Aileen (00:01):

Thank you for joining today’s episode of the How Did They Do It? Real Estate podcast. We are your hosts, Seyla and Aileen and today’s guest, we have Sean McKay. Sean is a senior vice president of American IRA. He received his Bachelor’s in economics from the University of South Florida and has been investing in real estate for the last 15 years. Sean enjoys using his education and experience to teach investors how to optimize their resources with tools such as their retirement account. He resides in Charlotte, North Carolina, with his wife, Heather and children, Blake and Bianca. Thank you for joining us today. How are you doing?

Sean (00:36):

Yeah, thank you so much for having me guys. It’s an honour to be here and yeah, it’s beautiful weather here in Charlotte, North Carolina. So, yeah, again, thanks for the invite.

Aileen (00:45):

Thank you so much. We were looking forward to having this conversation with you. So before we get started, can you give us a little bit more about your background and just, how did you get started in real estate?

Sean (00:55):

Yeah, absolutely. So for me, I think of my real estate investing in kind of two phases. I was really fortunate to have a couple of family members and friends that were investing in rental properties. So I saw that from a distance pretty early on, actually kind of right after high school, I would passively invest in their deals. Maybe I’d come up with some of the down payment money or something like that. And so that was kind of the introduction to it. I didn’t really get super serious about it until probably about 2008, 2009. We, we really kind of dug in and decided if we’re going to make investments, we need to get more educated and we needed to really understand where we are putting our money. So, you know, you’re always learning, right. But I think definitely over the last decade, we’ve been more intentional, I think about placing money in real estate.

Seyla (01:53):

Awesome. Thank you, Sean, for that background. What is a self-directed IRA and 401k?

Sean (01:59):

Yeah, absolutely. So I think with retirement accounts, there’s a lot of misconceptions. There’s a lot of confusion around IRAs and 401ks. And so for me, I think about retirement accounts fitting into one of maybe like three categories. So we have those retirement account products. A lot of times that our 401ks are employer sponsored plans, where you have very, very few options and maybe you even have an advisor that’s kind of putting you into some bucket with that 401k product. And then kind of that second world is what I consider almost like a semi self-directed account where you can pick your own investments as long as it’s an equity-based investment. So in other words, like a Vanguard or Schwab TD Ameritrade, those are great resources for people that just want to be largely investing in the stock market so they can pick their index funds and their mutual funds. And so that’s a great tool as well. And then to me, third realm is a fully self-directed retirement account, which is what we provided American IRA. And so the premise there is you can still invest in the equities world. You can pick your own stocks, bonds, and mutual funds, but largely clients come to us because they want to invest in what we consider alternative assets. So they’re investing directly into actual real estate investments. Maybe they’re investing in a privately held company as opposed to a publicly traded company on the stock market. But we have clients that are investing in hard assets, such as precious metals, gold, silver, things of that nature. Really the way the IRS code is written is it tells you, you cannot invest in just a few things, which is basically collectibles and life insurance policies. So really beyond that, there’s almost endless opportunities of what you can actually invest in. So ultimately to me, your retirement account options are really just kind of predicated on what financial services company you’re working with.

Aileen (04:03):

So you talked about some of your clients coming to you to invest in alternative retirement accounts. What are some of those reasons why they’re coming to invest in these alternative options?

Sean (04:16):

Yeah. So for me, I look at our client base in, in kind of terms of theirs like two general groups, right? So we have some clients that are looking for true diversification. So maybe they’re still going to have the bulk of their money in the stock market. Maybe they’re going to continue to work with an advisor, but they want something that’s not directly correlated to the stock market. So maybe they’re going to buy just a single rental property or do something a little bit different. So that’s certainly a base of our clients, but then there is what I consider kind of the asset class experts that we have. So for example, you guys are into syndication. So you guys are real estate experts. You’re experts in multifamily investing so many times, those types of individuals might have their entire retirement account with us and they’re going to specialize in what they know and what they understand. So it’s really, you can make this what you want it to be. But I think ultimately it either comes down to true diversification or wanting to put your money where your actual knowledge is.

