JF1463: From Boots-On-The-Ground Investor To Private Lending & SDIRA Expert with Chris Tanner
Chris was flipping houses and owned some rentals. He realized that he wanted to be more hands off and also loved helping others get involved in real estate. Now, he lends privately as well as helps people with self directed retirement plans. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Chris Tanner Real Estate Background:
- Business Development Manager at New Direction IRA
- Specializes in helping people use self-directed retirement funds for real estate investments
- Author of “Beat the Traditional Retirement System”
- Based in Denver, CO
- Say hi to him at https://newdirectionira.com/home or ctannerATndira.com
- Best Ever Book: Invest in Debt
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Best Ever Listeners:
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Chris Tanner. How are you doing, Chris?
Chris Tanner: I’m doing great. How’s it going today, Joe?
Joe Fairless: It’s going really well. Nice to have you on the show. A little bit about Chris – he is the business development manager at New Direction IRA. He specializes in helping people use self-directed retirement funds for real estate investments, and he’s the author of “Beat the Traditional Retirement System.” Based in Denver, Colorado. With that being said, Chris, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Chris Tanner: Yeah, of course. I’ve been involved personally as a real estate investor since about 2006. I mostly was involved in single-family, rental-type properties. More recently, personally, I’ve gotten into the private lending business… But I took a special interest in utilizing self-directed retirement accounts to help people invest in real estate. So I’ve done it both personally, I’ve also owned a company, which specialized in self-directed or solo 401-K plans, and I’m now working at a company that offers any sort of self-directed retirement plan you can imagine, we offer it… So that’s where my specialty lies.
Joe Fairless: Cool. Well, I believe I know where we’re gonna focus our conversation then, and it will be helpful for a lot of the Best Ever listeners who have those retirement accounts that they can tap into for real estate.
You said you owned a company and now you work for a company, so how come you don’t own that company anymore?
Chris Tanner: I was kind of a one-man band, and what I found is as time went on, being involved in accounting, marketing, bill collecting, promotions and helping set up plans – I was wearing too many hats… So I had a good opportunity to kind of merge my business with another business, and really focus on what I’m good at, and that is helping people with advice and doing the correct things with their self-directed retirement plans, and kind of the backdoor stuff – the bill collecting, and those types of things that I didn’t have a passion for; I don’t have to do those anymore. Hopefully that makes sense.
Joe Fairless: Oh, it will help you live longer as well, to be focused on things that you enjoy and that you’re good at. What does a typical client come to you saying, and what is the typical result, assuming that things go according to plan, based on how you envision them?
Chris Tanner: For your Best Ever listeners, this is really for people that are just investigating self-directed retirement plans. I think a lot of people come in and they wanna invest in real estate… My advice is that you wanna be kind of specific. I think sometimes when people are new, they just have this broad definition of investing in real estate, and when somebody calls me, if they are specific and they say “Chris, I wanna invest in a single-family rental”, that helps me guide them and direct them to the best fit or the best product to match their needs.
If they’re just wanting to do private money loans, we might do something a little bit different for them… Because there’s so many ways, as you know, Joe, to invest in real estate, it really helps to be specific in what exactly is it you wanna do, or maybe even have a specific investment. So that would be my biggest thing, is that people have a good feel for what it is they want to do and how they wanna match that.
Joe Fairless: Please educate me on how investing in, say, private money loans versus apartment syndication or a single-family house would change what you recommend… Because I thought – and clearly incorrectly – that a self-directed IRA is a self-directed IRA, and then there’s not much more than that. I know there’s checkbook IRA’s and some other things, so can you elaborate on that?
Chris Tanner: Absolutely. I wanna give you two specific examples, and one of these was personal experience… When I bought my first single-family little rental property, I used a self-directed IRA, and I didn’t have enough money to buy this property outright, so I used leverage, and I got a loan from a bank… And within that IRA plan, what I didn’t know and I didn’t understand going into this deal was that when you use leverage, there’s something call UBIT (Unrelated Business Income Tax), and when you use leverage in an IRA, you’re subject to UBIT.
So what ended up happening is that meant I had to file an additional tax return called the 990-T, that cost about $500/year, and then I was fortunate enough three years later to sell this property and there was some appreciation. Well, what I learned was that when there were capital gains, you might actually be paying tax on those capital gains, even though it’s within a retirement plan.
The reason I share that story is that there’s a better way and a way I could have done that deal utilizing a Solo 401K. So the 401K – when you take title in a 401K and you use leverage, it’s not subject to the UBIT tax. So if I have somebody call me and say “Hey, I wanna buy a single-family in the name of the retirement plan”, obviously, I would say “Here’s some things to consider. I would suggest you might consider the 401K, simply because you can keep all of that capital gain within your retirement plan; you’re not paying that extra UBIT tax.”
