JF1464: Passive Investing, Active Investing, and Raccoon Communities? With Whitney Elkins-Hutten

Listen to the Episode Below (22:31)
Join + receive...
Best Real Estate Investing Crash Course Ever!

Whitney is an investor with a wealth of knowledge and experience with multiple strategies and asset classes. She invests passively in multifamily syndications and self storage, actively invests in her own multifamily and does BRRRR deals! Joe and Whitney dive into different deals she’s either been a part of or was the lead on. There are a lot of valuable tips to pick up on in this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

Whitney Elkins-Hutten Real Estate Background:

  • Public health research turned operations and systems manager
  • Started real estate investing in 2001 with $0 of her own  
  • Now controls 345+ residential units and 1,437 self-storage units across 7 states utilizing BRRR, creative financing, and syndication strategies
  • Based in Boulder, CO
  • Say hi to her at: whitney.elkinsATgmail.com
  • Best Ever Book: Long Distance Real Estate Investing by David Greene

Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com


Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help.

See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


TRANSCRIPTION

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, Whitney Elkins-Hutten. How are you doing, Whitney?

Whitney Elkins-Hutten: Good! How are you, Joe?

Joe Fairless: I’m doing great, nice to have you on the show. A little bit about Whitney – she is a public health researcher turned operations and system manager. She started investing in real estate in 2001, with zero dollars of her own. She now controls 345 residential units and 1,437 self-storage units across seven states, using the BRRRR method, creative financing and syndication strategies. Based in Boulder, Colorado. With that being said, Whitney, will you give the Best Ever listeners a little bit more about your background and your current focus?

Whitney Elkins-Hutten: Yes, thanks Joe. So I started off post-college in public health research; I really always just leaned into helping communities and helping people. Over the course of my career I ventured into community health and nutrition primarily, working pharmacies, and my husband actually works for the government, and he realized just a few years ago that what we were doing to save for our retirement just wasn’t gonna get us there, and we wanted to have better clarity and control.

So we took my experience in real estate investing that I learned in 2001, and I rolled that into building out a rental portfolio that we hold single-family rentals, as well as a multifamily portfolio that we control – almost 345 residential units, and then also some self-storage units across the United States.

Joe Fairless: Self-storage, residential – is the residential a part of that? Is that an apartment community, I imagine?

Whitney Elkins-Hutten: The residential — no, we actually buy single-family homes and we utilize the BRRRR strategy. So we’ll buy low, rehab the unit, put a tenant in it, then refinance out and then just rinse and repeat.

Joe Fairless: So all 345 residential units are all single-families?

Whitney Elkins-Hutten: No…

Joe Fairless: That’s what I was asking, sorry.

Whitney Elkins-Hutten: No, it’s okay. We’re coming up on 20 residential units that we’ve through various strategies, including the BRRRR strategy. Of the 345 units, 325 are actually multifamily units that are in multifamily syndications.

Joe Fairless: Got it. So were you the GP on those deals?

Whitney Elkins-Hutten: No, LP.

Joe Fairless: I’m with you, okay. Now the picture is crystallizing. So you have 20 residential units, and then separately you are limited partner on 325 apartment units.

Whitney Elkins-Hutten: And increasing month over month.

Joe Fairless: Okay, cool. And the 1,437 self-storage – are you a limited partner on those?

Whitney Elkins-Hutten: Yes, limited partner on those as well.

Joe Fairless: Okay, cool. What has been your experience in the differences between investing as a limited partner in apartments, versus self-storage?

Whitney Elkins-Hutten: The self-storage units are relatively new for me, but just looking at the business model, both multifamily and self-storage operate like a business; so you’re looking at the proforma and the P&L as if you were running your own business. Income coming in, all the expenses are figured into the numbers upon the purchase.

Now, self-storage – I think there’s additional ways, especially if you’re doing value-add, that you can bring in and partner with other entities, say like maybe who have a U-Haul contract that you wanted to bring in… So you can leverage other big names in order to build into that value-add.