Seyla (05:20):

If someone who is who is a full-time professional working and has a 401k already can depose and still have a self-directed IRA.

Sean (05:30):

Absolutely. So there’s a couple of ways they can go with it. Some clients, if your 401k is with your current employer, it’s a great idea to ask the human resources department and see if there is any opportunity to actually move those funds to another provider, whether it’s a rollover or an in-service distribution. Most of the time, the rule of thumb is the larger the company you work for. The less chance there is that you can move those funds. So if you’re unable move those funds, you still always have the opportunity to just simply create an individual retirement account. So you can start an IRA with whatever firm you choose. So there are options for you.

Aileen (06:09):

For the self-directed IRAs, are you and your company, the ones helping to match the opportunities with the clients, or is it something that the clients will find out their own and present it to you guys, and you will help to evaluate, to ensure that it’s a good fit for them.

Sean (06:25):

Yeah, that’s, that’s a great point. I’m glad you asked that question. So I think probably to our detriment, you’re always trying to differentiate your business, right? And so in the self-directed arena, what we found was there weren’t a lot of self-directed providers that were really knowledgeable about real estate. And so early on, again, probably to my detriment, I think what I focused on was the fact that our founder and I are heavily invested in real estate. We’ve built rental portfolios. This is our life. This isn’t just the day job. This is our passion. And so I think from that came the confusion that you open an account and we somehow put you into some desirable real estate deals and we found opportunities for you. But the reality is with a self-directed retirement account, it is truly self-directed. So as a financial services provider, we’re not going to have an opinion as to whether it’s a good fit for an investment. Certainly we do our best to have kind of a fundamental analysis of whether the investment is just simply compliance, just basic rules around retirement accounts. But ultimately we’re the first ones to say. You want to certainly heavily rely on your attorneys and CPAs for tax and legal guidance. And certainly with the asset class, like real estate, for example, certainly leaning on whether its realtors, appraisers, real estate investors, mentors, people that can help you analyse the deal itself.

Seyla (07:53):

For someone who has already has a 401k’s at work, right, is there any limitations of opening a self-directed IRA in terms of contribution or [Inaudible]?

Sean (08:06):

Absolutely. So if it’s an old employer sponsored plan, like an old 401k or a four Oh three B or a thrift savings plan, you can always roll that to any financial services firm that you deem appropriate. So there’s no limitations on that. Certainly if it’s with your current employer, there may be significant limitations or an inability to move that to another provider. But if you are kind of locked into that 401k with your current employer, then we do have clients that will open anything from a, a Roth or a traditional IRA to maybe they have a small business on the side. So they have their day job, but maybe they’re flipping houses or they’ve started a landscaping company, or, you know, whatever the case may be. There’s also small business plans that they can look at as well from steps to simples, to solo 401ks, just depending upon their, their situation, but it’s the same rules and regulations for any other type of IRA or 401k. So the same contribution limits, depending upon the account, the same ability to take distributions, ideally in your retirement years.

Seyla (09:13):

So let’s just say I have a 401k. And then I believe the maximum that I can contribute is 19 500 for 2020, correct. Let’s say I contributed $10,000 to my 401k to do I have the ability is to open an either self-directed IRAs and contribute and add in 19 500 or how does that work?

Sean (09:38):

Yeah, absolutely. So with the, with the small business plans, there is still that ability, as you said, if there’s, if there’s still room left, if you will, for contributions to be made to small business plans, typically IRAs and their contributions are not correlated to 401k. So again, always speak with your CPA, but it’s very typical that we’ll see clients that will max out their 401k contributions, but they can also still max out a Roth or a traditional contribution, for example.

Seyla (10:09):

Got it. Can you give us an examples of your client who had used self-directed IRA to invest in real estate and how does that work?

