The Private Equity Real Estate Podcast – Show 20
Summary
On this week’s episode, we’re going to look into using a self-directed IRA to purchase commercial real estate. To discuss this topic we have Adam Sypniewski. He is a senior member of the business development team at Midland IRA. He has over 13 years of experience with alternative investments. He specializes in private placements, real estate, and other non-traded assets.
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Speaker 1:
You’re listening to the Private Equity Real Estate Podcast brought to you by First National Realty Partners, where investors learn from private equity experts and insiders. We share our own real world experiences so you know exactly what it takes to be highly successful at investing in passive commercial real estate opportunities.
Eric Murphy:
Hello and welcome to the Private Equity Real Estate Podcast, which is brought to you by First National Realty Partners. I’m your host, Eric Murphy. And on this program, we like to sit down with experts in commercial real estate and talk about different topics across the commercial real estate landscape. And this week we’re going to look into using a self-directed IRA to purchase commercial real estate. So we’ll go over what a self-directed IRA is, how to get started and some of the rules that you need to know as an investor. And to discuss this topic today is Adam Sypniewski. He’s a senior member of the business development team at Midland IRA. He has over 13 years of experience with alternative investments. He specializes in private placements, real estate and other non-traded assets and Adam, I also see that you are from the Chicago land area so not sure if you’re a Bears fan like myself, but go Bears. Adam, thank you for being on the show.
Adam Sypniewski:
Bear down, Eric. Yeah, thanks for having me. I’m excited to be hearing and chat with you about some commercial real estate and self-directed IRAs. Looking forward to it.
Eric Murphy:
So for our listeners who may not be familiar, can you tell us what is a self-directed IRA?
Adam Sypniewski:
Sure Eric and self-directed is really just a marketing term. A self-directed IRA is just like any other IRA you might have for your retirement planning. Self-directed is really a marketing term. It’s just used as a way to communicate to investors and taxpayers that they are in charge of their retirement account and they can go out and pick and choose their own investments in the marketplace. They aren’t limited to say a curated list of traded investment products at a large custodian, say a Schwab or a Fidelity. It’s to communicate that private investment opportunities are available to them as well. So when you talk about self-direction, these are self-directed accounts where the investor has opened an IRA, whether it be Roth, traditional, SEP or SIMPLE to pick and choose their own investments and their own opportunities they come across in their circles and their centers of influence.
Eric Murphy:
So is the only real difference between a self-directed IRA and other types of IRA is that the investor has more control?
Adam Sypniewski:
Correct. And really over that Eric, it would be the fact that they’re primarily used to communicate alternative investing. Again, the private nature of these investments, they aren’t publicly traded investments like stocks, mutual funds and bonds.
Eric Murphy:
Okay. Adam, can you tell us what are some of the benefits of using the self-directed IRA to purchase commercial real estate?
Adam Sypniewski:
So I’d say right off the bat, it’s a tax strategy, right? I mean, we all want to plan for our retirement. We all want to make sure that we’re prepared for the years that we might not be working later in life. So using your IRA to do that is something that most people aren’t aware of. Even on the side of the capital [inaudible 00:00:02:52], they’re not quite sure that they can access this pool of capital that’s sitting in people’s retirement accounts. It’s very common for the working population to have a 401k or something like that with an employer. It’s possible that they can access that capital to use and put towards these investment opportunities. So when you talk about what are the benefits? One, if it’s that extra pool of capital. It allows it access to commercial real estate that you might not have in your taxable investment accounts. You might not be liquid enough to get into an opportunity and then two, base out or strategize your tax implications from investing in commercial real estate. Because an IRA is at the end of the day a tax shelter.
Eric Murphy:
And are there certain types of property that can or can’t be purchased?