Joe Fairless: And how do you pick which type of partnership or which type of deal that you invest in? I know that’s a loaded question…

Whitney Elkins-Hutten: [laughs] Great question though. I think really what has allowed me to scale as quickly as I have is to build out a trusted network, and to basically leverage that network, get to learn the people that are actually putting together those deals, and be able to build such a [unintelligible [00:07:00].28] where you can pick apart the numbers and really dive in on their particular strategy and where they’re going, their path that they’ve taken on building out their financials. So you really wanna put your money with a trusted provider.

Joe Fairless: And with the self-storage versus residential, and plus also combining with the 20 residential units that you’re doing, where does your focus go, and to what degree do you have to manage the limited partner investments?

Whitney Elkins-Hutten: Once you do the due diligence in the limited partner investments, the management behind that is relatively minimal… So  just making sure that the deposits are coming in on time, and then just kind of keeping an eye on how are things trending – are they trending according to the proforma that was put together? And then just staying on top of that investment.

As far as time, the 20 single-families take up far more time… Faaar more time! But it’s something that my husband and I actually really enjoy doing, so for now we’re okay with that.

Joe Fairless: What aspects of managing 20 residential units do you actually enjoy? I’m really curious to hear this.

Whitney Elkins-Hutten: Oh, no, no, no, we don’t self-manage our units; all of our twenty single-family residential units are managed by a property manager. We just really enjoy taking a home that’s been run down in the community and rehabilitating it and basically bolstering that community in a variety of ways. We’ve just actually finished one in Grandview, Missouri, that would be a beautiful home on an amazing street, and literally nobody would touch it with a 10-foot pole.

We went in there and really basically just removed the raccoon community. It’s just taking something that’s really run down and just making it beautiful again. That’s just something that I love doing, but at the same time it is a labor of love, and it’s not the best use of your time, but to that point we leverage our property managers in order to do our rehabs, so we’re not actually swinging the hammer or putting the paint on the walls ourselves.

Joe Fairless: And what would you say is the area where you make the most difference when overseeing your portfolio, in terms of profit and loss?

Whitney Elkins-Hutten: As far as where I have the most impact and control of the expenses, it’s gonna be within managing our single-family residential portfolio. As a limited partner, once you do the due diligence on the deal, you’re really a passive investor; depending on the relationship you have with the GP, you can maybe offer suggestions and give feedback, but as far like actually once you have bought into that syndication, you buy into it specifically for it to be passive, whereas on the residential portfolio there’s several different strings that you can pull to manage the numbers… But again, in both cases you’re really looking to buy right, and run either one like a business, as you would.

Joe Fairless: What’s been something that hasn’t gone right, that you can tell us about?

Whitney Elkins-Hutten: Well, I have a few examples. [laughs] Most recently, actually with the BRRRRR property that we just spoke about, that we just rehabbed in Kansas City, Missouri, we bought it at 95k, did all of our due diligence that we normally do up front; we were looking to put about 30k into it. Once we started tearing the walls apart, there were just things that we couldn’t anticipate based on the inspection, and we ended up putting about another 10k-12k into it. Fortunately, I build those variances into any of our proformas whenever we’re doing this type of deals, so it wasn’t too much of a hit, but it did impact our numbers in the end. We were looking for, obviously, a home run. Not all of them are gonna be that way.

We are still gonna be looking to make about 20% cash-on-cash return, and with that investment we were aiming for closer to 30% to 31%.

Joe Fairless: What were some things that came up during due diligence?

Whitney Elkins-Hutten: Well, we thought the raccoon family actually moved out. It turns out they weren’t… So we ended up putting a new roof on, and whenever the roofer was done — actually, he was almost done, and he forgot to put the soffit back on… The raccoon entered in one of the open soffits, and came back into the house, so all of the drywall that we had put up in one of the bedrooms had to be replaced.

Also, when we went to tear down the wallpaper in the living room, there was mold behind the wallpaper, so that was an expense that we had to mitigate… And to turn around and remove all that drywall, mitigate that as well. That was something that we hadn’t anticipated.