Sean (10:19):

Yeah, sure. So in the real estate asset class for me, again, I kind of like to start with what we can’t do, right? That’s sometimes a little easier. So primarily we need to make sure we’re not buying a primary residence with our retirement accounts or even a second home, maybe a condo at the beach, you know, something on the Lake, what have you, it needs to really be strictly for investment purposes. So we’ll see clients that will do anything from purchasing a single family home for rental purposes, to investing in a 400 unit apartment complex, typically with a group of other investors. You know, we mentioned your syndication model. So we see a tremendous amount of investors that invest in syndication deals. We also see kind of more transactional strategies where people will do fix and flip real estate deals inside their retirement account. And sometimes depending upon their professional’s preferences, they can also be a lot more transactional with wholesaling deals, putting options on properties, really kind of all the tools we’re familiar with as real estate investors, and many times they can be utilized with these accounts as well.

Seyla (11:31):

From your experience, does it make sense that people that have a self-directed IRA invest passively in some type of a deals out there, or, you know, like, is it difficult to invest as an active real estate investor?

Sean (11:47):

Yeah, that’s certainly a great point because I think ultimately with retirement accounts, the goal is always to be personally removed from providing any services to a property owned by our retirement account. And so to your point about being passive, I think passive is always going to be a safer concept with retirement accounts. I always say I’m not the brightest crayon in the box. So I like to follow the smart people and the smart people with retirement accounts tend to either be lenders to other real estate investors, or they invest passively in other real estate investor’s projects such as syndication deals and things like that. So that’s definitely something we see a good bit of now, conversely, based on just their personal preferences and goals and conversations with their professionals, they might deem it appropriate to be a little bit more aggressive with shorter term activities where they’re, as you say, more active, whether it’s fixing flips and off-market deals and stuff like that. So we see kind of a huge range of where our clients feel comfortable going with their investing.

Aileen (12:56):

So can you talk a little bit about the benefits of utilizing a self-directed IRA to invest in real estate versus just independently contributing to an investment on your own without using that vehicle?

Sean (13:10):

Yeah, absolutely. So I think, you know, to me, there’s, there’s the point of the opportunity costs and just doing an analysis of opportunities that you have available to you. So for example, let’s say you already have a retirement account and that retirement account has, we’ll just say a hundred thousand dollars in it. So you’re looking at that capital and you have a variety of opportunities to invest. You can invest in the stock market, you can invest in these alternative assets, and you can just put it into a bank product just to be very, very conservative with it. And so ultimately obviously we all make that decision, but I think it’s going to be predicated on what our goals are and then trying to reverse engineer to see how we get to that goal. And so I think for most people, if you’re younger and it’s a smaller amount of money, the bank products probably that’s off the table, right? There’s no yield in that. There’s no growth in that. And so then to me, that the next conversation is if you spend the time and you’re reading the annual reports for companies, and you’re doing the legwork to identify the right opportunities in the stock market, then that might be the best option for you to take as an investor. Now, again, for those, especially that are looking to invest where they understand if they are studying and they’re invested in the world of let’s say real estate, for example, then that’s probably also going to make sense for them as well. So it’s really so personal in nature. What I always do say though, is I always want to be very careful. We have clients that start with zero and they go to a million dollars in a couple of years because they’re experts in strategies. They can make tremendous happen off market. Sometimes it’s, it’s a very creative in nature, but I think ultimately unless you have that very specific skill set, you can have the same types of outcomes with these alternative assets that you can have in the stock market. If you’re emotional and you’re buying high and you’re selling low, whether it’s stocks or piece of real estate, the risk is really predicated on your skillset, your knowledge and your ability to control your emotions. Right.

Aileen (15:22):

That makes sense. And so if one of your clients has identified an opportunity that they would like to contribute to the self-directed IRA, and what types of information are you looking at that you would need from them on the paperwork side to kind of help move things along?

Sean (15:39):

Yeah, absolutely. So really, if you boil down our role, it’s essentially we’re the record keeper for these retirement accounts. So we’re doing everything from, if it’s a kind of residential type of deal where signing off for, to purchase documents on behalf of the retirement account, we’re sending the moneys, whether it’s due diligence, earnest money, purchase price, etc., to the appropriate closing attorneys. We’re essentially another vendor, just like a realtor is helping them get to closing retirement account is purchasing that asset again from a vetting standpoint. If we’re seeing that the client is purchasing a property from someone who has the same last name, then the transactions team will ask, just to make sure it’s not a disqualified person that they’re purchasing the property from, but we’re really limited in a lot of situations to intense underwriting, to, you know, to make sure it’s an appropriate deal for them. So that’s why it’s so critical that people have their team, their CPA, their attorney, their resources that can help them from a strategy standpoint, from a legal standpoint, put it all together.

