the go-to book in the industry. Every major company uses it. The National Association in the industry uses it. You can check it up on Amazon and the reviews, but yeah the second edition is literally on Amazon. It got submitted over the weekend, last weekend.

Adam Hooper - Nice.

Mat Sorensen - So that's going to be available by the time you're listening to the podcast, and I've added three big chapters to it. 80 pages of content. 50 new legal citations and cases. Updated stuff that needed updating, but added three new chapters on solo 401Ks, which I think we're going to talk a little bit about today. That's a great tool for certain people. A new chapter on cryptocurrency, which is all the rage. I have clients investing in this thing years ago, and then obviously a lot of people investing in it now too, but I got new chapter on cryptocurrency, and then one on valuation and distribution rules, which are a little quirky sometimes for self-directed IRAs. So three new chapters. There's also going to be an audiobook done right now. I'm in the process on doing the audio book.

Adam Hooper - Perfect, and we'll put links in the show notes for all those as well so listeners can have access to that. So let's talk a little bit more about the tax bill. We've done a couple episodes with some of the big four accounting firms around how that's going to impact the real estate space. Primarily from either the managers or the individual investors' perspective, not necessarily from that of a self-directed qualified account side. So let's maybe kind of unpack that a little bit. How did the tax bill effect these qualified retirement account investment strategies?

Mat Sorensen - So the biggest change was, everybody heard about the corporate tax rate went to 21%. That was a big piece of tax reform and there's a weird tax called UBIT or UBTI that can sometimes apply to an IRA. The best way to think about this tax is, IRAs are designed to receive investment income, so rental income, capital gain income, dividend income, interest income. As long as retirement accounts get investment income, they don't pay tax on the money they make. That's one the great things of using and building wealth in a retirement account, but if you run into what's called business income, which would be like, in a real estate context, let's say it's a real estate development project or new construction projects, it's not like buy-and-hold real estate. It's more short-term stuff or development stuff. There's a tax called UBIT that can sometimes apply to that income, and it's a 37% tax. What happened with tax reform though is, now that you can, the corporate rate is only 21%, there's a strategy that was around before but it's now even more valuable called using a corporate blocker. So rather than have my IRA receive, let's say I did a real estate development with my IRA or it was invested in a new construction company or something and we're getting ordinary income from that, it's not rental income, it's not capital gain income, it's ordinary business-type income, if my IRA was going to get that, I'm going to pay 37% tax on that. That's a crushing tax. But what you can do is put a C-corporation election. The IRA ends up owning a company,

Mat Sorensen - which would be a C-corporation in this scenario, and the C-corp in turn owns the real estate development project or the new construction project. Now when that pays income out, it goes to the C-corp, the C-corp pays 21% tax on it at the new corporate rates, which are very low comparatively, and then it pays out a dividend to the IRA, which is exempt from UBIT.

Adam Hooper - Got it.

Mat Sorensen - So the strategy is basically, this blocker corp you can put in the middle, you get the 21% corporate tax rate, and then you get an exemption from UBIT 'cause you ended up paying corporate tax instead. It's been around for years, even before the rates down to 21%, but now it's a huge deal. For every 100,000 of income, it's savings you 16,000 in tax.

Adam Hooper - Right.

Mat Sorensen - Now the goal for most people when you self-direct is not to run into UBIT taxes, to just get investment income so you're exempt from it, anyways, but on the self-directed side, that's a big deal for people. Like I said, I have a lot of real estate developer clients and stuff like that that even use their Roth IRAs and those type of situations just 'cause that's where a lot of their money is and they can get tax free returns. Now they just pay 21% corporate tax and it's still lower than their personal rate, so big change-- 21% corporate tax rate.

Adam Hooper - And that, again, that makes sense because you got the tax protection from the retirement account, whereas, traditionally, if you had a C-corp, you'd have a double taxation right?

Mat Sorensen - Exactly.

Adam Hooper - But because you're not paying at the retirement-account level, with that corporate tax being lower than the UBIT tax, that's a great strategy.

Mat Sorensen - Yeah. Now it's just at the one level, which is the corporate level, and the corporate level rate got lowered to 21. So it's actually a, like I have clients that are real estate developers, for example, and they look at it and say, "Well, if I did this in my personal name, I'm on a 37% rate, personally. If I did it a C-corp personally that I own, I'm going to pay 21%, and then pay again on the dividend, paying the double taxes as you mentioned, but if I have my Roth IRA, for example, own the C-corp that does the development, I just pay 21%, period, I'm done, and now it's tax-free building up in my Roth after that."

Adam Hooper - Good, that's a great strategy. That makes a lot of sense. What about the primary focus of our earlier podcast on tax was with the pass-through, the 20% pass-through tax deduction? Does that have any impact on self-directed accounts or is that separate from because they're not paying tax in your retirement account that's nor really applicable.

Mat Sorensen - Right, exactly. So it's not taxable income to the retirement account for, so, no, you wouldn't have that. Again you probably are going to do the corporate rate anyway so you wouldn't get the qualified business income deduction which is more pass-through-related, but let's say that you did have your IRA, your self-directed IRA or 401 was invested in a partnership that had qualified business income, you could still get the deduction for that for your IRA, but then you're paying 37% UBIT tax, so, but you got a deduction for it. So really, 2018 moving forward, you're better off in every scenario. Really, on the personal side, on the corporate side, on the self-directed side, it's a win all the way around, really.

Adam Hooper - Any other changes in the tax bill that investors again specifically making investments through self-directed accounts, anything else that was in there that they should be aware of or that might've changed?

Mat Sorensen - No. There was a pending bill actually I was a part of, The Coalition for American Retirement, that did not get added to the final bill. So there are still some spending bills out there that kind of simplify prohibited transaction rules and try to minimize the penalties on those, but nothing that passed yet so that there's still some other bills on the works.

Adam Hooper - Okay, but overall, though, it seems like the tax bill was a positive change for those that are investing on their retirement accounts.

Mat Sorensen - Absolutely, absolutely.

Adam Hooper - Good. Well then let's do a lit bit of a deeper dive into the self-directed IRA. For listeners out there, some of this is is going to be a little bit of review of what we talked about last year, but we're hoping to do a little bit deeper dive on some of the specifics of it. So let's just start high level again. What is a self-directed IRA?

Mat Sorensen - So what a self-directed IRA is is really an IRA that can invest in any retirement, sorry, an IRA that can invest in any investment allowed by law. So most people when they think of their IRA or 401 typically think of buying stocks, bonds or mutual funds, and retirement accounts have always been able to invest in real estate or in private companies like LLCs or corporations that are privately held. The problem is the financial institutions who are the ones who started custoding retirement accounts when they first got created is they just sell financial product. That's their business. So they create retirement accounts to buy what products they easily sell, but there's 30 companies out there now in the self-directed-IRA space that you can use that will allow your IRA to invest in real estate directly or it can even own a note on real estate or it could invest in an LLC or limited partnership as a partner in a real estate deal. Those would be considered self-directed accounts, and it's mostly non-publicly traded assets. That's another easy way to think about it.

Adam Hooper - And now just at a naming convention, is that the same as a checkbook IRA or are those different?

Mat Sorensen - Those are a little different. A checkbook control IRA, that's kind of a term I don't love, but it's out there. A lot of people could understand it. We call that an IRA LLC. Essentially what that is is, see, when I have a self-directed IRA and I want to investment that, what happens is that all my investments get invested in the name of the IRA. So if I wanted to go buy real estate, for example, with my IRA or I want to invest in an LLC and get some LLC interest with my IRA, it's not Mat Sorensen buying the real estate or the LLC. It's Mat Sorensen's IRA. So that would be like, ABC Trust Company FBO Mat Sorensen IRA. That's who's going to be on that investment and owning it 'cause I have to own it in the name of the custodian of my IRA, which in that example would be ABC Trust Company. So there's a lot of back-and-forth with the custodian of your IRA to say, "Hey, invest in this. Oh, there's a rent check coming in." 'cause your IRA when it's involved in an investment, it receives all the income and it pays all the expenses. So there's a lot of back-and-forth going on there for certain things like, for example, a rental or a property you're going to flip, and a lot of times that can cause some headache for investors so they'll use what's called an IRA LLC or a checkbook control IRA. So rather than the IRA owning the real estate directly, the IRA owns an LLC 100%, the LLC in turn owns the investment, let's say a rental property just to keep it simple. Now that owner of the IRA is manager of the LLC, they don't own the LLC at all.

Mat Sorensen - Their IRA owns the LLC 100%, but if it's Mat Sorensen's IRA that owns the LLC 100%, Mat Sorensen can be the manager of the LLC and that allows me to manage the bank account. Now my IRA custodian invest the cash into my LLC that I setup and I'm managing the LLC, which is kind of like the holding company. The LLC then has the assets which could be a rental property directly, it could be a note, it could be a partnership interest in another company. That would be what's a checkbook control IRA, or we call it an IRA LLC, and we set lots of those up in our office.

Tyler Stewart - So are there reporting requirements for the investor under the IRA LLC, would have to report back to the custodian?

Mat Sorensen - Yeah, so once a year, you have to do what's called an annual valuation of the custodian to say what's in the LLC because once the IRA cash is invested into the LLC, the custodian's really not involved anymore of what's happening in the LLC. If my IRA got invested in the LLC, I'm managing the LLC, I'm signing checks, I'm paying bills on the investment, I'm receiving the income, I'm buying a new asset, I'm selling asset, but I have to report at least once a year using what's called an annual valuation form to tell my custodian what's in the LLC. So I would say, "At the end of 2017, I had a bank account with $60,000 cash in it and here's my bank statement at the end of 2017 and I own the property at 123 Green Street which was worth $40,000, and it's in the Midwest, and I own a partnership interest in XYZ LLC worth 50,000." So you add that up, it's 150 grand, and your custodian uses that to update your account 'cause they have to update your account annually as to the value and they report that to the IRS. So there's just kind of once-a-year update and report of what's actually in the LLC and what the value of those assets are.

Tyler Stewart - And then on those valuations, is that a third-party evaluation, like a purpose of paying a value or is it just self-reported value? What are the requirements around that annual evaluation metric?

Mat Sorensen - There's little differences between the companies, but usually most companies that it's just an annual valuation like you're not trying to do a conversion or take a distribution or you're not in R&D. This is your kind of annual evaluation, which has no tax consequence. As long as you have some third-party information, they're going to rely on it, like your bank statement's pretty clear for the bank account. For the value of real property directly, what I recommend is just getting like a comparative market analysis or something from an agent you know or maybe your property manager that says, "Here's what the value of the property is." You don't need a full-blown appraisal or even a broker-price opinion, but some just third-party estimation of value. And then if you're in, let's say a partnership, maybe it's a fund you invested into that owns real estate, hopefully that sponsor-ish work will, if they're allowing IRAs to invest, they should be having a system of letting everyone know what the annual value of the LLC is and what, if I got 10 units in the LLC, what that would be worth.

Mat Sorensen - And then I could provide that third-party info to the custodian.

Tyler Stewart - And is there a difference between a self-directed IRA and a IRA LLC as far as reporting? So the LLC, it's coming from the investor to the custodian. With a self-directed IRA, is that going from the sponsor to the custodian or...

Mat Sorensen - Yeah, yeah. If I had my self-directed IRA own the assets directly, I own the real estate directly or the partnership interest or fund interest, then it's still kind of my job as the owner of the IRA to track those down. The custodians in the industry are like, "We're not going to chase down all these valuations for all these assets. There's too much." They're all non-publicly traded and they can't really do it and frankly the people on the other end aren't really responsive to them. So it's really the investor that has to chase those down. So they'd have to get the fund sponsor or the issuer to say, "All right, here's what it's worth." and then they just pass a copy on to the custodian. Same thing with let's say real property held directly. You'd have to chase down a real estate agent or property manager to give you a comparative market analysis or something as to the value.

Adam Hooper - And then to, of course, caveat this with none of this is legal, or tax, or retirement advice. You must consult your--

Mat Sorensen - Right, yeah, exactly.

Adam Hooper - Professional--

Mat Sorensen - I actually gave that disclaimer.

Adam Hooper - We'll add that in the beginning. So one of the things that's come up in our industry is the kind of bankruptcy protections of whether it's a series LLC or multiple individual SPVs. Can an IRA have multiple LLCs that it owns or within that one LLC which you then drop down multiple entities underneath that so it's not all rolling up? How do you see that if you're making multiple investments and partnerships or individual buildings or other deals? How do you protect that main LLC from other business activities?

Mat Sorensen - Yeah. So I have some clients that have some asset in self-directed accounts and it's just a similar strategy you may do outside in the IRA world where, I mean I have some clients over $100 million in Roth IRAs. It's insane. How do you have that much money in a Roth IRA, but they're just really good at what they do. But for those like maybe over a million in an account, they might want to look at this because if I own 10 properties or 10 different investments in one LLC and something goes wrong on property number seven or investment number seven, well that plaintiff or that judgment for that asset can go against the LLC and all 10 assets...

Adam Hooper - Right.

Mat Sorensen - Are now tied up in that. So what we usually like to do is essentially a holding-company strategy where it kind of like the parent-child subsidiary. So you have the parent holding company that the IRA owns 100%, and then that parent holding company would adopt let's say property or investment holding assets separately, and we usually try to break those down every about 250,000 of assets. It makes sense to have a separate property holding or investment holding entity. So if I had 10 properties, for example, but they're all worth a million bucks, I'm probably going to do four different LLCs to divide up those 10 assets between and we just try to do it based on equity. On the one hand, sometimes we have clients that have, they'll have 100 properties and its owned in one LLC, and something goes wrong on that thing, they're all at risk. It drives us nuts.

Adam Hooper - Right.

Mat Sorensen - But on the other hand, I have clients that'll setup an LLC for everything and the properties are mortgaged to the hilt. There's not a lot of of equity and it's like, "That's probably overkill." So we want to look at what's the equity. Our rule of thumb is 250,000 of equity, do a separate kind of property holding LLC that the holding company owns just to kind of so your-eggs-aren't-in-one-basket kind of deal.

Adam Hooper - So there's no limit on structural complexity. Once you have that first LLC setup, you can do subs and you can do individual SPVs underneath that LLC.

Mat Sorensen - Absolutely. Absolutely. For those that are in a state that allows a series LLC, you can also do series IRA LLC. So for like Texas, or Tennessee, or Illinois, Nevada, Utah, those states that have series LLCs, you can do that too.

Adam Hooper - Got it. Okay, well that's a good summary there. Again, taking kind of a step back, we've talked a little bit about it, but who is the ideal candidate for utilizing this for self-directed IRA? Is it anybody? Should everybody do this? Why wouldn't people do this?

Mat Sorensen - It's not for everyone, but I will say it's for a lot more people that are using it. Tomorrow I'm speaking at the Scottsdale Area Association of Realtors Commercial Forum and when I go to a place like that, I always start out the same spiel and say, "How many of you have a retirement account?" 3/4s the room raises their hand. "How many of you own mutual funds in it?" and everybody's hands still up. "How many of you know a good mutual fund to buy? How many of you have found a good mutual fund?" Everybody's hand goes down. Most people don't even know what mutual fund they own anymore. If they know what mutual fund they own, they don't know what the fund owns. They're just like in the market. We've just been trained to just put your money in a retirement account and be in the market. Well, for that group of people, I always ask them, "Well how many of you know a good real estate investment or a good deal?" and everybody's hand goes up. It's like, "Why aren't you investing in what you know? If you're good at real estate and you spend all your time in real estate, you have a competitive advantage here. Why are you just letting your retirement account go on the market?" For most people, it's 'cause they didn't know they could use their retirement account to invest in real estate. So that's what I'm trying to teach people is really invest in what you know. I don't care what you invest into. It doesn't matter to me. I mean I have clients doing cryptocurrency, to commercial real estate, single-family real estate, hard money private lending,

Mat Sorensen - VC-private-equity stuff, startups, I mean, precious metals. I got clients all over the place, but they should invest in what they know where they have a competitive advantage, and that was really kind of the story of Mitt Romney, if you recall way back when we had a different Republican presidential candidate. So Mitt Romney in his presidential cycle, I mean the salacious news during his time was, "How does he have $100 million IRA?"

Adam Hooper - Right.

Mat Sorensen - Well that's 'cause Romney was investing in startup and turnaround companies. He was consulting. They realized, "We're really good at helping these companies become successful. We're always out raising money for 'em. Why don't we invest our IRAs in them?" and that's what they did. They did self-directed IRAs and they invested in these small little companies when no one knew what the heck they were. Now they've got big returns and that's kind of the story of his big IRA and that the principle there is simply invest in what you know. So if you're in the real estate world, you have retirement account dollars, why aren't you investing it in what you know? It seems kind of common sense to me. Why I want people just understand is how to do and actually execute it. Make sure you don't make some mistakes, but also for those in the real estate industry also, I think the real estate industry has been, I don't want to say lazy, but they've been behind. The financial-services industry got really, Wall Street, so to speak. The insurance companies, they all got geared up for retirement accounts. They realized there's so much money pouring into it. They're like, "We got to offer products for this. We got to make it easy for retirement accounts to buy stock, easy for retirement accounts to buy annuities." and they would create all these products. The real estate industry, meanwhile, is just like kind of asleep at the wheel. You've always been able to own real estate. Now it's finally, as technologies improved, the word's starting to get out,

Mat Sorensen - we're starting to see more and more activity in it, but I think the message is simply invest in what you know. That's who should self-directed. Now if you're like, "I don't know anything about investing. I have no idea what to invest in," well, maybe don't self-direct then. I mean I'm not saying you should do it, but if you have opportunities to invest or you know an asset class better than let's say Wall Street investments, maybe look at investing your retirement account in that.

Adam Hooper - And then the process to start one or to convert, can you convert a traditional IRA into self-directed? How do you go about actually getting into a self-directed account?

Mat Sorensen - Yeah, so you can have any type of self-directed IRA, whether it's a traditional IRA, or a Roth IRA, a SEP IRA, a simple IRA. Those can all be self-directed, so to speak. So you can have a self-directed traditional IRA, a self-directed Roth IRA. So let's say I have just a traditional IRA at Fidelity and I'd buy stocks and mutual funds with it. Well you could transfer that to a self-directed IRA custodian and you'd have a self-directed traditional IRA. It's basically like going from Merrill Lynch to Charles Schwab, you just change the custodian and that's all you're doing. A self-directed custodian is basically when you're money's there, it's going to say, Well, we'll let your account invest into any investment allowed by law and you want to invest in real estate? Great, we'll execute that. You want to invest in an LLC? Great, we'll execute that. If my account's at let's say Merrill Lynch and I say, Hey I want to to invest in this limited partnership that's going to own an apartment building, they're going to say, You can't do that. It's not 'cause retirement accounts can't own that asset. It's 'cause Merrill Lynch won't let you do that, unless you're an ultra-high-net-worth client with 50 million of assets or larger. Everyone else, you're like, "Well, you can do that." So what you'd have to do is then, you say, "Okay well I'm going to move my account then and I'll go to one of these 30 self-directed IRA companies who will let me self-direct."

Adam Hooper - That simple.

Mat Sorensen - That simple, yeah, that easy. A lot of the other group of people who go to self-directed IRAs is people who have prior 401Ks. They left an employer or they reached retirement-plan age and they can rollover their 401K to an IRA. That's a lot of people doing the self-directed IRAs also.

Adam Hooper - Now so we'll talk on the solo 401K in a second here too, but before we get off the self-directed IRA, maybe this is the same with the 401K, you said any investment allowable by law. What are the restrictions there? What can't you invest in? What triggers problems when you're running a self-directed account?

Mat Sorensen - Yeah, there's really, I mean in terms of the types of investments that you cannot invest in, there only three things: collectible items like an art collection. Retirement accounts used to be able to buy collectables, like you can buy a wine collection, but the wine collections turned into bottle collections and there's a lot of abuse. So Congress was like, Well, we can't let people buy collectibles, 'cause people were putting art in their home, and it's like, Yeah, my IRA owns that. Okay, or they're buying antique cars. So collectibles were out. Life insurance, can't buy that in an IRA, and then S-corporation stock IRAs just don't qualify as S-corporation shareholders, but everything else is fair game. So IRAs can own LLCs, limited partnerships, again, non-publicly traded here for self-directed people, real estate, tax liens, notes, all that stuff retirement accounts can own. The biggest restriction though is what's called the prohibited transaction rules, and that's essentially a rule that says whom your account can transact with. It doesn't really save what your IRA can or cannot buy. It's whom can you transact with. What that rule basically is is Congress said, "Hey, when we create these retirement accounts, these are like tax-favored accounts. We're giving people a really good tax incentive with a retirement account." 'cause it's like if I buy a real estate for $100,000 with my IRA and I sell it for $300,000, that 200,000 of gain goes back into my retirement account and I don't pay tax on it. That's a big incentive for people to save

Mat Sorensen - in a retirement account, but they said, "We don't trust you to use that account with certain people. We don't want buying assets from yourself or selling to yourself or your spouse or your kids or your parents." So there's certain family members essentially that are what are called disqualified persons and that just means your IRA cannot transact, buy or sell between those people.

Adam Hooper - Got it, and that's, again, those are pretty well-known, well-defined rules for people that are looking at this. We can maybe send us a link to some resources that further explain a little bit about that or how do people learn about that? Is that something that their custodian applies or that's just kind of general knowledge that someone running a self-directed needs to accumulate? How does someone--

Mat Sorensen - It's definitely something you want to know before you invest and that's, what I tell a lot of clients is or new people to self-directing is, self-directed IRA is not difficult, but it's kind of like when you start it, it's like playing a board game for the first time. If you didn't read the rule book or you're not playing with someone that knows what the heck they're doin', you're going to screw it up. You're going to make wrong moves. You're not going to be playing it right, and then someone else in going to come and be like, "Boy, you jacked this up. What are you even doing?" So you need to kind of read the rule book or do it with someone you know first who knows what they're doing, but it's not hard 'cause once you've played it a few times, it's the same thing over and over again. So the rule book, of course, would be my book, The Self Directed IRA Handbook. It's only 20 bucks, guys.

Adam Hooper - No shameless self-plug there, that's okay .

Mat Sorensen - Yeah , so. What I would say too is if you go to my website,, I have a top 10 frequently-asked questions on self-directed IRAs that kind of answer the top-10 questions people typically ask or could eventually end up running into when they're self-directing their account. So at least go through that and that goes over the prohibited transaction rules in some significant depth. I attached videos to it as well. So it's a comprehensive article to check out.

Adam Hooper - Good, and, again, we'll put links to all this in the show notes for the listeners out there. Well, let's switchover now to the solo 401K. How is it similar or how is it different? What are restrictions around that versus the IRA side of the world?

Mat Sorensen - Yeah, and solo 401K is becoming much much more popular. IRAs, the difference is an IRA is simply an individual retirement account. If you have retirement account money or you're individual, you can have an IRA. It's pretty easy. For solo 401Ks, on the other hand, are essentially a 401K for one person or it could be for spouses or even business partners, but solo means one and the solo 401K for one person. But it's essential a 401K plan designed for self-employed people with no other employees. Now a 401K plans are employer-based plans, so there must be an employer that adopts the 401K for the benefit of its employees, but I could be an Uber driver just putting my income on schedule C as a sole proprietor. "I'm self-employed now. I could adopt a solo 401K." A lot of people that use solo 401Ks, though, would be, we actually have a lot of real estate clients that do it, from real estate investor clients to real estate professionals, brokers and stuff who are self-employed, but they really don't have any other employees. It's just them. I have a lot of syndicator clients that also, they may use a lot of 1099 contract or those other professionals, but they, they're kind of just, it's just them so they could adopt a solo 401K. So the reason someone would do a solo 401K instead of an IRA is, if I'm self-employed, again, with no other employees, other than family members, partners, or spouses, then I can adopt the solo 401K and I can put up to 55,000 in it a year. In an IRA, you can put in 5,500 bucks a year as a new contribution.

Mat Sorensen - So to grow, if you're like starting from scratch or you don't have a lot of retirement plan money yet, IRAs take forever to grow and most people who self-direct in IRA, they had a 401 at a prior employer for 20 years and they roll it to an IRA and so those people aren't growing that account or starting self-directing by put in 5,500 bucks a month or, excuse me, a year. They've grown it over a lifetime of contributing to their, like a prior employer 401K. But a lot of people who are like, "I'm working. I'm self-employed. I want to stock away money in a retirement account or stock away money in a retirement account." the solo 401Ks where it's at 'cause you can put 55,000 a year into it. Basically the way it works is, with a self-directed solo 401K, we set these up for lots clients, you have a bank account for the 401K, you drop your money in as contributions, you're a trustee of that 401K plan, which allows you to basically make investments in the 401Ks name, sign for it, sign checks. So now my solo 401K could invest into a fund, or it could own real estate directly, it could have a note, whatever I want to do in the real estate space, and I don't have to have a custodian. That's another distinction. The solo 401K can be what's called self-trustee. You as the business owner can trustee it. So, again, the perks would be: I can put more money into it, 55,000 a year. I can self-trustee it. I don't need a custodian or I don't need an LLC to get checkbook controller or checkbook IRA. I can just do it right out of the solo 401K.

Mat Sorensen - It's also, really, there's some other perks to it, like you can loan yourself money from a 401K, which you can't do from an IRA. There's some participant loan rules that money personally. So there's a lot of other perks, probably don't have time for it today, but what I would say if there is anyone who is like, "Well, I need to do better saving for retirement account. I want to self-direct." if you're self-employed, the solo 401K is definitely the better route to go.

Adam Hooper - So it's not for an employee of Google that works and they have maybe 401 plan at that company. You can't necessarily create your own solo 401K out of your traditional employer contributed 401K plan.

Mat Sorensen - Right. Right. Now maybe if you have a consulting business on the side though that you do part-time, you could do that. I might have my 401K at Google, but I have my own solo 401K at Sorensen Consulting, for example, and that can be a sole-prop or a little S-corporation, whatever, and that can adopt a solo 401K. So we have a lot of clients like that that kind of have a day job and a small business that will adopt a solo 401K and the small business.

Tyler Stewart - Got it, and then can you rollover your 401K from Google into your solo 401K?

Mat Sorensen - You could, but it depends on the company rules. Most 401K plans will restrict you that you can't move your money out of the company plan until you either leave from employment or you reach retirement-plan age, which for most plans is 55 or 59 and 1/2. Usually, you're captive in their plan, and you can't move it out unless you meet one of those requirements. Some plans allow what's called an in-service rollover where you can usually get about 1/3 to 1/2 of the money out of the account, even before you leave or reach retirement-plan age, but that's kind of a plan-by-plan basis.

Adam Hooper - And so what is the process for creating a solo 401K? With the self-directed IRA, that seems pretty straight forward. Is it more complex with the solo 40K or is it pretty similar?

Mat Sorensen - Yeah, it's a lot more complex. You're right, like a self-directed IRA's pretty easy. You just go to a self-directed IRA custodian. You just fill out their forms. They create a bunch of documents and you got a self-directed IRA. The solo 401K, the company, let's say it's your sole proprietorship or it's your S-corporation or your LLC, whatever, that company has to adopt a 401K plan and 401K plans need to be pre-approved with the IRS. So we have, for example, we have a pre-approved 401K plan that's self-directed, solo, you can self-trustee it. So you have to adopt these plan documents, and then you get a tax ID for it, and then you're off and running. So it takes a little more work on the front end because you have to adopt a plan, whereas in IRA, you just kind of check the boxes and some forms, but once you're set up, it's not as hard because you don't have to pay a custodian every year and you do have some annual reporting on a solo 401K. If you have over 250,000 of assets, you have to file an annual report to the IRS called a 5500 that kind of says what's in there, it's not hard though. But the solo 401K is adopted with plan documents. It costs a little more on the front end, but in the long run, it's actually easier and cheaper.

Adam Hooper - And are you able to give a ballpark of costs for setting up a solo 401K?

Mat Sorensen - Yeah we charge 1,200 bucks for a self-directed solo 401K plan. That includes consultation and such.

Adam Hooper - And what is a typical account balance that makes sense to start doing this right for someone's that maybe starting out or has an IRA and maybe doesn't have 100 grand in there to start working with right away? What is a typical account size in either a 401K that they can do this or with a self-directed to roll that over?

Mat Sorensen - Yeah. Well, everyone's different. I would say the most common self-directed person usually has a couple 100,000 that they're working with that is maybe from an old employer 401K or maybe they had a SEP IRA for years they contributed to. So they kind of have some retirement-plan dollars already and they simply just roll it over to a self-directed IRA. But when I got into this industry, it's very interesting how I kind of stumbled into self-directed IRA, this is back in 2006, the real estate market in 2006 was on fire. I had a really successful real estate client who wanted to use a Roth IRA to do an investment deal and he had $10,000 that he had to work within this. So he used a Roth IRA. He got an option on a piece of property that he paid 10,000 bucks for. This property was agricultural property abutted against the freeway, but he knew, he was a developer, very savvy, kind of knew the City and County planning, and there was going to be a freeway interchange going in in this agricultural property. So he went to the property owner and said, "Hey, I'll give you 10 grand now, but you got to sell me this property within the next five years. I have the right to buy." I think for around like $400,000 and the property at that time was worth maybe 250, 300. So the owner of the property's like, "All right, I'll take your 10 grand. Great." Well, within three years, this free interchange goes up, the value of the property goes from agricultural to freeway commercial and now it's worth over $1.5 million and he's got an option on it to buy

Mat Sorensen - it for 400 that he paid $10,000 for from his Roth IRA. So he ends up selling the option for over $1 million profit and all goes into his Roth IRA. For me in 2006, that's when it really clicked for me where it's like, "I want to learn how to do this. I'm going to be the expert at this."

Adam Hooper - Right.

Mat Sorensen - Because I was like blown away, and this client's still a client to this day. He's got a pretty sizable Roth account. He's done a lot of smart deals like that. But he started it with only a little bit of money, but he had a good opportunity. He saw it, I mean this is a guy that is doing a lot of real estate deals already, but when he found the right thing to throw his Roth into, this is the Z-deal to bite off for him and he didn't start with a lot of money.

Adam Hooper - And that's a fascinating story. I mean, what a great position to be in to take advantage of that, right?

Mat Sorensen - Exactly, but I run into clients like that all the time. If you're good at something, and this is funny, this client in particular. He was so mad when I first talked to him about all his professional advisors he's had over the years. He's like, "I spent so much money on lawyers and accountants and other people." He's like, "They know my stuff."

Adam Hooper - Right.

Mat Sorensen - "They know what I do. They know that I can make a lot of money doing real estate. They see my tax returns and no one told me, 'Well, why don't you use a Roth IRA or you could use your retirement account to do this." He's like, "They just tell me to invest in the stock market." Once he realized this, he was like so happy. I think there's a lot of satisfaction for people when they can invest in something they know. When you invest in the stock market, to me, it's like I'm happy when my account goes up, but there's no satisfaction in it. What the heck did I do? I just kind of got lucky. I mean I don't know, but it's like, if I'm in that market and I have a competitive advantage and I'm working that investment and that pays off, those clients I think really have a lot of satisfaction to it and they love their self-directed account because it's turned into a tool for them. They're good at what they do and they just found this new tool for like this client with the Roth IRA. This just way more tax efficient and it's better way for him to grow long-term wealth.

Adam Hooper - And that's I think, as we talked about on the prior episode with you as well, that that's the main benefit of doing this in your retirement accounts and with real estate specifically is the ability to do that in a tax-free way.

Mat Sorensen - Right, yeah, and I think a lot of people come at this from different angles. Frankly, a lot of people, it's just where their investible cash is. A lot of people, it's like, they don't have, they might have 250,000 in their retirement account that they could put to a self-directed IRA, but they got maybe $10,000 in a savings account of personal money. So it's just where their investible cash is. So if they see investment opportunity, "Well, where's my investible cash? Oh, it's actually in my IRA. It's not in my savings account." You have to be smart about it. You don't want to bet the farm and lose the whole thing. So some people, it's just where their money is. Other people, they, it's more of, "Well, can I invest in a certain property or fund that's got a cap rate better than what the stock market's offering?" It's just basically, they're not trying to hit home runs, like some of the examples I was giving. They're just like, "Just give me something that pays a guaranteed return that's in a physical asset that I, not a guaranteed return, but, A stable return that's in a physical asset I can actually understand. I can't read a stock prospectus or a mutual fund prospectus and even understand it." But I have a lot of clients, like airline pilots, for example, and engineers, they hate the stock market and stock 'cause they can't understand it. They are the people that get the mutual fund prospectus and they get to like page 100. I didn't even know people read these things anymore. Peers don't even these things. But then they get to a self-directed IRA and

Mat Sorensen - they love it because it's like, "I can understand it."

Adam Hooper - Right.

Mat Sorensen - When I had a pilot client was a pilot, he's like, "When I flew planes," he's like, "I had to know everything about that plane. I had to know everything, how it worked." He's like, "And until I did that, I did not feel comfortable flying the plane." He's like, "It's like that with my money, with my retirement account. I'm scared of putting it into Wall Street because I just don't understand it or trust it." But with the self-directed investment, he's like, "I can understand 10 of my buddies in a partnership when we're buying a little apartment building. We each put in 100,000 bucks. There's $1 million cash going in. We got 10%. I get that. It's simple, it's easy. I can see the apartment building." So some people they just like being able to understand it and have comfort and peace of mind of an actual hard physical asset behind it.

Adam Hooper - Yeah. Now are there any traps or gotchas or anything like that that when an investor does convert to self-directed that they need to be looking out for?

Mat Sorensen - Yeah, so there's really three. We talked about two of them already. The first we had talked about at the beginning of UBIT tax which is, again, if you get into like business income, or development income on real estate, that can trigger that UBIT tax, which is 37%. Again you can use the corporate blocker to get down to 21% to try and minimize that. The second would be the prohibited transaction rules, which is essentially just the restriction that says you can't transact your retirement account between yourself. So I can't sell property I personally own to my IRA or vice versa or my dad can't sell property he owns to my IRA. That's all prohibited. I got to deal with unrelated people, and then the last one is something called UDFI, Unrelated Debt-Financed Income, that can apply to IRAs. So whenever an IRA invests into a leveraged asset, whether the IRA gets a loan to buy property, which has to do what's called nonrecourse, or invest into let's say a fund or a partnership that gets a loan to purchase the asset, there's a tax on the debt in the deal called UDFI. There's no way on a podcast I do it justice on why I need it, but basically the IRS looks at that and says, "Well, profits you make from the debt, we have to tax 'cause that's not retirement plan dollars." So there's an equation that goes into how much debt you have on the deal, and then that percentage of income that you make or that the IRA makes gets subjected to this tax called UDFI. Really it's not that big of a deal from what we see clients

Mat Sorensen - that end up paying this, 'cause we do these tax returns, really are invested in good properties, frankly, that are having a really good cash flow 'cause you still get to expense a lot of things. You get to take depreciation to offset it. So there's a lot of offsetting factors on it, but there is that. You should know about it. It's called the UDFI. It's a chapter in my book, also on my website, again, I have a one-hour webinar where I breakdown a specific property example and do all the calculations on it. So if you just go into the blog and put in UDFI, you can get kind of the nitty-gritty on it.

Adam Hooper - You had mentioned earlier when we were talking about structural setup, you just mentioned some people that have the kind of sub trialed LLC underneath the main IRA LLC and those properties would be mortgaged. So that's the case where you'd have this UDFI is if you put debt against one of these investments.

Mat Sorensen - Yeah. Correct.

Adam Hooper - Probably sounds more complex than it is or is it fairly complex calculation? Is that something that you as the accountant for or the attorney or counsel advisor to this self-directed investor would do or where does responsibility of making sure that that all ties out lay?

Mat Sorensen - Yeah it always boils down to the account owner's responsibility to figure it out, and then file a tax return and pay any tax if tax needs to be paid on it. So I can always help a client when they're going into a deal that's leveraged with debt kind of understand how much it'll be in their situation so they know going in, and then we do those tax returns of clients end up needing to have returns done and actually pay the tax, but it's usually your accountant or lawyer. The one thing that's kind of, the self-directed space is still pretty small and growing. A lot of CPAs and accounts don't know this tax or understand it or know how to do these returns so we started doing in my office and our law firm just 'cause we kind of have an expertise in it, but it's the only tax turn I do here on the firm just 'cause we have an expertise in it. But I will say too that within the self-directed space in particular, a lot of investment sponsors or people raising capital have tried to find ways to avoid using leverage. A lot of times I frankly I don't think it's a big deal. Again if the property's performing well and you're getting a good return, it's just kind of the cost of having the good return, but you'll see a lot of funds now that have no debt on 'em. I don't know, I've even seen 'em on RealCrowd over the years where it's all cash deal, they're not using debt at all, or if you're doing like a note or lending fund like a debt fund, that's exempt from it 'cause that's just interest income.

Mat Sorensen - So there's a lot of situations where you seen people position a investment strategy where it's not using debt and those ones are really easy for the IRA to invest in.

Tyler Stewart - So the IRAs play very nicely with debt-free, but you want to leverage, change your investment philosophy when using an IRA?

Mat Sorensen - Yeah, I mean, if I have a deal that's a really good deal that's using leverage and versus kind of a mediocre deal that doesn't use leverage, I'd rather invest in the good deal that has leverage and pay a little bit of tax along the way. So you don't kind of want the tax tale or the wag dog, so to speak, but you do need to know about it so you're putting that into your calculations and making the investment. But one thing I've seen some clients is, there's kind of different shades of this I've seen over the years. On the one hand, I've seen clients that had no idea about this tax at all and I'm the one kind of breaking the news to 'em sometimes, and then, on the other hand, I have clients that learn about it and they're freaked out about it so they never invest anything with debt. Well, that doesn't make sense either. You just got to look at the deal and is the debt valuable? Is it providing a good value? You're probably putting in less cash you otherwise need to to get the return and if the numbers work out, if you're getting a good return, just pay some tax along the way. It's going to be less than you would if you were personally invested 'cause it's only on the debt part of the deal.

Tyler Stewart - Sure, sure. So if a deal is levered at 70%, would that mean the investor 70% of their return would be taxed or how's the math work?

Mat Sorensen - Yeah, exactly. In simple terms, yeah. If a deal was levered 70% with debt and let's say my IRA was invested and I got a K-1 from my profits for the year of 10,000 bucks, so on that 10,000 of profit I would take 7,000 of that, 70% that represents the debt, and I subject that to the UDFI. The other 3,000 of the 10 goes back to my retirement account. I don't need to subject it to the tax, but the 7,000 that represents the debt part of the profits gets subjected to this UDFI tax. Now 7,000 in that example, you might end up paying 600, 800 buck on that. As you get higher, the rates go up a little bit, but you're going to be payin' them maybe 1,000 max on that scenario.

Tyler Stewart - Sure, and if you weren't using your IRA, you'd be taxed on the full 10,000?

Mat Sorensen - Correct, exactly, yup.

Adam Hooper - Okay. So I think as we kind of round out here, you mentioned a few times the buzzword de-jour of crypto.

Mat Sorensen - Yeah .

Adam Hooper - I think we'd be remiss if we didn't get into that just a little bit. We had earlier this year, BitGo bought Kingdom Trust. So we know that there's at least one custodian out there that's comfortable with holding crypto in self-directed. Have you seen that gain more acceptance or what are some of the rules or what's the temperature out there with self-directed custodians around holding crypto in a self-directed account?

Mat Sorensen - Well, in the self-directed space, I advise probably seven or eight different custodians that are banks or trust companies and most of them from a legal standpoint are okay with you owning crypto. What we've usually done for most of my clients when we started doing this years ago, it's funny. I even have a YouTube video on it that's funny when I had talked about what the price of Bitcoin was, and it's insane what it's at now. So I'm like, "Can you believe people pay this much for Bitcoin?" I even on the video, I'm like, "I don't know if you should invest in this, but if you are, this what it's at." Now I look back at it and just laugh, but what we do is an IRA LLC. So we say, "Have your IRA own an LLC, then have your LLC go open up a wallet and get on an exchange." for example, Coinbase. So I'd link my LLC. I do a business account through Coinbase, which actually pushes you through to GDAX which is their sister company. And then you would buy and sell your cryptocurrency through there. That's the best way to do it because it puts you in control. You can decide what to do with the keys for the crypto and you're in control. The custodians like that too because that's the biggest thing they're freaked out about.

Adam Hooper - Right.

Mat Sorensen - They don't want to have a data or security issue and a lot of 'em aren't really built up for that to be storing these keys. When you buy cryptocurrency, that's kind of like the dollar bill, so to speak. The key is everything. That's where the value is. If you don't have that, you can't exchange it or trade it for anything. So those keys, the cryptocurrency, like if I have my IRA buy it directly, technically, my custodian's got to be holding that or housing it in some way. And they're all kind of worried about that so that's why most of them have not gotten into the space yet. I know there's some that are getting close to it. There some of the depositories that kind of hold the precious metals that are security kind of firms, so to speak, that are looking at this and trying to figure out ways to store crypto keys for other self-directed custodian clients so they'll kind of be like a specialty place to store keys. So that's coming online. But right now for like the client's perspective, for someone wanting to buy cryptocurrency within IRA, we like the LLC structure. I actually bought a bunch of cryptocurrency with, I self-direct my 401K account and it owns an LCC. I use that LLC on Coinbase-GDAX to buy cryptocurrency and I just hold it in my wallet on Coinbase. So that's the most common way and easiest way to do it, and you're in control, you know?

Adam Hooper - Yeah. So then with the prohibited transactions before, I guess you can't buy collectibles with the...

Mat Sorensen - Right.

Adam Hooper - With the IRS's interpretations maybe somewhat in the air as to whether or not these are currencies or goods, property.

Mat Sorensen - Yeah. Well the IRS did issue a notice in 2014 on this saying that cryptocurrency is property. Which is perfect for IRAs because...

Adam Hooper - So that works.

Mat Sorensen - It means a lot of things. The IRA's going to own property. The other thing that was nice about it is buying and selling of property is capital gain income. So the buying and selling of cryptocurrency is capital gain income so you don't have the UBIT tax on it either. There's a new chapter on my book, I kind of go through that, but that 2014 notice, they weren't really writing it thinking of self-directed IRAs in mind, but their conclusions were really nice actually for self-directed retirement accounts to be able to buy and own cryptocurrency that's simplified. Some of the questions that were lingering out there.

Adam Hooper - But that's I think one of the biggest challenges that faces people that've made a huge amount of wealth in the crypto world is the tax implications. Every time you make a trade, that's a taxable event, theoretically.

Mat Sorensen - Yup.

Adam Hooper - So, had there been more awareness around how to do this through a self-directed account in the years past, maybe there would be less pain coming on the tax front. But I think yeah that'd be interesting to, maybe that's something we can kind of pick apart in another episode is how to look at the tax strategies around that. I think that that's an interesting layer that again as we're looking in this space too that is one of the biggest impacts of people that have generated that wealth through this crazy run up in the market is how to harvest that in a tax-efficient way or if there is.

Mat Sorensen - Yeah I mean for those who were really smart about it on the front end that used a Roth IRA or a Roth 401K, I mean they're sitting pretty and I have a lot of clients that did that. They're looking like geniuses now. Not only do they make a good investment choice, but they did it in a tax-free account. But yeah, for those that bought it personally, that is kind of the rub is, "I'm going to sell this or convert it into cash, essentially, or exchange it for other assets and I'm going to get taxed on that." And, yeah. I'm curious too about strategies. I haven't looked into it outside of the IRA spaces much just 'cause I keep such a narrow focus on that, but I run into that too with a lot of clients trying frankly coming up with crazy ideas that I usually shoot down about. "Can I do this and, well, this, and avoid tax? No, nice try though."

Adam Hooper - Yeah. So as we run it out, what are some of the key questions that investors should be asking, either of their advisors, of the custodians, or of I guess potential maybe potential sponsors that are going to be accepting self-directed funds? I know you've got some content and some checklist on your website, but what are kind of the top five questions that investors should ask if they're looking at converting or getting into the self-directed world?

Mat Sorensen - I think the first thing to just think about is, Is this right for me? Am I the type of person that likes to kick the tires and look at things and do my own due diligence? Do I understand a certain investment class that I want to go after or am I interested in learning about it? If that's the case, then you're probably a good candidate for a self-directed IRA. If it's not the case, then don't do it. If you're going to hate it, you're not going to like it anyways. And then once you're going about it, make sure you find a good custodian that you like working with. You want to be checking on fees. Some of the custodians, the fee ranges are very vast. You might have some self-directed custodians that I won't name names, but they might charge 'ya 1,000 bucks a year for a self-directed IRA account. That's insane. Some custodians are going to be more in like the 350 to 400 a year, which is probably where you should be. So, kind of be careful on the fees. The other thing is understand the account type and how to become, I brought up these questions earlier too about whether to do a solo 401K or an IRA. If you are self-employed with no employees, look at doing the solo 401K. If you can get a lot more money into it, it's actually easier to administer and handle and you got control right out of the bank account for the 401K. So that's a good option. And then the last thing I would say is when you go to make investments is, I've given some examples of people that have made a lot of money in self-directed accounts, but there's also people that have lost money at it. When you start self-directing,

Mat Sorensen - your financial advisor that frankly probably doesn't know about the assets you want to invest in anymore, you're off Wall Street now and they don't really have an idea of what you want to do and frankly they don't want to help you as much 'cause they don't make money off of you now. So you're kind of on your own in finding an investment, but seek out other professionals, whether they're other real estate professionals if you're going in real estate, lawyers or CPAs that can help walk you through it, do due diligence on your deals, and just learn the process of a self-directed IRA too on your first deal. Sometimes I think people are like, "Oh, I got to talk to an attorney or someone like Mac every time I want to do a deal." no, but on your first one, you should. The next one you do is the same type of deal. I'm going to give you the same info so you're probably going to get it down first time. So I think those are the things I kind of do on the front end and be thinking about before you pull the trigger and send hundreds of thousands of dollars into a non-publicly traded investment.

Adam Hooper - Perfect. Any final parting words? Anything we didn't cover you want to get in or any questions for us?

Mat Sorensen - Man , I don't know. You guys seen a lot of self-directed IRAs coming through RealCrowd?

Adam Hooper - Yeah, and I think, like you said, it's growing, right? We're five and a half years into this business, but we're still having conversations today that we were five years ago. So a lot of what we're doing is still just building awareness and a lot of why we do this podcast and why we're excited to talk to you again is just to kind of get this out there, introduce people to the ideas. I know Tyler's a little bit more close with the investors and the activity on that side, but, yeah, we've been seeing a handful. I think it's increasing, so yeah.

Tyler Stewart - Yeah, yeah, and I think there's a growing awareness that you can use an IRA to invest in a real estate, but where the education really needs to come is, will you have to get a self-directed IRA custodian to help you do it?

Mat Sorensen - Yeah, I think a lot of people are like, "Oh, I can invest an IRA?" and they call their, they may call TD Ameritrade or Fidelity or wherever their account is and I'm like, No, no, no.

Adam Hooper - Right.

Mat Sorensen - "You can't do that." They're like, "Oh, I can't?" and they stop, you know? And it's just 'cause they're talking to the wrong people, but, yeah, I think it's growing. I love talking about this topic and, again, I think for a lot of people, it can be a really great strategy. For those in the real estate space raising money, to me, it's a no-brainer. I mean there's $28 trillion out there in this, nine trillion alone in IRAs that can be self-directed. Every one of those $9 trillion can be self-directed and invest into a real estate deal. If you think about a lot of the people you're raising money from, the people that are already putting money in, they probably have IRAs they might want to put money in from.

Adam Hooper - Right.

Mat Sorensen - Or a lot I have people that I know that are real estate deals, they're doing friends-and-family deals. It's like, Alright, my neighbor's puttin' in money on this. My uncle's got an IRA in this, but when they start talking about it and are smart about IRAs, they realize that actually there's more money in people's IRAs that's investible cash that they can put into my deal than there is in their regular investment or savings account. So it's kind of opening up that other set of funds that can be invested into real estate.

Adam Hooper - Do you know, of that 28 trillion, do you know how much of that is currently in self-directed accounts?

Mat Sorensen - Well, the estimate is about, there's a million accounts and the industry's estimated over 100 billion is invested in self-directed accounts that are going to be in real estate or partnership interest.

Adam Hooper - That's just a tiny fraction of what's available out there.

Mat Sorensen - Right. Yup, but it's grown I mean from 10 years ago, 10 years ago, it was probably 1/10th of that. I mean it's really really grown and I think the next 10 years, you're going to see it grow 10x again. It's growing. It's a fast-growing industry.

Adam Hooper - Okay. We'll keep spreading the word and we'll keep helping you do that as well.

Mat Sorensen - All right, appreciate it. Thanks so much for...

Adam Hooper - Perfect.

Mat Sorensen - Having me on, guys.

Adam Hooper - All right Mat, great to have you back on again. Listeners out there, as always, if you have any comments or questions, send us a note to, and with that, we'll catch you in the next one.

Tyler Stewart - Hey, listeners. If you enjoyed this episode, be sure to enroll in our free six-week course on the fundamentals of commercial real estate investing. Head to to enroll for free today. In RealCrowd University, real estate experts will teach you the important fundamentals like the-start-with-risk approach, how to evaluate real estate sponsors, what to look for in the legal documents and much more. Head to to enroll for free today. Hope to see you there.

RealCrowd - This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit to learn more about how we provide our members with direct access to commercial real estate investments. Don't forget to subscribe to the podcast in iTunes, Google Music or SoundCloud. RealCrowd, invest smarter.

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