And then just the amount of work that we had to do in the kitchen, we underestimated for that, as well. But again, with any of these projects, I think anytime that you’re removing drywall, you just don’t know what’s behind it. You have to build that into your numbers, because there will be surprises.

Joe Fairless: You mentioned the variance, but I didn’t write it down… So how do you project that in your numbers, so that you have that cushion?

Whitney Elkins-Hutten: With this particular property, just due to the condition of it, I wanted to almost put in a 50% variance… So we were allotting 30k for our rehab, and I just went ahead and built in another 15k just in case.

There were things that we didn’t think that we were gonna have to actually do at the property that I wanted to make sure that we  were accounting for just in case we did… Perhaps replacing the mast with the electrical, if we had to upgrade the electrical box. If we got in that situation, I wanted to make sure that we had a 5k cushion to be able to account for that.

Again, anytime you take apart drywall, you just don’t know what’s behind it, so I always put in an extra 2k-3k in. In this case, knowing that we had to mitigate the pest, I doubled that and put in an additional 5k. So like I said, when we went over budget, it was just a couple thousand within our worst-case scenario that we had planned for.

Joe Fairless: What’s another story of a challenging situation?

Whitney Elkins-Hutten: Well, I’m not sure if this would be of interest to your listeners, but we actually had to turn an inherited property lately. I can dive into the financials around that…

Joe Fairless: Please, yeah.

Whitney Elkins-Hutten: We had a family member of mine pass away recently, and unfortunately – or fortunately, depending on how you look at it – we inherited a home in Houston, Texas. We live in Boulder, Colorado, so automatically we’re dealing with distance. The home we knew had not been maintained for the past at least 8 years, and we knew that there were plenty of issues with the house. We already knew that there was gonna be HVAC issues with the house.

What we didn’t realize when we ended up to go in to clean up the house – just the extent of the damage from the various plumbing issues, the HVAC going out… [unintelligible [00:14:03].17] the water heater had gone out, and in Houston, for some reason, in two-story homes they put the water heater in the second story; I don’t know why… So we had damage in the family room, into the kitchen… And then we generally had to deal with [unintelligible [00:14:20].21] situation in the house, and then unfortunately the death occurred in the house, so we had a stigma to deal with as well.

As we were digging in and looking to reposition this property, or figuring out what we were gonna do – if we’re gonna rehab it ourselves and keep it in our portfolio, revive it and sell it, or just turn it to an investor… Surprise, the house is in foreclosure! So it really took an all hands on deck. We really dove in and leveraged our network of realtors, contractors and other investors that we knew in the area to be able to just really understand what we had on our hands, but reposition it quickly and effectively… That way we could do write by the estate.

Joe Fairless: When you were going through that process, what aspect of all those things was the hardest?

Whitney Elkins-Hutten: Aside from the emotional part?

Joe Fairless: Right.

Whitney Elkins-Hutten: Dealing with the bank, honestly. Dealing with the foreclosure was by far for me the hardest… Just getting into a position to where you can actually communicate with the banks effectively and have them understand what your plan is… They are concerned; they have an asset that hasn’t been paid on for a number of months, and when they learn of the death, they’re scared, in a way… They’re gonna put pressure on the estate in order to reposition the home or get things paid off.

The other thing that we learned in this process is just being on the other end of the BRRRRR investor… Just how refreshing it was when we did end up working with investors that really took time to care about our situation and help find the best-fit need for us, as opposed to seeing an opportunity to get a cheap house really fast.

Joe Fairless: Based on your experience, what is your best real estate investing advice ever?

Whitney Elkins-Hutten: I’d say for the Best Ever listeners my best advice would be that if you [unintelligible [00:16:11].27] a proforma on a single-family deal or even a syndication, if the numbers don’t make sense, find out where the numbers do make sense, make your package or make your offer on that, and if you just can’t close the gap quickly enough, walk away because there’s always gonna be another deal behind it.

Joe Fairless: I was asking about things that haven’t gone right… What’s a proud moment that you’ve had as an investor?