So that’s one example of where we would wanna fit the investment to the most efficient or tax-effective plan, and shame on me, I learned the hard way, but I learned. Sometimes it’s easier to learn from somebody that’s made the mistakes previously.
Joe Fairless: That’s one of the reasons we do this podcast. That’s really interesting, thanks for sharing that. What about private money loans? How would you structure that?
Chris Tanner: The truth is with the private money loan there’s not a significant amount of difference when it comes to what kind of a plan you utilize… So the biggest thing I would have to figure out for folks is how quickly they need the money. Sometimes they need the money very fast; they might need check-writing ability, and the ability to process that a little bit faster, in which case a checkbook type situation might be a better fit, if someone’s wanting to do that.
In other words, they would be able to cut checks or process payments quite a bit quicker than if they used a custodian, for instance.
Joe Fairless: What are the main types of plans?
Chris Tanner: It’s a great question. What I would do is I would break it down into three categories. The first one I think is the one – and this is probably what you are familiar with – we just generically call a self-directed IRA. That’s a scenario where you have a custodian, and the custodian actually holds the money on behalf of the IRA owner, and what happens is the IRA owner directs the custodian to make an investment.
There are pluses and minuses to that. One of the pluses is the custodian is going to be looking at all the transactions, to make sure you’re not committing any prohibited transactions. So I think for newer investors, who aren’t as familiar with the product, that’s actually a good option, because they have a little more oversight.
And then you may have heard of what I would call checkbook IRA’s, or sometimes you’ll hear them called an IRA-owned LLC. This is still a self-directed IRA; the difference is that there’s an LLC typically that’s owned by the IRA, and the advantage to that is that it does give the IRA owner checkbook control. So they literally have a bank account with checkbook control, it’s just funded by the IRA… So it allows people to move quicker.
For example, if they were going to a tax deed sale, or maybe a tax lien sale where they need to produce a check after the sale, that gives them that option.
Then the last type of retirement plan that’s in the self-directed world would be what I would call – and you’ll hear it called different things, but it’s a self-directed 401K. Sometimes you’ll hear it called a Solo 401K, or sometimes you’ll hear it referred to as a qualified retirement plan. This is a product that’s for people that have a small business, that they can affiliate that 401K plan to, but it is also a checkbook control type retirement plan. This is one that offers a lot more control, but it also comes with a lot more responsibility.
Within those three there’s different bits for different people, and sometimes people start with one and they may graduate to a different one based on their needs later on, which was what happened to me.
Joe Fairless: Are the self-directed 401K plans for small businesses exclusively, or do other people use them?
Chris Tanner: In order to establish the actual 401K, there does need to be a business entity of some kind in place… And when we say business entity, it could be anything from a sole proprietorship, to a C-corp, it could be a partnership… The form of the entity isn’t as important as the fact that it needs to, number one, be a legitimate, active business. So you wouldn’t wanna set up what I consider to be a paper business, where you just file the articles of organization, you pull an EIN number, but there really isn’t an underlying business. That would jeopardize your retirement funds.
You need a legitimate, active business, and the business needs to have active income. As long as you meet those criteria, it doesn’t matter if you’re a one-person business or a larger business, then you can self-direct that 401K plan that’s associated with it.
Joe Fairless: What’s a mistake that you’ve heard someone make, and then they come to you with having made the mistake and you’re like, “Sorry, buddy, I can’t help you out. You already messed up.”
Chris Tanner: Well, real estate investors, as you know, and I’m sure some of your Best Ever listeners, are creative people, and they’re very entrepreneurial. And what I would tell your listeners is when you’re using retirement funds, that’s not the time to get creative and try and work the system. So when we’re talking about retirement funds, the IRS has very specific rules about who you can invest with, and sometimes what you can invest in.
The biggest mistake I see is people commit prohibited transactions. In essence, what that means is they’re doing something with their retirement money that could jeopardize their self-directed retirement plan. So be creative when you’re using personal money or your business money, get as creative as you want, but with the self-directed retirement plans you really wanna look for what I would consider to be vanilla type stuff, that there’s no danger of any prohibited transactions.
Joe Fairless: What are the most common prohibited transactions?
Chris Tanner: The biggest one we see in real estate involves self-dealing. What the IRS basically says is that you can use retirement funds to invest in real estate, but you can’t personally benefit… So a real common example is someone might co-mingle their money. What I mean by that is let’s say somebody has a fix and flip; they go out, they buy the fix and flip in one of their business names, and then maybe they use their retirement plan to help with the rehab. Well, right there they’ve committed a prohibited transaction, and the penalty can be pretty severe. When there’s a prohibited transaction with an IRA, the IRS can actually distribute that IRA, meaning you no longer have an IRA.