Seyla (16:53):

So you mentioned about purchasing property from someone with the same last name and making sure that the transaction is qualified. Can you elaborate a little bit more?

Sean (17:03):

Sure. So really when we’re dealing with retirement accounts, there’s a list of people and entities, what we call disqualified persons and entities that we have to be very careful with. So we start with the account holder. So I, Sean McKay, I actually have a few self-directed accounts, thankfully, right? It’d be kind of weird for us in this business and I wasn’t doing the investments, but let’s say that we pick out my self-directed 401k. And so that 401k cannot purchase a property from myself or any entities that I own or control sell to myself or those entities or my spouse or my lineal family members. So parents, grandparents, great grandparents, children, grandchildren great-grandchildren, and the downline also includes spouses as well. So those individuals, as well as entities that they own or control, that’s the primary analysis of people that we can’t do business with. There’s also people that we have a quote unquote, significant business relationship with. So let’s say that it’s two siblings that have a construction business together. Their siblings are not disqualified persons because they’re not part of the lineal family line, but if they have that construction business together, they’re professionals should tell them that they then become disqualified from one of them using their retirement account to lend money to the other or some entity that they’re involved with. If that makes sense.

Seyla (18:35):

Yep. That makes sense. So if I understand correctly, you can actually have multiple self-directed IRA accounts, right? And then as an investor, you can actually open one IRA accounts to possibly invest it in one real estate deal and an open amount of one to invest in a different deal. At the end of the day, you know, the property or the real estate property is. So how is that fun returning to the self-directed IRA and how is that being taxed?

Sean (19:05):

Great. So when we think about taxes, there’s basically two concepts that can create a taxable consequence with these retirement accounts. So the first one is if you’re running an actual business inside the retirement accounts, that’s going to constitute unrelated business income tax. That’s a taxable consequence. So it could be anything from an obvious storefront type of business to doing some sort of activity with such frequency and volume that your professional state that’s a business. So an example might be, let’s say you are a builder, and let’s say, you decide, you’re going to build 35 houses a year inside of your retirement account. I hope that your CPA is stating that there is such volume of activity that that retirement account is running a business. So thus, there’s a taxable consequence for that. So that’s situation. Number one, to be careful with situation number two is if we’re using leverage inside of the retirement account, there’s a distinction between the IRAs and the 401ks, the IRAs. So just overall the retirement accounts, if we’re, if the retirement account itself is borrowing money, there is a potential for a tax consequence. It’s what’s we call unrelated debt financed income. So basically what the IRS is saying is you’re taking money from outside the retirement account to make money. So then a portion of this deal could be subject to a taxable consequence. Now, the nice thing is that as you guys are well aware, we have a lot of tax benefits and deductions associated with being real estate investors. So because we’re bringing in this, this outside money, your CPA will essentially do an analysis as to a portion of the deal getting the deductions. Many of them that were used to outside of retirement accounts, so that there’s kind of a net analysis of gains and losses for that investment. And so if there happens to still be a paper loss, for example, as you know, with rental properties, we’re kind of used to, at least I’m used to that. That’s a situation where that typically will not constitute an actual tax consequence, but it is certainly something to be cognizant of as you’re thinking about your planning and you’re using leverage that there could be a tax consequence there.

Seyla (21:28):

Got it. So if someone wanted to open a self-directed IRA accounts with American IRA, could you elaborate what’s out of the associated?