Whitney Elkins-Hutten: Oh, wow… We actually just came off another rehab this spring, where we had a family — and I think we were going through it at the same time as we were dealing with this inherited property. We had a family in a house that we were looking to pick up, and they were just in dire straits, and just really going back to them and being able to empathize with them where they’re at, and work with them to strike the deal, get to the right number that works for both parties, also the right timeline that worked for both parties, and not to be too anxious.

That was a really proud moment for me, just to have that conscious awareness as an investor.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Whitney Elkins-Hutten: Sure, let’s do it.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [[00:17:27].09] to [[00:18:05].00]

Joe Fairless: Best ever book you’ve recently read?

Whitney Elkins-Hutten: Long Distance Real Estate Investing by David Green.

Joe Fairless: How come?

Whitney Elkins-Hutten: You know, it really encouraged me to go back and put the systems in place that I hadn’t already.

Joe Fairless: Like what?

Whitney Elkins-Hutten: I think the biggest takeaway that I had from that book is we had been putting together our own deals, really looking at hundreds and hundreds of properties every month… The thing that struck me was leverage the people around you, find the deal finder that will bring you deals. And since we did that, our portfolio acquisition has really accelerated.

Joe Fairless: And will you elaborate on how you found the deal finder, how you compensate him/her, that sort of thing?

Whitney Elkins-Hutten: In a variety of different was – pure networking, reaching out and just making connections, attending different REIA groups, talking to people in your area or in your network and asking them who they are doing deals with, or who they would recommend, and then just really getting to know that person and building a relationship with them.

As far as compensation, we look to partner with people that can find us the deal, but also potentially manage the deal if we’re doing a rehab deal. So they’re getting compensated on the purchase of the property, they’re getting compensated on the rehab, and then if we reposition the property in any way, hopefully perhaps with property management, or if we’re flipping it, they would get compensated there as well. So we kind of create a win/win/win.

Joe Fairless: Best ever deal you’ve done that we haven’t talked about?

Whitney Elkins-Hutten: My first property – I purchased it for 171k with none of my own money. I took out a second on the property; this was back in 2004, whenever you could get 103% financing… We put about 8k in rehab into it and then flipped it about 11 months later for 219k.

In that time I had renters living in the house, so I was living for free. So I made about $50,000 off the deal, between not having to pay housing expenses, and then also the sale of the house

Joe Fairless: Beautiful. What’s a mistake you’ve made on a transaction that we haven’t talked about?

Whitney Elkins-Hutten: Let’s see… The biggest mistake – I would say just not buying with the location in mind. I picked up a vacation rental… I was really starry-eyed; I picked up a vacation rental here locally in [unintelligible [00:20:26].21] I found it extremely hard to rent, hard to resell, and then eventually, when I was going through the sales process, I had to rebuild the retaining wall out behind the house, which opened up a whole can of works with the city… And then when we closed on the property, literally 48 hours after we closed on the property, my neighbor had parked her motorhome right behind the house, on top of the newly/freshly-built retaining wall, and it tumbled into the roof of the house… And I thought I was gonna get sued.

Joe Fairless: You didn’t?

Whitney Elkins-Hutten: I did  not, no. My realtor at the time had both parties sign a waiver, because we mutually agreed on who the construction crew and engineer was gonna be on rebuilding the retaining wall behind the house… I have to admit I was kicking and screaming whenever I did that, but at the same time that was probably the best asset protection that I did during that deal.

Joe Fairless: Yeah, that’s good to know; I appreciate you sharing that story. What’s the best ever way you like to give back?

Whitney Elkins-Hutten: My husband and I, we actually participate in the Boulder County [unintelligible [00:21:29].18] program here, and I volunteer at my child’s school, and then we’re also both avid supporters of “Charity: water.”

Joe Fairless: The best way the Best Ever listeners can learn more about what you’re doing and get in touch with you?

Whitney Elkins-Hutten: They can reach out to me directly at whitney.elkins@gmail.com, or they can find me on Bigger Pockets.

Joe Fairless: Well, Whitney, thank you so much for being on the show, talking about a wide range of topics. A lot of what we talked about was specific deals, and wins and losses and lessons learned along the way, from your 20-unit residential portfolio to some things that you look for when investing as a limited partner… So thank you so much for being on the show, sharing your advice, and we’ll talk to you again soon.