Adam Sypniewski:
So really up and down the spectrum, Eric. Whether it’s commercial real estate, like we’re talking about today like a syndicated opportunity where you’re pulling a group of investors into to purchase a large piece of real estate, you can hold all the way down to a single family home that you want to rent out to an individual or a family that you want to landlord within your IRA. You can participate in a closely held LLC or a smaller multi-member LLC, multifamily. You go up and down the list, Eric. There’s ways that you can access these real estate opportunities. It’s not just commercial. And really the IRS does not restrict any sort of class of real estate from being held in your retirement account.
Eric Murphy:
We all know there are risks involved with any type of investment, but are there any particular risks that one should be aware of specifically when it comes to using a self-directed IRA to purchase commercial real estate?
Adam Sypniewski:
Yes. So right off the bat, you have to consider that this is your retirement account. This is what you are using to prepare for when you’re not working anymore. So the investor needs to be aware that that money, like any other money we put towards our investment opportunities is at risk. So you have to be prepared to, as most accredited investors would be aware, to part with that money should anything go wrong. But ultimately, the main risk when you talk about retirement money is the fact that it’s without a tax shelter. So any sort of [inaudible 00:04:51] tax strategies, you can’t write off capital losses when it comes to using an IRA. So I don’t know if that really answers your question, Eric about risk, but besides losing your nest egg for retirement, that would be the only thing that I recommend investors be aware of that if you’re looking to say in a down year, write off some capital losses, you’re not able to do that when participating in these investments using IRA money.
Eric Murphy:
I know there are a lot of rules involved with this process. Can you kind of walk us through them?
Adam Sypniewski:
Yes. So broadly when it comes to using your IRA to invest in really anything, the IRS focuses much more on who then what. And what I mean by that, Eric is that there’s really only two things you cannot hold in your IRA. So even looking beyond real estate, okay? There’s only two things that you can’t hold in your IRA, that’s life insurance and there’s collectibles. Things like artwork, nice bottles of wine, classic cars and the like. So that opens up a world of possibilities, right? So again, it’s not what but who. So when you talk about the specific rules using an IRA, I’d recommend the listeners focus on the list of disqualified persons to an IRA. The IRS has a list of about seven or so parties or profiles of people that you can not, or individuals that you can not invest your IRA money with, particularly yourself.
Adam Sypniewski:
I think this is an easy way to capture the essence of this rule and what people commonly refer to as an arm’s length transaction. So the IRS wants you to make, in their infinite wisdom, they want you to make sure that you’re using your IRA for benefit of your own retirement, not for your benefit today. They don’t want you to personally benefit today from your IRAs activity. So you can’t transact with yourself. You can’t transact with your spouse or your parents or your children up and down your family tree, those lineal ascendants and descendants of yourself.
Adam Sypniewski:
So really when it comes to any sort of real estate deal, you might be looking at putting your IRA into, you want to be aware of who those people are. That would be my main focus when you’re talking about the specific rules to using your IRA for these types of opportunities. Now, if it’s just strictly a professional or a contact of yours that you’re looking to invest with, no family relations, you’re likely going to have no restriction whatsoever. As long as you aren’t purchasing interest from yourself or someone close to you, chances are you’re not going to run into many problems there, Eric.
Eric Murphy:
Now, when it comes to disqualified persons, you had said up and down the family tree, but just for clarification, outside of the spouse, where does that leave family by marriage?
Adam Sypniewski:
Sure. So the way that the IRS rule reads, and again it’s called disqualified persons. If you folks want to Google that, you’ll find it a very specific list, but the way you can think about it as this, yourself up and down your family tree. So parents, grandparents, children, grandchildren, and your spouse. Now there is some legal gray area, and I’m not a legal advisor, but when you talk about in-laws and how you’re navigating a family tree, I’d use your best discretion there or lean on say a legal person, but it’s not any and all relatives because they don’t restrict the lateral family members of your family tree. Your brothers and sisters, your aunts, and uncles and cousins and the like. So it’s pretty specific in the fact that it’s lineal ascendants and descendants. You just get into some murky areas when you talk about in-laws. And that would be my only recommendation is really make sure that if you find yourself in a gray area there, you just want to lean on say a legal advisor.