Sean (21:38):

Yeah, absolutely. So typically there’s a $50 setup fee to open the account for our IRAs. If they mentioned your podcast, we’re always really grateful for kind of those referral type of, of clients. So I would actually waive the $50 setup fee in terms of the annual fee. There’s an annual break point. If the account balance is less than $7,500, the annual fee is $165 7,500 Plus the annual fee is actually capped at two 85 a year, which is pretty unique in our arena because what you typically find is the annual fee continues to go up as the account balance goes up. And most of those firms cap the annual fee at between 1500 or $2,000 a year, or they have a different model where they’re charging two to $300 per year per asset. And so again, if you have four or five assets, you could be running up a pretty significant annual bill there.

Sean (22:36):

So our model is we’re not helping you grow your account because we’re not advising you. We shouldn’t get to see the upside as your account balance goes from 50,000 to hopefully half a million plus. So that’s kind of the model. We do have a transaction component because a lot of our work is done if you purchase an asset or sell an asset. So there is a single transaction option for $95. Let’s say someone who’s just going to invest in one syndication deal for the next 12 months. They’d probably go with that option. Or you can do unlimited transactions for $165 a year that covers unlimited purchase and sale of assets. And beyond that, it’s just simply hard costs. So wires are $30 and outgoing checks are $10.

Aileen (23:23):

Great. Thank you so much for sharing. Okay. Can we talk a little bit about the cares act? And can you talk a little bit about the changes that we’re seeing?

Sean (23:32):

Yeah, absolutely. So it’s obviously been a wild and scary year for a lot of us in terms of the pandemic and all the fallout health wise and economically, and as you both are well aware, the government has put some mechanisms in place to give some relief to people as far as the financial concepts. And as specifically as it relates to retirement accounts, there’s been a couple of things. So the first being that they’ve kind of suspended the required minimum distributions for this year. So typically they actually just bumped up the age to 72 years old. If you have a pre-tax retirement account at 72 years old, plus you would be mandated to take a certain amount of money from your retirement account each year. If you have essentially a 401k traditional IRA, something other than typically a Roth IRA, you would have that RMD. So that’s the first component so that the individuals in that age group don’t have to take their required minimum distribution this year. The second element is if anyone has been adversely affected by the virus this year, whether it’s job loss, they personally they’ve, they’ve gotten the virus. And so they’ve been ill from it or essentially a close family member. There are some tools that individuals can use where they can borrow typically up to a hundred thousand dollars from their retirement account to just simply be able to, you know, keep the lights on, and pay their bills and their necessities. There’s a little bit of debate in terms of how that’s going to play out on the backend in terms of the ramifications from that. But what we do know is you can borrow the money for up to a three-year period. There is some flexibility in terms of how you articulate the distribution in terms of your, your tax returns and what have you. So it’s certainly a big discussion to have with your CPA, but effectively it’s, it’s something that you may want to discuss with them again, if you’ve been adversely affected financially or health wise from the virus to see if it makes sense to be able to take a distribution essentially from your retirement account.

Seyla (25:49):

So if I hear correctly, we have until the end of the year to borrow the money from the retirement account and we have three years to pay it back, is that correct?

Sean (26:01):

Correct. Now there may actually be some extensions past 2020, obviously seeing how the virus plays out. So there may be the ability in future years to be able to take that kind of qualified distribution as well.

Aileen (26:13):

Got it. And then, so when we take the money out, is there any penalties that the IRS impose? Yep.

Sean (26:19):

Great question. So they’ve removed the 10% penalty, which you would typically have for an early distribution again, in terms of the taxable consequences, beyond that there is a little bit of confusion out there, the law and the way it’s being kind of understood and examined. There’s, there’s a little bit of confusion with that. So unfortunately, per usual, there’s a few things to unpack there and kind of hopefully get some additional guidance.

Seyla (26:49):

Got it. So how has real estate investing impacted your life?

Sean (26:55):

It’s been a, a great opportunity for me, just simply because at American IRA to this point, I’ve been an employee. I do not currently own equity in the firm. And so it’s allowed me to have an entrepreneurial outlet to be able to learn, to certainly make a tremendous amount of mistakes and to have just kind of my own little small business so that I could understand what it was like to be on that side of the table, which is certainly very different than being an employee. It’s also just been really fantastic to be able to diversify income streams. And I think kind of, I was speaking with my wife about this the other night it’s maybe makes me an odd quirky kind of guy, but in some ways, being fortunate to learn from a lot of real estate entrepreneurs and, and over time build a rental portfolio, it has given us kind of this safety net where I felt more comfortable, actually being more aggressive in my corporate career, where I actually wanted to dig in deeper to try to see what kind of additional value I could bring to the firm, knowing that if I just simply annoyed our founder to an extreme degree, and he said, we got to get rid of this guy. We had other opportunities there as well. So it’s been a really great learning experience for sure.

Seyla (28:14):

Since your real estate journey in the last 15 years, what is one thing that, you know now about real estate that you wish you knew when you first started?

Sean (28:23):

Yeah, absolutely. So I started technically, I started back in 2002 and I was actually right out of high school, very, very poor student, very poor attitude, not a great listener, all the characteristics you want as an employee of your company. Right. But I think that as I, as I worked to learn and to absorb information from mentors and other real estate investors, I think that in my anxiousness to hit certain milestones, I think that probably in retrospect, I was overly stressed and intense about trying to reach those goals, whether it’s units, net worth, what have you. And so I think I’d probably tell the younger Sean to just try and relax a little bit it’s, you know, things will work out okay, and that, you know, you, you don’t have to get there tomorrow and you’re going to make tons of mistakes. And, and that’s great. That’s growth, as we know to learn, you know, whether it’s in terms of dealing with vendors, in terms of the wrong properties, in the wrong areas, you know, if you’re fortunate to survive and keep working through it and you survive the upturns and downturns, you know, it all works out pretty. Okay.

Seyla (29:39):

What is one thing that sets the successful people apart and their real estate investing business?

Sean (29:44):

For sure. It’s focus. The people that I try to mirror, I find that especially early on in their careers, they’re not trying to do every strategy simultaneously. They’re not trying to do new builds and fix and flips and build a rental portfolio and work 17 different metropolitan markets. At the same time, they really try to become competent and then ultimately experts in a specific strategy. And so I think that that’s certainly something that is challenging in today’s world with the influx of free information that’s out there. It’s so easy to kind of get that, that shiny object syndrome. And that can be really difficult.

Seyla (30:23):

What tools or techniques have you used to improve the efficiency of your business or personal life? Well, we were

Sean (30:30):

Speaking before that I’m really impressed with this whole zoom concept that you guys have going on. This is some 21st century technology. So for me, it’s not so much tech driven. I think for me in trial and error, what I’ve realized is I need more time probably the most to be productive. And so probably my biggest hack, if you will, for life, is I get up very, very early, you know, as you mentioned, wife, kids, and, and all that goes into life. So I’m usually up for maybe five in the morning trying to get a lot of things done before the family gets up and we get into that morning routine. So as much time as I can by myself. And, and, and because of that, we’re the most boring, thirty-something couple in the world. We’re in bed by, you know, eight or nine o’clock at night. So, you know, it is what it is, right.

Aileen (31:18):

No, we absolutely hear you. We’re probably in the same position.

Sean (31:23):

And you’re out there and you’re focused, right. And you’re, you’re making it happen with your syndication. So that’s what it’s about. Right.

Aileen (31:30):

Definitely. Thank you. So, Sean, if our listeners wanted to find out more about you and your company, where can they go?

Sean (31:36):

Yeah, absolutely. So again, not being the tech guy, they made me get a Facebook account this year, which is pretty embarrassing because of my lack of attention to it. But I do have the Facebook account. Certainly if you go to our website, we have the contact information for email phone. I’m looking to, I go through waves of being involved in different platforms, like bigger pockets, but I’d say LinkedIn and Facebook are usually easy, easy ways to get to me.

Aileen (32:04):

Awesome. Well, thank you so much, Sean. I really enjoyed having you today and thank you so much for sharing all your knowledge and your information today.

Sean (32:10):

Absolutely. This was great. Thank you guys so much. I appreciate you guys sharing a lot of great information with the listeners and hopefully this wasn’t too much of a dip in terms of quality of content, but this is great. Thank you so much for the opportunity.

Seyla (32:24):

Thank you so much. Thanks a lot.