Whitney Elkins-Hutten: Thanks, Joe.

Best Ever Real Estate Show Banner

JF973: How to Make a Pot of Gold with Tax Advantages

Listen to the Episode Below (21:38)
Join + receive...
Best Real Estate Investing Crash Course Ever!

Just go to the end of the rainbow… Okay Okay, well in fact this is all about IRAs. Yes, with tax advantages, why wouldn’t you open a self-directed IRA to invest out of? It’s definitely not for everybody, but if you are one to hold large sums of cash and not sure what to do with it, this episode is for you!

Best Ever Tweet:

Clay Malcolm Real Estate Background:

– Chief Business Development Officer at New Direction IRA, Inc.
– 20 years of teaching and 25 years of management experience
– Teaches continuing education classes for CPAs, CFPs, and real estate professionals
– Degree in communications from Northwestern University
– Based in Boulder, Colorado
– Say hi to him at https://newdirectionira.com
– Best Ever Book: Spectrum of Consciousness

Made Possible Because of Our Best Ever Sponsors:

Want an inbox full of online leads? Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to adwordsnerds.com/joe to schedule the appointment.

 

benefiting from tax advantages

 

Joe Fairless: Best Ever listeners, 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 fluff.

With us today, Clay Malcolm. How are you doing, Clay?

Clay Malcolm: Great! Good to be here, Joe.

Joe Fairless: Nice to have you on the show, and glad you are here. A little bit about Joe – he is the chief business development officer at New Direction IRA. He’s got 20 years of teaching and 25 years of management experience. He teaches continuing education classes for CPAs, CFPs and real estate professionals. He’s based near Boulder, Colorado – between Boulder and Denver. With that being said, Clay, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Clay Malcolm: Sure. Well, I’ve been here at New Direction IRA for a little over five years, coming up on six, and for my real estate investing experience it’s been a great learning place, because IRAs can be a real estate investor, and it’s something a lot of people don’t know. From my perspective, I came into it personally needing to change my retirement investments, because they were pretty static in 2008… A lot of people got clobbered. So this has met my personal needs, as well as my professional needs. It’s a great learning experience, like I said, and the nice thing is that I’m usually telling somebody something that they can use and that they haven’t heard before, so it’s a really satisfying position to be in. It turns out not to be for everybody, but certainly it’s a nice thing to be able to give somebody more options.

Joe Fairless: Who isn’t it for?

Clay Malcolm: Well, I would say that it can be for everybody, but I would say that if you’re in a long-term government position or a company that has a very robust pension, you might not need to do this, simply because IRAs in and of themselves, your retirement accounts, including HSAs are really built to help yourself later in life, give you income and hopefully retire the way that you want to, pay for your medical expenses, so on and so forth.

If you have that stuff covered, you might not need to move those retirement funds into alternative assets like real estate, but then again, you might. But a lot of those plans for government and some pension plans don’t actually allow you to move the money or to do real estate… So if your mind’s locked up, then it’s probably not the exact right tool for you, but pretty much anybody else, especially somebody who has contributed to a 401k or 401a, 403b, 457 – any of those plans, and you separated from employment, and those plans aren’t making money… A lot of those are static; a lot of people actually have put them on the sidelines, and they have real estate investing expertise, but they’re unaware of the fact that they can actually combine the tax advantages of the account with their real estate investing experience and preferences. That’s the combination that a lot of people don’t have in their heads.

Joe Fairless: Can you elaborate on that combo that you just mentioned?

Clay Malcolm: Certainly. The IRS does not limit your IRAs asset purchases other than to say “No collectibles and no life insurance.” The IRS does not however tell IRA providers which assets they have to handle, so IRA providers like us, or Schwab, or Fidelity, or your bank – we’ve all chosen a business model built around the rules [unintelligible [00:05:32].19] and so on and so forth. Banks and brokerage houses typically have built their business where you have to invest in publicly traded securities, which often you get a commission from, and so on and so forth; that’s the business model.