Eric Murphy:
Okay. So the transactions are not to be used for your benefit today. So say an investor was to purchase an office building and occasionally use the office, or even maybe say a vacation property, that would not be allowed correct?
Adam Sypniewski:
That’s an excellent question, Eric. And yes. When you talk about purchasing hard real estate, an active management opportunity where you’re purchasing, like you said a vacation home, or a lot of folks may ask about purchasing a second home with their IRA money. You can’t have any sort of personal use nor can the ascendants and descendants of yourself use it. So you can’t purchase a vacation home in your IRA and use it a couple of days a year, or have your kids take a vacation there with his family. It’s just the IRS does restrict that type of use for a property like that within the IRA. So you don’t want to get into that situation because it’ll put your entire IRA at risk, should the IRS uncover some sort of situation like that?
Eric Murphy:
Yeah, I guess when in doubt, always best to consult a professional.
Adam Sypniewski:
Absolutely. Yes, I would. We always suggest, we’re merely a custodian and an administrator, when it comes to these legal, finer points, definitely lean on your CPA, lean on your attorney, anybody that might be able to speak more definitively on these subjects.
Eric Murphy:
I know we broke down some of the rules involved, but I’m curious, what are some of the biggest misconceptions that you find your clients sometimes have about using a self-directed IRA?
Adam Sypniewski:
At the commercial level? No, I think the only time that it comes up Eric is when they try to exchange a holding that they have in their investment accounts. Say they bought into a deal with $50,000 of their own money and they want to try to somehow get that into their IRA. And more specifically like a Roth IRA to limit the tax hit, right? And get that tax-free growth. But that’s where this commercial level, that’s really the only time that it comes up at different classes of real estate, specifically like we were talking about before, when you’re holding like a single family home and they want to use it themselves, or they want to say maintenance that property themselves, any sort of sweat equity type of situation, the IRS does restrict that type of thing.
Adam Sypniewski:
So, we’ve had clients before where they purchase raw land and they want to develop that raw land. Well, while they’re waiting for their vendors to break ground and pour concrete, they want to hunt the property or they want to do some recreational activity on the property. Again, the IRS restricts any sort of personal use of an asset held in your IRA. So you just kind of have to think about that when you’re going to make this endeavor happen because again the IRS does restrict that type of behavior.
Eric Murphy:
And if an investor wants to purchase commercial real estate with their self-directed IRA, what’s the process? What do they need to do?
Adam Sypniewski:
Yeah, sure. So when it comes to the processes that we operate under, we do everything online and paperlessly. The first step being you have to open up an IRA account. It doesn’t matter if you have an IRA today or not, you can have as many IRAs as you like open with as many different providers as you like. Because I think one thing to make clear for the listeners is that your IRA is looked at an aggregate from the IRS. Meaning you can have an account at Vanguard. You can have an IRA at Schwab. You can have an IRA at Midland Trust. You can have an IRA wherever you want to have it. The IRS will look at it in totality. There’s no restriction on, as many as you like.
Adam Sypniewski:
So when it comes to using your IRA to get into a commercial real estate property, you’d have to have that self-directed IRA open at a particular provider, like a Midland Trust. You would need to fund that IRA. And then you would need to work with that custodian, the provider of that IRA, to direct your investment into the commercial real estate process. There are some particulars in there, and I could certainly get into the weeds, Eric, but it’s really that three step process. You have to open the IRA. You have to fund that IRA and you have to direct the investments.
Eric Murphy:
And what’s the timeline? How long would it take to set it up?
Adam Sypniewski:
I’d say in most cases, Eric, you’re looking at about a week or two and in your best case scenarios. And this might come up later in the conversation as well, Eric, but there are three main ways you can find your IRA. One is a contribution. The IRS only lets you contribute $6,000 to an IRA every year. You know, it’s $7,000 in some cases if you’re over the age of 50, but as most of the listeners would know, $6,000 a year is not going to get you into a $50,000 minimum opportunity, right? So in most cases, people are going to fund these IRAs either by transferring from an existing IRA they have elsewhere, or by rolling over from a 401k or other type of employer plan. That’s where we get those big balances, right?
Adam Sypniewski:
Where we have a 401k with our employer and they’re matching us on a certain percentage. And we’re also earning returns in the market. That’s where we get those big balances. We roll them out of a 401k when we change jobs and into an IRA. And that’s how we get that $50,000 minimum, that $100-250,000 type of opportunities. So I’d say that is the bulk of the lead time. When you talk about timelines, because you can open an IRA online within minutes, we just have to wait for that money to come to us depending on where it’s coming from.
Eric Murphy:
Got it. I’m curious. Does the funding have to come 100% from the self-directed IRA? Or could I use a portion and then have funds from other sources?
Adam Sypniewski:
Oh, absolutely. I mean, especially in these more passive opportunities, something like a subscription based opportunity where it’s usually up at the discretion of the issuer. Will they maintain something of like a household income where $25,000 can come from the individual and $25,000 from the IRA. That’s something we’ve seen done so that an investor can gain access to a particular opportunity that they might not be liquid enough to get today. You can also, even on the other side of the spectrum like we were talking about earlier, Eric if someone’s looking to buy a multifamily home or something like that or a duplex or something like that, where again they’re not liquid enough. They only have say 60% of the money available to put towards a property. They can tap into their IRA for that other 40%. And you can partner with your IRA to purchase, say a single family or multi-family hard piece of real estate. There are some rules you’d have to be aware of, but it is absolutely a possibility and is done quite often.
Eric Murphy:
Adam, can you tell us a little bit about the tax benefits and also maybe the tax implications involved?
Adam Sypniewski:
Yeah, absolutely. And when it comes time to direct, I’d say that probably the biggest thing Eric, is that everybody needs to be aware of the fact that you need to work with your custodian when it comes time to actually direct the investment into an opportunity. Because folks should be familiar with say an LLC operating agreement or something like a subscription document that gets them into a specific deal. That needs to be registered in the name of your IRA. So tax implications or particular risks. If you don’t have that properly registered in the name of your IRA, you’re looking at a taxable liability or an early withdrawal situation where you’re going to hurt from a tax perspective. If it’s not registered properly and you have an early withdrawal, it’s going to be taxed as regular income for the year and you’re going to get levied a 10% penalty by the IRS. So make sure you’re engaged with your custodian early on about your plans and your specific deal that you’re looking to get into.
Adam Sypniewski:
When you talk about the benefits, the other side of the coin, Eric is that you have this cap gains that you might be taxed on, the income that your deal is throwing off, that’s all not occurring because it’s all under the shelter of your IRA. Now from a longterm perspective, IRAs do have a life cycle. Again, they’re meant for our retirement planning. So when it comes time that you’re over the age of 59 1/2, you can start taking money out of that IRA account, but it is going to be in the case of a traditional IRA, taxed as regular income when it comes out of the IRA.
Adam Sypniewski:
So Uncle Sam is going to get his hands on your money at one point or another. It’s just a matter of when and how much. So I’d say, one, make sure when it comes to engaging in an opportunity, make sure your custodian is aware and involved in that process. And then two, it’s going to come down to each and every individual earning lifetime, income lifetime about how they can benefit from a tax perspective and strategize from there.
Eric Murphy:
Great. You are listening to the Private Equity Real Estate Podcast, which is brought to you by First National Realty Partners. A little bit about our sponsor, First National Realty Partners is a rapidly growing commercial real estate private equity firm that owns and operates more than 3 million square feet of real estate throughout the United States. And with a portfolio valued in excess of $400 million, First National Realty Partner focuses on expanding its portfolio by acquiring market dominant well located commercial assets well below replacement costs. First National Realty Partners actively manages its portfolio through an in-house team compromised of more than 30 full-time real estate professionals focused on acquisitions, property, asset management, leasing, finance, accounting, and investor relations. If you want to get in contact with someone at First National Realty Partners, you can always email them at info@fmrpusa.com. Today, we are talking with our guest Adam Sypniewski, he’s a senior member of the business development team at Midland IRA. Adam, I wanted to talk a little bit about an IRA LLC. You let our listeners know what is an IRA LLC and what are some of the advantages of using one?
Adam Sypniewski:
Yeah. If folks aren’t familiar with an IRA LLC, it’s also called checkbook control IRA. Really what it is from a mechanics perspective, Eric is you open up an IRA and underneath that IRA, you open up what is called a single member LLC. With a single member of that LLC is your IRA. So, if anybody has seen an LLC operating agreement, it’s got a schedule of members. The scheduled member again is the IRA account. So when you talk about checkbook control and what the benefits are of that is, well you have this LLC, this vehicle where you can open up a bank account in the name of that LLC, that you set up underneath your IRA and you fund that bank account from the funds in your IRA account. And you have that check writing authority on that bank account in the name of the LLC.
Adam Sypniewski:
So you can go out and find your own opportunities. You don’t have that friction of passing each and every investment through your custodian, because a lot of times folks just open up an IRA to hold one or two deals in their IRA and their custodian or their administrator will be executing the paperwork for each one of those deals, right? So some people don’t like that friction. They’re sophisticated enough to know how to execute these types of subscription agreements and other documents. There’s obviously a fee compression component. A lot of providers out there will charge a fee per transaction and they might have checks and wire fees and things like that. So when you talk about opening up a checkbook IRA or an IRA LLC, you might have a bigger upfront cost, but over the longterm, if you’re one of those frequent high volume, sophisticated investors that planning on doing multiple deals out of their IRA, it’s probably going to save you a lot of money in the long run.
Adam Sypniewski:
But again, you’re not going to have that custodian looking over your shoulder or that administrator looking over your shoulder, making sure each and every deal is done perfectly in terms of paperwork, in terms of cashflow, things like that. So the onus of thing within the IRS rules and regulations and the guidelines is really put on the taxpayer in that scenario. So that would be kind of the other side of the coin in terms of when we talk about benefits of the IRA LLC.
Eric Murphy:
Adam, before I let you go, you’ve been very informative. This has been great. Is there any advice that you would give to investors who are looking to go the route of purchasing commercial real estate with their self-directed IRA? What advice would you have for them?
Adam Sypniewski:
Yeah, I would just say be aware of the steep penalties because you want to engage with an expert, with a provider that does this on a regular basis. You do in fact, need an administrator and a custodian to execute this type of thing. The IRS does require it. There’s a lot of us out there that are educational resources. We’ll talk you through the process. Just make sure that you have portable retirement money. And what portable means is basically you have an IRA today, or you have a 401k that you can roll over without any sort of issues, meaning you are non-active in a plan. So as long as you got portable money and you’re looking at an opportunity that you feel comfortable with, call up someone that does self-directed IRAs. They’ll coach you through it. Most of us are pretty open and willing to help.
Adam Sypniewski:
So I think those two things, make sure that you have an opportunity in mind, you have enough time to get into it and that you have some portable retirement money and we’ll help you the rest of the way.
Eric Murphy:
Adam, if someone wants to get in touch with you, how do they do so?
Adam Sypniewski:
Yeah, so you can find me via email at adam@midlandtrust.com. Thankfully they don’t list my last name in my email handle, but again, that’s adam@midlandtrust.com or you can reach me directly at (312) 767-6863.
Eric Murphy:
Awesome. Thanks so much for being on the program today.
Adam Sypniewski:
Eric, thanks so much for having me. It was a good time. Thanks, man.
Eric Murphy:
My thanks again to our guest today Adam Sypniewski and thank you for listening to the Private Equity Real Estate Podcast brought to you by First National Realty Partners. Please remember to subscribe, rate and review the podcast if you haven’t had a chance to do it already, it helps us out and we would definitely appreciate it. I’m your host, Eric Murphy and we’ll talk again next week.