So they either work with themselves, or they work with other people that they have businesses with… So they may not even know they’re committing a prohibited transaction, because they’re working with somebody that indirectly somehow benefits them… Or they can’t work with direct family members, like mom, dad, their wife, or their son, or their daughter. So you’ve gotta kind of keep the retirement funds separate from those prohibited individuals.
Joe Fairless: What’s maybe a story or example of a prohibited transaction that you’ve only seen once, and you’re like “Really? That happened?”
Chris Tanner: That’s a great question. Probably the prohibited transaction I can think of and it was unintended was a situation where a client gave a loan out, and did the loan in the name of a self-directed retirement plan… And loans are pretty safe, from the standpoint that you’re not out working on a property, you’re not doing anything, you’re just lending money.
Well, where things became tough and became difficult is this particular deal went bad. So it was a loan secured by real estate, and when the loan went bad, their only recourse was to foreclose. Well, the challenge that these individuals faced was that most of their money was tied up, meaning there was not really a cash reserve available, because unfortunately, if your Best Ever listeners have ever had to foreclose, you’re gonna have filing fees, you’re most likely gonna involve an attorney, so there’s some costs associated with this…
So this individual used their own money from their personal account to go ahead and pay the attorney, pay for some of the filing fees, because they just didn’t have the money in their retirement plan. Well, unfortunately, that’s a co-mingling. They should have paid for everything out of the retirement plan. So that was an unfortunate situation, so if I had an opportunity to advise that person before that happened, I would have told them “Let’s find a way to get some money into the retirement plan, and then pay for it out of the retirement plan.”
So they could have made a contribution to the retirement plan as a way to pay for it out of the retirement plan, as opposed to just paying for it directly out of their personal bank account. So that was one I wish we could have interceded a little bit sooner.
Joe Fairless: Man, it’s crazy… It’s the same money, it’s just how it flows. It can have major implications from a tax standpoint if you misstep.
Chris Tanner: It most definitely can, so my recommendation for your listeners, the Best Ever listeners, or our clients, is before you do something, pause and go ask somebody who knows. It’s always easier to ask; it might not be the answer you wanna hear, it might not involve doing the easiest thing, but it will certainly protect you from the IRS coming in and potentially distributing your retirement plan, which is the worst thing, one of the last things you would ever want to happen. So just get advice from somebody that knows.
Joe Fairless: What’s your best real estate investing advice ever?
Chris Tanner: For those with self-directed retirement accounts, find a competent custodian or advisor who can best match your real estate investing to the self-directed retirement account that you want or intend to use.
Joe Fairless: Amen to that, certainly! If you’ve got one — there’s too much regulation in place for us not to have a smart team member on our side with that. We’re gonna do a lightning round. Are you ready for our Best Ever Lightning Round?
Chris Tanner: Let’s do it!
Joe Fairless: Alright, let’s do it! First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve recently read?
Chris Tanner: Interesting little book called Invest in Debt. The author is Jimmy Napier. A quick book that at first glance doesn’t seem all that great or powerful, but it’s one that after I read it and understood the power of the financial calculator and the power of being a banker has really shifted the way I invest.
Joe Fairless: Best ever way you like to give back?
Chris Tanner: What we’re doing right now. The way I love to give back is just through education and advice. I’ve been at this game for quite a while, both personally, as a real estate investor, but more specifically from the self-directed retirement side. So what we’re doing right now, Joe, is how I love to give back, especially when people are new to this arena. They really need somebody that they can go to to give them good, sound advice, because there’s all kinds of information out there – some of it is good, some of it is bad, and some of it can actually be poisonous.
Joe Fairless: Best ever way the Best Ever listeners can get in touch with you and learn more about your company?
Chris Tanner: There’s a couple of ways. You can find me on LinkedIn – just look for ChrisTanner1. I am the bald guy with glasses. The other way is by e-mail. The e-mail address is CTanner@ndira.com (ND stands for New Direction).
Joe Fairless: Awesome. Well, thank you so much for being on the show, Chris, talking about the three main types of plans: self-directed IRA, checkbook IRA and self-directed 401K, also known as Solo 401K… Telling the stories about some prohibited transactions, what happened to people, a more esoteric example, as well as what happened to you and what you learned, and perhaps how you got more and more involved in this space.
I’m really grateful… I’ve interviewed a lot of self-directed IRA experts, and I learn something new every time, and I certainly learned a whole lot from you, so I’m really grateful that you were on the show.
Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Chris Tanner: Thanks, Joe.