We’ve actually taken the opposite approach, and we’re not the only company that does this, of course, which is that we handle almost all the assets that are allowed by the IRS – including real estate – and the fact of the matter is the IRS does not limit real estate investors. So if I get one message across today, it’s really that your IRA can keep its tax advantages and be a real estate investor. The thing that conceptually you’re kind of adjusting to is just that the money, once it’s been contributed to the account, instead of it buying stocks and bonds and funds and looking at the appreciation or dividends and things like that, that same (tax advantage) money is buying real estate, or making a real estate loan, or something like that, and that’s how the IRA or the account makes the revenue. It’s still tax-deferred while the money is in there, so if your IRA buys a house at $80,000 and several years later gets to sell it for 95k, first of all, good job! Second of all, that entire 15k, the profit, would come back into your IRA and be ready to be reinvested without any capital gains and things like that.

By using the tax advantages, the tax-deferred status, hopefully you can get that money to compound faster, so that’s really the get. So really just taking those tax advantages and graphing it on to your real estate investment preferences.

Joe Fairless: This is two separate questions — actually, I’m not gonna ask you two separate questions, I’m just gonna ask you one question: what are some mistakes that you see people make when it comes to setting up or thinking about a self-directed IRA?

Clay Malcolm: I’ll give you the two most common ones. One is people are very unaware of the differences between a 401k and an IRA, and there are some specific rules that they have to follow, one of which is that the IRA provider is the signer for the account, and things like that. So I would say conceptualizing that difference is one thing.

The other paradigm shift that I think is a little bit tough for some people to get into their heads is that in this particular scenario, which is typically called “Self-directed IRA Investing”, the account holder is calling all the shots. The provider, us – we’re a very neutral part of the equation. Our job is to make sure that the account is documented properly, so that the IRS knows that it’s a part of that account type and it gets to keep the tax advantages. But the account holder himself is the one who chooses the assets, and you can use your regular real estate team or a financial team, but you choose the assets, you negotiate the deal, you’re the motive force.

In the scenario where somebody’s IRA is with a managed company, whether that’s a bank or brokerage house, it’s a very passive kind of participation. In the self-directed world, especially in real estate, it’s very active; you get to make calls, and we’re really just responding to your scenario, the thing that you’ve developed. And again, we don’t supplant anybody, so bring your own real estate team, bring your financial team, whoever helps you work, your preferred method for real estate investing – bring them all, and they can just, again, take that same scenario and move it into your IRA. But a lot of people don’t realize that you’re gonna have to be the motive force, and get to be the motive force.

Joe Fairless: When your company starts working with someone, what are some surprising elements that they come across? And perhaps you just covered it, where that’s basically the same question. If so, say “Joe, dude, that’s the same question”… But I’m wondering what surprises people when they’re working with you.

Clay Malcolm: I’ll give you a different slant. I think that one of the surprising things is that they think it’s gonna be very expensive usually, and they think that it’s gonna be difficult. Neither of those things is necessarily true. One of the things I mentioned is that each IRA provider has their own revenue models and their own technology… But in this day and age of electronic banking things, tools that you can use, so on and so forth, a real estate investor who has an IRA that owns a property – you can pay your bills online for free with some providers, the paperwork is becoming almost always electronic – things like that.

Again, it will vary from provider to provider, but I think people are surprised that it can be relatively easy. The information is out there, we do a lot of education, so we want people to do it well. The other thing is that our fees are different and often less than what they’ve been paying at a 401k company or an IRA company, so that surprises some folks, too. But I would just say that your ability to get into this type of investing – it probably doesn’t have the barriers that a lot of people expect that it will.

Joe Fairless: What is your company’s revenue model?

Clay Malcolm: We basically charge for our bookkeeping labor… Things like when you open an account, it’s $50, because we have to push some paper. When you make a purchase or sale, we have a transaction fee that corresponds to how much paper it is, basically. If you’re buying precious metals, it’s $40. If you’re buying a piece of real estate, it’s $250. All of it is really based on our bookkeeping labor. It’s like hiring a bookkeeping and custodial entity to document your IRA transactions.

