The government spends billions of dollars each year on goods and services, and by tapping into this vast marketplace, small businesses can secure lucrative deals, gain steady income and heightened visibility. In this episode of The Agent of Wealth Podcast, host Marc Bautis and guest Richard C. Howard dive deep into the world of government contracts.
As a career military acquisitions officer, Howard oversaw $82B+ in DoD contracts, and has advised and trained over 400 companies as a consultant. He’s the CEO of DoD Contract – which guides, trains, and mentors small business owners and sales executives through the government sales process – and the host of DoD Contract Academy Podcast.
In this episode, you will learn:
- The benefits of selling to the US government as a small business.
- How small businesses can find opportunities to sell their products or services to the government.
- How small businesses can stand out in the government procurement process.
- How small businesses and startups can utilize the Small Business Innovation Research Program.
- And more!
Resources:
www.dodcontract.com | DoD Contract Academy (Podcast) | Usaspending.gov | Sam.gov | Small Business Innovative Research Program | Bautis Financial: 7 N Mountain Ave Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.
Welcome back to The Agent of Wealth. This is your host, Marc Bautis. I’m joined by a guest for today’s episode, Richard C. Howard. Richard is a leading authority on US federal government contracts. As a career military acquisitions officer, he oversaw $82B+ in DoD contracts, and has advised and trained over 400 companies as a consultant. Richard is the CEO of DoD Contract, which guides, trains, and mentors small business owners and sales executives through the government sales process.
Richard is the host of the DoD Contract Academy Podcast, and speaks extensively on the nuance of federal contracting strategy. Richard, welcome to the show.
Thanks for having me on, Marc.
I don’t think people even realize that government contracts are out there. Can you start off by explaining this market size, and some of the benefits of selling to the government as a small business?
The Benefits of Selling to The US Government as a Small Business
The US government is the single biggest purchaser of goods and services in the world. When people think about government spending, most immediately think of big defense contractors. But in reality, the government buys just about anything you could think of – from defense and weapon-related spending, to tai chi instruction, to commodities, to food. Think about it like this: Every military base is basically a small town, or city in some cases. All of the infrastructure that goes into that town or city is paid for by the government. And they have a mandate to buy from small businesses.
So whether you’re in – cybersecurity, accounting, legal, you’re selling food, you have a franchise, you have a training business – the government is most likely buying in your area. It is very rare that I find an area where the government isn’t spending money, so the spending is vast.
The government has to buy from small businesses, yet less than half of 1% of US small businesses are actually participating in the government contracting process, despite the high spending levels.
Alright, so there’s a lot of opportunity here. How does a small business find the contracts?
How Small Businesses Can Find Opportunities to Sell to The Government
Because we’re talking about the government, there is a lot of regulation that exists to ensure there’s fairness and that the public can see what the government’s doing. So everything the government spends money on – with the exception of a couple classified contracting avenues – is public knowledge.
So, as a small business owner, you should ask, “Does the government buy what I sell?” To find your answer, go to a website like usaspending.gov and begin searching public records to find out what the government spends on.
Whatever you sell, it probably falls under something called a North American Industry Classification Code, or NAICS code. When you go into usaspending.gov, type in what you sell under NAICS – for example, accounting. The website will suggest different codes that you would fall under. You can click on that, and sort it by small business spending.
You can quickly see how much the government spends on small business contracts in your industry and area of focus.
Are these contracts location specific? Does it help if a business is located near a military base, for example, or does it not matter?
It depends on what you’re selling. By the way, government contracts certainly extend past the Department of Defense and military bases. There’s lots of different federal agencies that spend money.
Okay so once a business owner discovers how much the government is spending in their niche, what’s the next step?
Once you know that the government buys what you sell – if it’s local, they buy it in your state, or if not, you can work anywhere – the next step is to register your company. You can do that at sam.gov. That’s where all registering and most of the solicitations take place.
So when you go to sam.gov, you’ll find instructions on the screen for registering. Of course, you need to have a legal business in the United States, and come ready to register with your EIN number.
All in all, the process takes a couple weeks sometimes, but at the end of it you’ll get what they call a CAGE code and UEI number – these are federal identification numbers for your business. Once you have those, you can start bidding on contracts.
By bidding, do you mean writing proposals?
Yes.
How Small Businesses Can Stand Out in the Government Procurement Process
What can a small business do to separate themselves from the others trying to do the same thing?
Good question. This is really where most companies fail in selling to the government…
Once your business is registered through sam.gov, you will begin to see what’s called a request for proposal, or RFP. At that point, a business can begin writing a proposal. But, the government is very regulated in how they buy products and services.
For instance, if I saw an RFP come out that the government is looking to buy a $3 million landscaping contract for base X, I can’t just pick up the phone and talk to someone to get my questions about the contract answered. Now, if it’s a big contract, the government will answer most questions publicly through sam.gov. In those cases, you might get some answers that can inform your proposal.
But otherwise, you won’t be able to set up a meeting with a government worker. You won’t be able to develop a relationship…
So, before the RFP comes out, there’s something called the market research phase. Let’s say you’re a software developer, and the government is putting a command and control platform together, and you have a great user interface for that. Well, it’s during the market research phase that you can engage with the government if you really want to have a shot at landing the contract later on. Meaning, before the RFP comes out, we want to know who is doing the purchase, and we want to know the details of the opportunity ahead of time.
If you want to differentiate yourself from the rest of the herd, you want to look for things like a request for information or sources sought. When those come out, they’re squarely in the market research phase. At that point, you can set up a meeting with the government.
I recommend small businesses to respond to requests for information. They’ll answer questions like:
- How long have you been in business?
- Do you have past performance?
- What do you think of the approach the government wants to take?
And, you’ll be able to suggest things. For instance, when you register your business, there are different certifications. Examples include:
- Small business certification
- Woman-owned small business certification
- Disabled Veteran-owned small business certification
If you happen to have one of those certifications, you do have a leg up, because the government needs to set aside a specific percentage of contracts to those certified businesses.
But, back to the market research phase, you can actually recommend that the government lists the contract for a specific certified group. So, you’re helping the government write the solicitation, and you can give yourself a leg-up if you suggest a certification you have.
Okay, so you’re trying to influence the decision a little bit. Have you ever seen a case where a small business had a product or service that the government isn’t spending on, but they propose it to them?
Yeah, there are a couple of ways to do that. I would say if you take away one tip on selling to the government, it’s to get meetings and build relationships with the people that actually buy what you sell. There’s a lot of ways to do that, but mainly through research.
If your business sells a product or service that the government is not actively looking for, but you want to sell to the government, the government needs two things: A requirement, and funding.
The Small Business Innovation Research Program
If it’s an innovative solution of some kind, for example a patent, you can go after something called the Small Business Innovative Research Program, or SBIR. Any government agency that spends a certain amount of money in research and development has got to contribute to this program. So, the SBIR program spends about $4 billion a year on innovative research and development contracts with small businesses.
This is a way to basically propose your product or service to the government, because they have funding in the SBIR program. If the review panel thinks that what you have is innovative, and that it would achieve a government need, you can win one of those contracts.
Phase one of SBIR is kind of low dollar. Let’s say, for example, you’re creating a VR training system. In that case, phase one might just be a feasibility study. You might propose that the government uses a VR or augmented reality training system to help maintain or fix aircrafts, for instance. Well, that might resonate with the board. That first phase one event is probably going to be somewhere around $100,000-$150,000, which is small for government contracts.
But, what you’re really doing is:
- You’re establishing past performance with the government, because now you have a contract.
- They’re now going to help you find people in the government that would potentially sponsor you.
Now you can’t totally rely on the government SBIR office, you also need to put yourself out there to find a sponsor. If you find somebody willing to sponsor, but they don’t necessarily have to have money, they just sign a memorandum of understanding for you to go to phase two.
Phase two is to develop a prototype, or set up a demonstration. There could be a lot of different things that you’re recommending, but that’s the phase two piece.
The Small Business Innovative Research Program is really great for getting your feet wet. Even if you have a developed product but you’re modifying it for government use, that would also qualify for the program.
Going back to finding these opportunities, my father actually had a government contract through a larger corporation. He created a pellet that went into 50 caliber ammunition. He wouldn’t get the government contract himself, but General Dynamics or Olin would go through him to create this component of their contracts with the government. Are there opportunities like that out there?
Yes. That’s a really good point. There is a variety of ways the government can buy things from a small or large business owner. For example:
- Contracts.
- Subcontracting.
- Sole source contracts.
As a business owner, you need to understand how the government is buying what you’re selling. That’s something that you can do pretty easily with the research tools the government offers.
Let’s say you own a company that is licensed to do HVAC. Over time, you’ve built a relationship with the government office that purchases contracts in construction. From that relationship, you learn that next year, Hanscom Air Force Base is going to be building an office building, and you have interest in installing the HVAC system. But, you aren’t able to take the full construction contract.
What I recommend you do is look through a website like usaspending.gov to see which construction companies have done that type of work with the government – illustrating past performance – and reach out to them about this upcoming opportunity. The fact that you’re bringing them this opportunity sweetened the pot for them to work with you, involving you in the project.
If you reach out to three companies like that, you’ll get at least one or two bites to form an agreement and go after a large contract together. That’s very helpful for a small business, because the big company can handle the proposal writing, and so on.
Artificial intelligence is all the rage right now. Do you see AI being used to uncover some of these opportunities, or to help small businesses in this process?
It’s interesting that you bring that up. Two of my recent episodes on the DoD Contract Academy Podcast were about AI in the government space.
One of them is called Govly, which uses artificial intelligence and machine learning to enable government contractors, OEMs, and distributors to accurately plan for government purchases years in advance
The other is called Rogue, which is an AI tool specifically designed to help businesses write proposals for government contracts. It kind of works like ChatGPT.
Business Financing and Government Contracts
What happens if a business needs financing to fulfill an order from the government?
First, it depends on the contract. If it’s a SBIR contract, where the business is developing something for the first time, then you can win the contract before you have to start development. But those are research and development contracts.
So let’s say you win a small services contract that involves employing 20 people. The small business will have to pay those individual employees before the government pays the small business. That’s because there’s about a 90 day turnaround time on invoicing to the government.
Now, there are certain financing houses set up specifically for government contractors. One thing to know is once you win that government contract, it’s one of the most secure contracts you’re going to have. So a lot of banks know they can count on the government paying the business.
That’s also one of the reasons companies go after government contracts – because it increases the value of your company.
Are Government Contracts Recession-Proof?
In addition to AI, the other thing that we’re constantly hearing about is this looming recession. At a high level, how is government spending compared to other industries?
Government spending is more stable. I always recommend that business owners – small or large – have one stream of income from commercial sales and another stream of income from government sector sales. The government is spending year over year, whether there’s a recession or not.
But I would say that the government experiences difficulties in different ways, and typically at different times.
Usually, if you have a three-year government contract, for example, you’ll receive that funding month over month. Now, there are times when the government shuts down, or when there is sequestration. The government can terminate a contract for convenience. But if they do, there are regulations to protect the companies that held the government contract.
That’s good. Well, we’re just about out of time. Richard, thank you for joining me today. You did a great job explaining how businesses can leverage government contracts as well as how to navigate the government procurement process. What’s the best way for our listeners to contact you or learn more about your advisory coaching services?
Your listeners can go to dodcontract.com to schedule a consultation. On the website, we also have courses available. And of course your listeners can check out my podcast, DoD Contract Academy, on whatever platform they like to listen on.
Great, we’ll link to those resources in the show notes. Thanks again, Richard. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review on the show.
Are you tired of being limited to just stocks, bonds and mutual funds in your retirement account? It’s time to discover the world of self-directed IRAs, where the investment options are endless. In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Mat Sorensen, CEO of Directed IRA and the best-selling author of the go-to book for investors and professionals in the self-directed IRA industry, titled The Self Directed IRA Handbook: An Authoritative Guide For Self Directed Retirement Plan Investors and Their Advisors. His knowledge as an attorney is sought-after for real estate, private funds, notes, rules and regulations.
In this episode, you will learn:
- What a self-directed IRA is, and how it differs from a traditional IRA.
- What types of assets you can invest in using a self-directed IRA.
- How to use a self-directed IRA specifically to invest in real estate.
- The risks and potential benefits of investing with a self-directed IRA.
- How to set up a self-directed IRA, and how to ensure you are compliant with the IRS regulations when using a self-directed IRA.
- And more!
Resources:
directedIRA.com | The Self-Directed IRA Handbook: An Authoritative Guide For Self Directed Retirement Plan Investors and Their Advisors | Mat Sorensen Social Channels: Instagram, Facebook, LinkedIn, Twitter, Tiktok | Bautis Financial: 7 N Mountain Ave Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. Today I’m joined by Mat Sorensen, the best-selling author of the go-to book for investors and professionals in the self-directed IRA industry, titled The Self Directed IRA Handbook: An Authoritative Guide For Self Directed Retirement Plan Investors and Their Advisors.
As CEO of Directed IRA, Mat led the trust company to One Billion in Assets Under Administration in three years. His knowledge as an attorney is sought-after for real estate, private funds, notes, rules and regulations. Mat, welcome to the show.
Thanks, Marc. I’m happy to be here to talk about self-directed IRAs.
This conversation is timely, because alternative investing is popular, especially now with everything going on in the markets and banking world. Can you start off by explaining what a self-directed IRA is, and how it differs from, say, a traditional IRA?
What Is a Self-Directed IRA?
Like you mentioned, the stock market has been a rollercoaster lately, so our business at Directed IRA has significantly grown.
A self-directed individual retirement account is a type of IRA that can hold various alternative investments normally prohibited from regular IRAs, as well as the usual range of financial investments. Using a self-directed IRA, you can invest in the following alternative assets:
- Private stock
- Investment real estate
- Limited partnerships
- Cryptocurrency
- Commodities
- Precious metals, such as gold
- Crowdfunded assets such as loans
Most people are blown away when they learn that this is even a possibility.
IRA vs SDIRA: What’s the Difference?
When you have a traditional IRA, you’re with the traditional assets that a brokerage has on the menu – stocks, bonds and mutual funds. With a self-directed IRA – which can be either a traditional IRA, Roth IRA or 401k – the account owner directs all of the investment decisions through a custodian or broker, like our company Directed IRA. As a result, the owner has a much greater degree of flexibility in choosing investment options.
Yeah, a lot of people don’t realize SDIRAs are an option, probably because self-directed IRA custodians don’t have the same marketing budgets as Fidelity or Schwab, for example.
Right, we’re outspent.
But, like you mentioned, you can invest in almost anything. As far as restrictions go, there are only three, right? Life insurance, S corporation stocks, C corporation stocks, and collectibles… Am I missing any?
That’s it. Those are the three no-nos.
- Life insurance is not permitted inside of a SDIRA, but you can buy it inside of a 401k, in some fashions.
- Because IRAs and 401ks don’t qualify as S-corporation shareholders, they cannot own s-corporation stock. But SDIRAs can own c-corporation stock, LLC units and LP interest.
- While collectibles are not permitted, precious metals like gold, silver, platinum and palladium are.
We’ve had clients buy ownership in Mexican soccer teams, livestock, water rights… All of these are assets that people don’t really think of investing in using their IRA or 401k.
So, how does someone open a self-directed IRA?
How to Open a Self-Directed IRA
If you want to open a self-directed IRA, you’ll need a custodian. Typically, this is a bank or trust company. And because not all custodians support nontraditional assets, you need to find a special SDIRA trustee or custodian that offers the alternative investments that you want to buy and sell.
Our company, Directed IRA is a trust company. We’re audited and regulated by the banking department. There’s maybe 30 companies that do what we do in total.
For example, if you have $300,000 in a traditional IRA at Fidelity, and you want to invest $100,000 in a private placement in some business – whatever it is – you just transfer over the $100,000 grand from Fidelity to your IRA at Directed IRA. Then, we’ll go invest the money and hold the asset in your IRA with us. The remaining $200,000 can remain at Fidelity, or you can transfer the whole thing, it’s up to you.
A lot of self-directed IRA investors invest $50,000 chunks, but we have as much as eight figure accounts at Directed IRA. You can transfer whatever you want, depending on your interest, knowledge and how you want to diversify.
How to Use a Self-Directed IRA to Invest in Real Estate
Can you walk through an example? Let’s say an individual opens up a self-directed IRA account at Directed IRA to purchase a piece of real estate inside the IRA. In this example, let’s say they’re buying it using cash and not leverage. So, they transfer over $200,000 to cover the purchase of the investment property… And here comes the first question: This real estate property has to be an investment, right? It can’t be a vacation home, or a home that is rented sometimes, but used by the owner other times?
Exactly. Yeah, that’s one of the first rules you have to know. The prohibited transaction rule is what restricts you from having use of an asset that your self-directed IRA owns.
When you purchase assets with your self-directed IRA, they need to be investment assets, not for personal use. And it can’t even be quasi personal use, like a vacation home that’s rented for 51 weeks in the year but used personally for one week. It has to be held 100% for investment purposes.
Also, the prohibited transaction rule requires you to buy and sell your assets with third parties. You’re restricted from buying and selling assets from yourself to your IRA, and the same goes for your spouse, children and parents – you self-directed IRA can’t buy or sell assets with them.
Back to your example… Let’s say you’re buying the $200,000 investment real estate property with cash. The self-directed IRA is the buyer in the transaction, so it will take title of the property. It’s not “Mat Sorensen” buying property. On the contract to purchase, it would read something like: “Directed Trust Company, FBO, Mat Sorensen IRA.” As the trust company, we send the money from your self-directed IRA for the earnest money deposit to acquire the property.
Let’s say this is a rental property, and that you have a property manager. That property manager is going to get the rental income, pay the expenses, then send the cash flow back to your IRA. So everything’s happening inside of your IRA, you just own it. The money remains in your account with us, which we keep for qualified retirement account purposes. It is a legitimate IRA.
The nice thing is that the income inside of the self-directed IRA doesn’t hit your 1040 tax return. It’s just like buying and selling stock in a traditional IRA account. You don’t have to pay tax as you accumulate this wealth, and get gains on the assets.
Can you talk a little bit more about income and expenses? Can I take the income and go on a vacation with it?
You can, in a way… You can receive it in your IRA, and if you’re 59½, you can take a distribution. But otherwise, no.
If you’re familiar with buying and selling inside of a traditional IRA or 401K, think about this the same way. An investor doesn’t live off of the income in their retirement accounts – it’s growing until you qualify for a distribution.
The same thing is true on the expenses side, right? Let’s say the investment property needs a new roof, which will cost $10,000. The owner of the self-directed IRA can’t take $10,000 from their personal bank account to fund the expense. That money has to come from the funds inside of the self-directed IRA, right? Either in the form of a contribution, or from the funds that have built up as a result of the rental income.
Exactly right. Those are the two options. The IRA gets the benefit of the income of the asset, which you don’t pay tax on, but it also has to bear the expense of the asset.
That said, you want to make sure there’s enough cash in the account to cover unexpected expenses, because if you’ve maxed out your contributions for the year, you can get stuck.
Now, there are some workarounds, like a revenue ruling called 80-28, where you can lend money to your IRA to avoid losing an asset or wasting an asset. It’s possible to get around sometimes, but it’s very painful.
Now, going back to our example… In it, the $200,000 to purchase the investment property was available in the self-directed IRA funds. What if that’s not the case? What if $100,000 is available, and the individual wants to take out a loan for the remaining $100,000?
You can get a loan to buy real estate with an IRA, but you’re not getting it at Wells Fargo or Bank of America. You’ll have to go to a bank that lets you do what’s called a non-recourse loan.
One of the other types of prohibited transactions is what’s called an extension of credit prohibited transaction. Again, these prohibited transactions are rules that are applied to self-directed IRAs and 401ks and, if you engage in one, you lose qualification of the retirement account. If you’re under 59½, there’s penalties… It’s ugly. You don’t want to commit one.
So there’s this extension of credit to transactions that prevents you or your IRA from guaranteeing debt. So my IRA can buy real estate, it can get a loan on real estate, but my IRA can’t guarantee it, nor can I, as the IRA owner, or my spouse or kids.
There’s a number of banks out there, we have them listed on our website, that do non-recourse loans. What they do is they lend on the property, and in the event of default, they will foreclose and take the property back. They’re not going to go after the IRA or the IRA owner for any deficiency.
Because those banks don’t have any individual or account on the hook, they typically require 30-40% down. So, in your example of a $200,000 property where the investor has $100,000 in the self-directed IRA, they’d qualify for the non-recourse loan and acquire the property that way.
Now, the property needs to be income-producing. You can’t get a non-recourse loan on raw land, although your self-directed IRA could own that type of investment, a bank won’t lend on it.
Will a bank deny the loan if the investment property is being purchased for the depreciation aspect, rather than cash flow?
That will depend on how much money you have down. There’s going to be a debt service coverage ratio that the bank looks at. Every bank’s going to have their formula. If you want to get into the details, we have webinars available on directedIRA.com about lending.
Okay. Sticking with real estate, I have a question about the benefits to it. Let’s say an individual has $200,000 in a self-directed IRA, and $200,000 available to invest outside of their IRA. Why should they purchase investment real estate using the self-directed IRA, and not the other way around?
That’s a good question. I say: Do both.
If we’re only talking about one opportunity in your life to purchase an investment property – with or without funds inside of a self-directed IRA – I see the argument to buy it personally and invest your IRA in something else. What happens, though – and this is tax lawyer Mat talking – high-income individuals don’t really get the benefit of depreciation. I own a lot of rental properties. I don’t get to take the depreciation right off. I can offset other income on other properties, but I can’t use it to offset my ordinary income.
You have to be a real estate professional to use real estate losses against your ordinary income. Well, I’m not a real estate professional. I have a day job and run businesses, but they aren’t real estate businesses.
So, for a real estate professional, that argument could make sense. But, keep in mind, when you sell rental real estate property, you have depreciation recapture. The real estate professional gets depreciation, but eventually the IRS gets paid on that. You could do a 1031 exchange and try to kick the can down the road… But, again, I have a lot of sophisticated real estate clients, and sometimes they end up putting deals and time deadlines that don’t really work. I’ve seen a lot of clients sell great properties and end up in crappy ones due to a 1031 exchange.
For our real estate clients, our message has always been to do both. That’s what I do – my SDIRA invests in real estate, and I choose to do it because I get a better, overall return then, say, a mutual fund.
Speaking of real estate, a lot of people like to lend out of their IRA. I’ve heard CPAs recommend doing that, because it’s ordinary income versus capital gains. Also looking at, all right, if you’re doing both, does it make sense to kind of look at the taxes that you would pay outside versus inside and try and maximize what types of assets they’re putting into each?
Yeah, great point. Private money lending using an SDIRA is very popular. This is just a secured note to some other investor, and the lender gets points and interest.
It’s becoming even more common right now, as banks are tightening up and cash is becoming more valuable. So there’s an opportunity for it, for sure.
What’s the actual mechanism for opening up a self-directed IRA?
Our accounts are all online, so you can do an e-sign application to open an account. We also have new account reps that can walk you through it by phone.
Basically, it’s a simple, three-step process.
Step 1: Open the Account
Again, you can do this online. It’s pretty straightforward.
Step 2: Fund the Account
I’d say 95% of our clients move money from an existing IRA or 401k to the self-directed account. Some people start at $0 and begin making contributions, but most are transferring existing funds.
Step 3: Making the Investment
Whatever your interest is, the next step is actually investing the money. Within this step, there’s going to be investment documents. It might be documents for an LLC, or a subscription agreement, or the actual real estate closing paperwork.
One thing a lot of people do when it comes to real estate is they would actually rather have their IRA own an LLC – which they manage – and then the LLC owns the investment property. This is for people who want a little more control. They get the checkbook for the LLC, but their IRA owns the LLC.
So, essentially, a self-directed IRA can own an LLC, and the individual can manage that LLC, despite it being owned by their self-directed IRA?
Yeah. They don’t own the LLC, their self-directed IRA does. But they can be the manager of the LLC, which is like being the president of the corporation, they act on behalf of the LLC. If the LLCs is called “XYZ Investments LLC,” they would sign documents as “Manager of XYZ Investments LLC.” And that’s what’s on the title.
Now, you can’t take money from the LLC, because you don’t own it. The self-directed IRA does. So it’s got to go from the IRA to the LLC, then back to the LLC’s bank account, back to the IRA. Then, you can take a distribution from the IRA.
This LLC strategy is popular for people buying properties at auction, or doing a lot of private money lending. We have lots of clients who do non-performing notes, where they’ll buy bulk defaulted notes and try to work them out. I even use the IRA LLC structure.
Makes sense. Going back to our earlier example of purchasing that $200,000 investment property… Let’s say that I have $100,000 in my self-directed IRA. We talked about getting funding in the form of a bank loan, but what about if I have $100,000 in a personal account. Can my IRA partner with myself to purchase something?
Yes, but you have to be careful how you do it. Remember, there are prohibited transaction rules, and you are restricted from personally transacting with your IRA (same goes for your spouse, children and parents), but you can co-invest into assets.
So, using your example of a $200,000 property where you have $100,000 in your self-directed IRA and $100,000 in personal funds, you could put both sets of funds into an LLC where your IRA owns 50%.
Or, what’s even more common is co-investing with a spouses’ IRA. For this example, let’s say the property is $100,000, so that I can do the math easier. If your spouse puts in $60,000 and your account puts in $40,000, you would break up the ownership in that LLC at 60%-40%. You always break up the ownership based on dollars invested. But it is possible to combine personal funds with your IRA, or your spouse’s IRA, as an example
What’s the best way to avoid prohibited transactions? Can the owner of a self-directed IRA go to the custodian and give a scenario? I’m sure the custodian does not want to provide legal advice… I know your book has a lot of really good examples, but I’m sure people come up with all kinds of scenarios.
Yeah, we get all types of questions. The book is a great resource, but we also have a lot of free, educational content on prohibited transactions at directedIRA.com.
I always tell my clients that self-directing your IRA is like playing a board game. It’s not rocket science, but you have to learn the rules before you start rolling the dice.
But, like you mentioned, the custodian does not provide legal advice. At our office, we provide some education, and will teach you the clear cut rules, but if you’re in a gray area scenario, our team will make a suggestion to talk to an attorney, CPA or financial advisor who is familiar with the rules. In those cases, you’ll require professional advice.
Makes sense. Alright, that concludes the questions I had for you today, Mat. Thank you for sharing your expertise with our listeners. For those of you who tuned into today’s episode and are interested in learning more about self-directed IRAs, Mat’s book The Self Directed IRA Handbook: An Authoritative Guide For Self Directed Retirement Plan Investors and Their Advisors is available on Amazon. Mat, can you share Directed IRA’s website, or any other place that you’d like to send our listeners to?
Your listeners can go to directedIRA.com for resources like articles, webinars, podcast episodes, videos, etc. On the website, you can schedule an appointment with one of our account reps.
Great, we’ll link to those resources in the show notes. Thanks again Mat, and thank you to everyone who tuned in to today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review on the show.
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