We’re not gonna take percentages, we’re not gonna be reliant on — we don’t sell any assets, things like that… So that’s the way historically banks and brokerage houses have built their revenue model. So again, we’ve kind of taken the other approach – you’re hiring us as a service so you get to do the type of investing you want, and we’ll just tell you what we charge and you run the show.

Joe Fairless: There has to be a larger way that your company makes money other than just charging $250 here and there…

Clay Malcolm: Well, there is an ongoing annual fee, because an IRA obviously keeps its tax advantages over a number of years, so a lot of the real estate investors that we work with choose our flat, which is $295/asset/year; it doesn’t matter what the value of the asset is… It could be 100k or one million, or whatever it is, because every year we report to the IRS the value of the account, and certainly we have to set you up with the online portal so you can pay bills, and that kind of thing. So that’s what the ongoing fee is about. So yes, there is an ongoing piece.

Joe Fairless: There’s gotta be another way that your company makes money. Do you invest? Because $295 – you have to have 203 people just to make $60,000, which would be to pay one person’s salary -ish… So do you invest the money that is in the self-directed IRA or do you borrow against it and then invest in something else from a larger revenue standpoint for your company?

Clay Malcolm: It’s a good question. We, as part of [unintelligible [00:12:15].07] FDIC-insured, but it’s also static… But typically speaking, in our agreement with account holders we’re allowed to invest any of the cash position that’s left with us. Now, as you might imagine, most people come to us with an asset in mind, so the cash is only here for a short amount of time. So they open an account, they do a transfer or a rollover, and then they take that money to buy a condo or a commercial property, or whatever it is that they do to invest. So the cash doesn’t typically stay with us very long, but we are allowed to invest it in the interim while we have it. It’s still liquid for everybody, but we can invest it, so there is some revenue there.

Joe Fairless: Okay, I imagine that’s gotta be the foundation of the business from just a business model standpoint for you all.

Clay Malcolm: Well, in our particular case because we try to get people to understand that their cash position is gonna be static and that they really need to be looking for investments, it’s not our major source of funds, and it’s not something that we really promote. We can do it and we do do it and it does help us to keep our costs down, but generally speaking, most of the way that we’re approaching this is we’ve been very bullish on investing in technology. We have IRA holders who have real estate, and the renters can pay the rent electronically. As you might imagine, in the bookkeeping and in the financial world, anytime you can automate a process and take a person’s attention away, so you don’t have to sit there and go “Okay, this check is for this thing, and I’ll enter it into here and there…” – any of those efficiencies that we can create, we do. So we’re trying to keep our cost down because, frankly, it’s all part of the bottom line, and we encourage people — if you’re the motive force in any investing venture (and that’s basically what you’re doing with your IRA here), we encourage you to do due diligence on every participant, whether it’s the asset or the IRA provider, or anybody that you’re working with… So we encourage people to look into our business model as well.

Those are the two things that we’re trying to work on: making sure that people understand what we’re doing, and also make it easy for them.

Joe Fairless: Based on your experience as a self-directed IRA expert, what is your best advice ever for real estate investors?

Clay Malcolm: Well, the best advice ever for the Best Ever listeners is really just to keep the idea that your IRA money is in play when you’re out looking at deals. That doesn’t mean just your IRA money either; if you’re gonna invest in a deal and you are gonna control it, but you need other investors, introducing that idea to them, that their IRA money is available to possibly invest in a project can be a huge boon.

Lots of times people are out looking for money, looking for investors, and all they really need to do, in some cases, is to just introduce the concept that their IRA money can invest in real estate, because most people don’t know, and that’s a fact… Most people will go, “Huh? Never heard of that.” I asked my bank, “Could I invest in real estate with my IRA?” and he said no. And the reason he said no is because they don’t handle real estate, not because the IRS prohibits it.

So I think my best ever advice for listeners is really to just keep in mind that that pot of money that is tax advantaged is available… So don’t forget about it, make sure that you incorporate it, and it can be for other people, as well, so it’s a real estate investor in and of itself.

Joe Fairless: What does someone have to submit, once they identify that they wanna do a self-directed IRA, in order to be fully up and running, and how long does that take?

Clay Malcolm: Good question. The typical process that we see is that somebody will open an account with us – in our particular case it’s online, so it takes 15-20 minutes to fill it out. The account is usually officially open within a business day. Transfers, rollovers and contributions are the way that money gets into that account in order to be positioned to disburse. Contributions are very fast, you can do those online with us. Transfers and rollovers are a little bit longer process, simply because we don’t control them; you’re actually asking your bank or brokerage house to liquidate those funds and then send them over.

We tend to tell people it’s 1-3 weeks to get that money from the old IRA or the old 401k over to us. Often, it is somebody who has a 401k at a company that they no longer work for or that they forgot about and left it there, so that comes over via transfer or rollover; no tax, no penalty… You’re really just moving it from one custodial entity to another. So I would say opening the account and getting it in position – we’re probably looking at 1-3 weeks; that can vary some.

During that time, most of our investors are already looking for the project or even negotiating the deal. So you can make an offer on a property even if all of your money hasn’t hit us yet. You can make an offer, be negotiating the deal, because the money will be needed at closing time. Often, people are in this sequence – they’ll be multitasking along the way, trying to get the investment ready to go as the money moves. So I would say that you’re looking at a few weeks.

Joe Fairless: Very helpful. Clay, are you ready for the Best Ever Lightning Round?

Clay Malcolm: Ready, Joe!

Joe Fairless: Alright, well let’s do it! First though, a quick word from our Best Ever partners.

Break: [[00:17:34].22] to [[00:18:26].19]

Joe Fairless: Clay, what’s the best ever book you’ve read?

Clay Malcolm: I will say Spectrum of Consciousness, although anything that Wallace Stegner wrote, I really like.

Joe Fairless: Alright… New author for me, new book for me – thank you for sharing that.

Clay Malcolm: Certainly.

Joe Fairless: Best ever way you like to give back?

Clay Malcolm: Well, my favorite way is I have been involved with a company that reads textbooks onto tape, so that blind students can use those textbooks in their studies. I always thought that was cool.

Joe Fairless: What would you say is a mistake you’ve made on a particular business deal or just as a business professional?

Clay Malcolm: I would say not empowering myself to make a move… And I’ll go back to 2008 – I hadn’t practiced moving funds into different investments, and it stalled me. It was an interesting thing, it’s part of my psychology that if I haven’t done it before, it seems bigger than it would be, and if I had been more agile and thinking and been empowered already to make financial moves, I think I could have mitigated some of my losses. It didn’t work, but that was the lesson, for sure.

Joe Fairless: Where can the Best Ever listeners get in touch with you?

Clay Malcolm: Well, the easiest way to get in touch with me is an e-mail address, which is info@ndira.com. I do get to travel a lot and have a lot of things that I need to be doing around here, but that way I can get that information, that question or anything and get back to you pretty much anywhere I am.

Joe Fairless: Well, from giving specifics on the process for opening up a self-directed IRA, and the timeframe that that requires (usually about 2-3 weeks from start to finish), to talking about the price points that it does cost with your company in particular, to the mistakes, like not knowing the difference between a 401k and an IRA, and the ramifications for the difference (like you said, the IRA provider is a signer on the contract), as well as the little know fact for some investors – perhaps not all of the Best Ever listeners, because we’ve talked to self-directed IRA experts, but as you mentioned, the self-directed IRA account holder is the one calling the shots… And then your overall lesson learned, that can be applied really towards anything we do as a real estate entrepreneur, and that is – I love your quote – “if you hadn’t done it before, it seemed a lot bigger than it should have been”… Isn’t that the truth with anything in life? If we haven’t done it before, it just seems like it’s a whole lot more complicated and harder than it actually is once we end up doing it.

Thanks, Clay, for being on the show. I hope you have a best ever day, and we’ll talk to you soon!

Clay Malcolm: Sure, I enjoyed it!

 

 

Subscribe in iTunes and Stitcher so you don’t miss an episode!

https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg