Rocket Your Dollar Ep. 34: Common Self-Directed Misconceptions

Bryan Ellis, CEO of SelfDirected.org, talks about becoming a ninja-level investor and the overwhelming tax benefits that follow.

Transcription:

Thomas Young:

Welcome back everybody to the show. Today, I'm stoked to have Bryan Ellis on the podcast and Bryan is an unusual guy. You'd think that a college dropout would have very little credibility in the world of Self-Directed retirement accounts where the rules can be very demanding and the consequences for breaking those rules, severe. And yet Bryan's expertise concerning Self-Directed IRAs and Solo 401(k)s have been incredibly well validated in many places. You can see his writing about Self-Directed retirement accounts on Forbes, thestreet.com and in many other highly reputable publications.

He is the host of Self-Directed Investor Talk, the longest-running and most popular podcast in America dedicated to Self-Directed retirement accounts. And he publishes Self-Directed Investor Magazine, America's only print magazine for Self-Directed investors. And if that wasn't enough, he even teaches continuing education courses for lawyers about Self-Directed IRAs through no less than the University of California. But what's going to surprise you most is exactly why Bryan got into the Self-Directed IRA world, to begin with. And it's quite a story. So let's jump in. Bryan, thank you for being here.

Bryan Ellis:

Hey, it's my pleasure. I'm always thrilled to hear what you guys at Rocket Dollar are doing and it's a pleasure to be here with you today.

Thomas Young:

Well, thank you again. So tell me a little bit about your career and how you ended up being so passionate about the Self-Directed space. I think that's where we should start the story.

Bryan Ellis:

Well, you know Thomas, I had been in the real estate world for a very long time, since the mid-nineties, and somewhere long about the late nineties, I discovered that you could use your IRA money to invest in real estate and such. And that was pretty revolutionary to me. There were maybe 12 people in the world total who knew that at the time. The number might've been slightly larger, but not much. But I realized that and started doing it, but also not long thereafter, I realized that if I could do that, then it probably made sense that I could get other people who had IRAs of their own, who weren't yet Self-Directed, to have them start a Self-Directed account and then I could partner with them to use their capital on my deals. And so I did that and it worked and it worked very well.

And so along the way, I learned more about doing real estate, more about using people's capital in their IRA and 401(k)s, et cetera, et cetera. And a lot's changed since then. The bottom line, Thomas, is that right now the focus of my work is in two areas. Number one, in raising capital for investment projects, some real estate projects, some oil and gas projects, some private equity projects. So I do a lot of that, that's where a lot of my time goes. But the rest of my time goes to supporting the Self-Directed industry and individual Self-Directed IRA users and Solo 401(k) users because there's just a tremendous amount that can be done with these tools that this is just not common knowledge. And so that's really what I do is help those people understand what they can do and then introduce them to exceptional alternative investment opportunities.

Thomas Young:

Yeah, and I love that. And I want to dig in a little bit more about your comment about 12 people. I know it wasn't 12, it was a few more, but what year was it that you discovered the Self-Directed IRA?

Bryan Ellis:

I think it might've been '96 or '97 so it was a long time ago at this point.

Thomas Young:

Right. And 25 years later or so, it still is not a mainstream thing. We're still sort of fighting this uphill battle against traditional custodians, traditional IRA providers because they just don't want people to know about this and they want to keep the assets for themselves.

Bryan Ellis:

Right. And I think that's going to change of necessity over the next several years. I suspect that some of the bigger custodians are going to take an interest and start to buy up people like Rocket Dollar, businesses like Rocket Dollar and other folks in your industry. And I don't know if that's in the future for you guys if that's something you're searching for or not, but I think that sort of activity in the industry is likely. The only question to me is whether the companies that will do the acquisitions will be the big IRA and financial custodians right now, or if there'll be more of the mid-size kind of financial service providers that are willing to serve a slightly different audience than the mainstream people.

Thomas Young:

Right. And I think that that's true. I think that's going to happen, especially as the way that people are investing is changing. And as this bull market sort of gets tired, it's going to lead to people start to think about their money more because you're not going to be able to sit back and make the returns that you've been able to make since the recession ended. And I think that explosion of interest, people are going to start demanding more because when you're still paying fees but making no money, that's when people start to get angry and that's when people start doing Google searches about what else they can do.

Bryan Ellis:

Yeah. You know, I think it's broader than that even, Thomas. In my experience, even really good times for the stock market like we have right now tend to be a pretty good spawn for people getting into alternative investments because suddenly they have a much larger asset base and it doesn't feel like much of a change to them to take a small part of that and diversify into some other asset categories. I mean, we're seeing that regularly. A lot of the work that we do is with savvy or accredited investors who are interested in getting into oil and gas. And that's something that not a lot of people have done at all ever before. But we're seeing people kind of shift away from, certainly away from the stock market and even away from some real estate type investments, into oil and gas because suddenly taking the $100,000 that they had deployed differently and deployed it into an oil and gas deal, it doesn't cause a problem for them because they have so much more money now than they did just a few months ago.

Thomas Young:

Right. It's almost like you're playing with house money at that point.

Bryan Ellis:

Exactly.

Thomas Young:

Nice, man. So that's interesting and I know that you and I have spoken in the past and we've talked a lot about oil and gas. We talked a lot about real estate. What is it about oil and gas that you find so fascinating? Where do you see is the opportunity in oil and gas even though you've been a real estate guy for a large part of your career?

Bryan Ellis:

All right, so do you want the official answer or the real answer?

Thomas Young:

I want the real answer.

Bryan Ellis:

Here's the real answer. A big part of my business, as I mentioned a moment ago, is raising capital for investment projects. I am blessed in that, I've been pretty successful in that and I no longer have to, I get to be choosy about the projects that I take.

Thomas Young:

Right.

Bryan Ellis:

These days, one of the primary considerations for me and whether I'm going to take a capital raising project is, is the project itself something that's exciting, that just the very nature of the project itself is going to make a potential investor go, wow, I've never heard that before. Well, you can get that with oil and gas. Oil and gas are, number one, it is not for everybody. We only service accredited investors and I know you know what that means and a lot of people know what that means.

We only service accredited investors. So this is not a general market type of opportunity. But what's so exciting about it to me, Thomas is that the cash flow numbers are just astounding. Like, it is not in any way unusual for a person to invest in a decent, not an extraordinary one, but a decent oil and gas deal, get all of their capital back in three years if it's running slowly, but one or two is pretty common. And then every penny they collect for years and years thereafter, totally free and clear, like it's just all pure profit. But that's not the end of the story.

I mean the tax benefits are astounding. They are astounding. Like even real estate, as tax efficient as it is, doesn't even vaguely compare to the tax benefits that the law offers us whenever we invest in oil and gas. I'm talking about massive, massive results in this year's tax bill. It's overwhelming. And also part of the money that you get paid every month or every quarter from oil and gas, part of that's just tax-free. That's the law. It's not difficult to make a compelling case for why people who invest in real estate or other alternative assets should consider diversifying a portion of their portfolio into oil and gas. And that's why I love that space and that asset class so much.

Thomas Young:

Right. And that makes perfect sense. And there's a couple of followup questions that I have. First one. Would you consider the oil and gas spaces tax treatment so good that you would do it outside of the Self-Directed account?

Bryan Ellis:

Oh, without a doubt. Without a doubt. But that's a very savvy question you asked there. Without a doubt. Most people that we work with do that kind of investment outside of their IRA or 401(k) because the nature of the tax benefits makes it possible for you to radically change how much income tax you owe this year. And that doesn't help you inside of an IRA.

Thomas Young:

Right.

Bryan Ellis:

But the cool thing about that, Thomas, is that with just a little bit of thinking, you can get massive benefits by investing in your IRA or 401(k) money into oil and gas deals. Again, assuming you're an accredited investor and assuming that it otherwise matches your financial situation, you can do some incredible, and we do some incredibly, really effective structuring strategies such that ... well, the magic ends up happening and you end up being able to do things between your Roth account and your Traditional account and end up converting a lot of the money that would have been taxable later into non-taxable money. And it's Ninja level stuff that we probably won't get into the details of today, but it can work in either context without any doubt.

Thomas Young:

Right. And I love that when a financial structuring or using your accounts in such creative ways that the only way to describe it, especially on a podcast, this is just magic and it's not, it's being intelligent and thinking through these situations and working with people like you, but when you're going to simply just describe it as well, it's magic. That's like, Oh, okay, we should pay attention.

Bryan Ellis:

It is like that. You know what, I had an opportunity to speak to a group of fairly savvy investors here recently, a group of dentists who are very much into alternative asset investing. And the point that hit home most with them, and that I think just blows people away, is that frequently you can take a given investment, change nothing about it except for how it's structured, maybe whether it's held in an LLC versus being held directly or how that LLC or corporation is structured and who owns the pieces of it, but you take the same investment and just structure it differently and the real bottom-line results of the amount of money that you get to spend one day, those results change radically just from the structuring differences. And that's one of the ways that we like to help people these days because not a lot of people know that.

And the people who do know it, like you guys at Rocket Dollar and your team there, you guys know all this stuff too, but we all know that the law puts a lot of clamps on what you guys, as custodians, can do. And I think that's unfortunate. And so that's why we work the way that we do. We're not a custodian, we're not the administrator or anything like that. We just help people to understand what can be done when they work well with their custodian or with their administrator. So there are all kinds of opportunities that are not broadly known that we love to bring to the fore.

Thomas Young:

Right. And that's another thing that I like about the way you guys operate is that for example, Rocket Dollar, we focus on one very specific thing and that's making sure that you have the vehicle, right, and I love the way that you guys approach it going, there are people out there like us, we weren't around when you guys started, but if they can set up the vehicle, now I get to go exercise my domain expertise and use these vehicles for their purpose, which is to be invested, to be deployed. And I love that you guys didn't just immediately jump in and go, we're going to do the whole thing. You guys were very, very thoughtful about your approach and education is the name of the game for you guys and it's changed your other business drastically, I'm assuming.

Bryan Ellis:

Oh yeah, absolutely. It's wonderful because I do have a fair amount of name recognition and expertise in this space now and so I get to go out and speak about this topic in various places and I'm going to tell you, I suspect you'll believe it, but the amount of ignorance about these things, even among people who say that they know something about them, the amount of ignorance and downright misinformation that exists out there is staggering. And this is one of those places with your IRA or 401(k), this is one of those places where if you get it wrong, you probably aren't going to have a chance to get it right. So that's really what we'd like to do is to help people dig into the details and make sure they get it right the first time.

Thomas Young:

Right. I listened to an episode of yours that you recorded a while ago just talking about how different people name these products and that they're all the same at the end of the day. For example, like the Solo 401(k) and some people brand it differently, whatever, and it's still a 401(k) and there's when you're talking about misinformation, there's a lot of one-off individuals. Like there's no backend, there's no real structure in place to keep people safe, but they're selling these accounts under different names and the internet is the wild west and there is so much bad information and so many people that are excited about these accounts and may not, there's no malice, but they just don't know. And so you have to be careful about where you get your information. You've got to go with the guys like you and like us, that this is what we do for a living. I mean, this is our thing.

Bryan Ellis:

I was on a conference call about two weeks ago with a coaching group of fairly affluent savvy investors. One of the other people on that call was one of the folks who kind of has branded Solo 401(k)s in a certain way. It blew me away. At least one of the things he said was wrong. Now I don't think the guy intended it that way. I just think it's either just pure ignorance, maybe laziness or disregard or something. I don't think it's malice, but still, you don't get a second chance with this stuff, particularly with IRAs.

Thomas Young:

Right. And we are lucky in that a lot of these individuals or small players are pushing Solo 401(k)s where the penalty is a little bit slower, but it's still a penalty and you still don't want to get in trouble and it's still a pain to go through an audit. And so you just want to be careful and that's why there are trusted providers. I mean there's certainly more than just Rocket Dollar, but you still want to be careful.

Bryan Ellis:

You guys have a nice situation though because we at Self-Directed.org, we can provide Solo 401(k)s because anybody can provide Solo 401(k)s really, but we can't provide IRAs. We're not a custodian or an administrator. Look, as much as I would prefer that everybody get a 401(k), a Solo 401(k) versus an IRA, not everybody qualifies for it. So it is just tremendously critical and crucial, the service that you guys offer.

Thomas Young:

Absolutely. And I mean that's the product we're building. I mean, we sort of build the initial product but now it's really about guardrails. I mean, we want to be able to catch something before it happens just by saying, Hey, log into Rocket and just go through the questionnaire. Let's just make sure it's okay. And we're still building that, I mean, we still have a long way to go with the product that we want to build. But for us, I mean, we know that these accounts are dangerous and we know that people are going to make bad investments. We hope that it wouldn't be that way, but I mean that's just the risk that exists in any investment situation.

Bryan Ellis:

Absolutely.

Thomas Young:

And Bitcoin, if you bought ... there are tons of investments that people have lost money on it and that's part of the game. But the part that we can solve is people getting in trouble.

Bryan Ellis:

Yeah, yeah. Right. The compliance issues, the basic core, sign your name and not somebody else's name kind of stuff.

Thomas Young:

So, talking about misinformation and bad things out there, what are some common misconceptions? Let's stick to IRAs specifically because there are some different misconceptions about the Solo 401(k), but what are some of the common misconceptions that people have about the Self-Directed and specifically, the checkbook control IRAs?

Bryan Ellis:

You know, that's a great question and I might give you a different answer depending on the day of the week. The answer I'm going to give you today is based on the latest example of this that I've seen and frankly, it was my lovely wife, Carol, she is the editor of Self-Directed Investor Magazine. She does as much public speaking and training on this topic, particularly for groups of female investors. And she was attending an investor meeting where there was another speaker and the speaker got up and said something like this.

If you just put about a $100 or maybe $500 in an IRA and you can use that to get a property under contract and flip that property and make five grand, and if you do that four or five times this year, you'll make $20–$25,000 and it'll be tax-free.

Thomas Young:

Oh boy.

Bryan Ellis:

You know what? That's wrong. That's wrong. If you do it once, maybe twice, depending on the circumstances, maybe, just maybe, that's okay. But the biggest issue concerning that type of thing is that people don't understand that there's a difference between earned income and unearned income. Earned income is like what you get paid at your job. Earned income is what you make whenever you flip a house. Earned income is like stuff that happens because you did something. Unearned income is investment income and IRA's only shield you from taxes connected to unearned income. Like whenever your stock grows in value, whenever you get paid from your private loan, the IRA is great for all that stuff. For unearned income, like flipping a house or having a job. If your IRA generates that kind of income, the problem is that it is fully taxable and not only is it fully taxable, it's fully taxable at trust rates since your IRA is a trust under the law. And those rates are much higher than your income tax rates, you just increased your taxes by not understanding what you were doing.

Thomas Young:

That's right and we see that a lot with people that specifically, like what you said, want to flip houses. To which we say, look, now that you've got full control of your IRA money to go make those sorts of investments, now maybe that frees up some cash that you were going to use for some alternative investments. Now you can go do that flipping business with cash and so it's not that because the IRA exists or because the 401(k) exists means you have to use it, it means you can make some money out from other things in cash and then run your business that way. It's not everything that has to be done through the vehicle. It's just part of the whole picture.

Bryan Ellis:

Exactly right. Exactly right. And you know another one that comes up frequently, Thomas, is people, I don't think they even think this consciously, but I think somewhere in their mind they believe that just because they're investing through their IRA, they're going to be successful.

Thomas Young:

Wow, interesting.

Bryan Ellis:

I'm sorry, but you can't plan on any more success in your investing just because you're using a Self-Directed IRA than if you were doing it outside of a Self-Directed IRA. Right. The tax rules are different obviously, and so that might make it better or worse, but you've got to be just as careful. I mean, I think what it is, is people think an IRA is inherently a longterm thing. I've got a lot more time to get this right, so if it doesn't go right now, I can do better later. That's the wrong way to think. I mean, you want to be hitting it out of the park every time you take a swing. Nobody's going to do that, but you've got to aim for that as your ideal, as your objective.

Thomas Young:

Right. I read a great quote, I got this book, this Warren Buffett quotes book, and he was talking about how an investment is like a pitch, right? And you just got to sit there and you got to wait for the right pitch. And when people get access to their money, it's easy to get excited and it's easy to pursue opportunities and nobody can be blamed for that, but you have to realize it's still money and it's still your money. Like Rocket Dollar is not going to suffer if you make a bad investment. Honestly, we don't want that to happen. But the only person that has hurt from a bad investment is you. And what this vehicle allows you to do is to sit there and look at pitches and when the right one comes, if you, realistically, you only have to be right once or twice really to have a huge impact on your retirement, on your financial life. You don't have to hit every ball that gets thrown at you.

Bryan Ellis:

Yeah, no doubt about it. You know, you mentioned Warren Buffet, it's kind of funny. There's a quote that's attributed to him. I'm assuming he said it. It said his two rules about investing are number one, never lose money. And number two, always look back to number one. All about not losing what you have first of all.

Thomas Young:

Right, right. And it makes sense and that's a really good point. You know, I've sort of thought about it in different ways, but the way you just stated it is so clear that just because you have the power to make investments, that doesn't mean you would have done it with cash just because you have this pile of money that, like what you said earlier, as some of it is house money because the market's done so well, and even if you were sitting in nothing, you would've made money in the last 10 years. But, this is still your retirement account. This is still your retirement money, it's not for you to go have fun with.

Bryan Ellis:

And you were so right that you only have to get it right just one or two or three times throughout your life. I mean, we have, I'm not representing this, this isn't normal, but just to give you an idea, we had a client who invested, I think it was around 90 grand in an oil and gas deal, about four or five months later, which is about the normal amount of time, they started collecting monthly income from that. They've been collecting almost $4,000 a month for years now from one $90,000 investment. You don't have to get too many of those before things change radically. You've just got to be careful not to get hurt in the meantime.

Thomas Young:

Right. You don't want to lose those 90 grand, but you can do a lot with them. And you know, I think about it this way, I'm relatively young in my career and I've been entrepreneurial my whole career, so I've never really made a lot of money. But I just think about it this way. If I were to double the savings that I have right now two times in the next 20 years, I'd be in a pretty good place. That's only two times, right? And that can be done passively. And that can be done safely.

Bryan Ellis:

It can be done pretty easily in 20 years.

Thomas Young:

Right. The laws. But then you add one more double to that, you add just one more time and now we're talking about something completely different. And that's why this space is exciting because you can do that. But any of these investments carry an amount of risk that is higher than a lot of other investments. But, if you do it right and you play the game right and the tax game properly, there is a way to do this and it just takes, the way people are professional engineers or lawyers, whatever, there's professionals in this space and a lot of people are like you're not smarter than the guy that spent 20 years doing this. Let the professionals be professionals then that's a whole other conversation.

Bryan Ellis:

Well, I still do that to this day myself, even though a lot of people would consider me that guy, I still, on a routine basis, talk to one particular tax lawyer who still handles this kind of stuff on a day to day basis. I'll talk to him regularly because I know a whole lot and I know more than just about anybody else out there, but not more than that guy. So we've all got to keep learning.

Thomas Young:

And I say that too, when our customers call me and when I have these conversations with even people at Rocket Dollar, it's like I'm good at the nuts and bolts of these accounts. Like I can tell you, you know what's good, what's not good inside of the account. But I'm not an investor. And I think that a lot of people don't realize that at a Rocket Dollar it is like we are your account providers. We're not advising you, we can't. Legally, we cannot tell you what to do with a Self-Directed account, but we can be good at our job. And then you go find someone good at the investment part of the account and I think that's always important.

You know, you're an expert in one, go deep in one, but then let other people help you with the rest. Doing it alone is ... what's the quote, if you want to go fast, go alone. If you want to go far, go together.

Bryan Ellis:

Yeah, exactly. Exactly.

Thomas Young:

I've always liked that one. So you know, sort of wrapping up, what are you most excited about for 2020 and this coming decade where everything is changing, it seems like every month, politically the market's like ... what are you excited about for the next year, five years, 10 years, whatever.

Bryan Ellis:

For this year I'm excited about, well, I'm at least very interested in all the political goings-on. I'm going to be very, very, I don't know, politically incorrect right now. I hope to God Donald Trump wins again. I don't care what anybody thinks of me for saying that, I don't care what anybody thinks of him. You can't argue with what's going on in the economy right now. You just can't. Well, why do I say that? Why does that matter? It's because I'm an investor, my investments don't make money unless other people spend money. They don't spend money if they're not well employed. Right now, people are well employed, wages are going up and like the trajectory has been crystal clear and everybody who is not him, all of his opponents are saying the same thing. We need to pay more taxes, we need more regulation.

They're all saying the same thing, so this is not a partisan issue for me. This is a results issue for me. Like if you care about your financial wellbeing and the financial wellbeing of your portfolio and future generations, that all happens right now. There are things about that guy that are kind of questionable, but dear God, the economic impact can't be questioned. And so that's exciting because to me, that's an opportunity that if he gets reelected, there's no reason to expect that that's going to change a whole lot. We will have a downturn at some point, but the question is how severe will that downturn be and will that downturn, will it happen in an economy where we're just having a natural ebb and flow slowing of the cycle, or will it be because we have a situation where people are really, really in bad shape and it's just all catching up to us?

Well, a downturn can be just a slowing rather than a slaughter and I think that's more likely if we have current policies extended for multiple more years, so that's the big deal. I'm also really excited about, as I mentioned, helping people to think more broadly about their investments and we're heavily focused on oil and gas and RV parks, oil and gas and RV parks. Like frankly, if I don't do anything else but that all year long, I'm going to be, really, really happy. Oil and gas is an amazing thing for a certain subset of investors. RV parks, I think, my prediction is that the multifamily world is, for the last five years, the multifamily world has been like you throw a dart and you win. I don't think it's that way anymore. I think we're pretty close to the top of that cycle.

There's still going to be great opportunities, but they're going to be fewer and farther between and I think with lots of great data to support me that there's going to be a lot of transition from multifamily investors over into RV parks. Also in some mobile homes, but I think RV parks are an even better gain for a number of reasons. So I'm excited about that. And finally, we've been teaching a lot of people how to raise capital and man, it's working for them. It's working for them. So I'm looking forward to doing more of that this year, helping other people learn how to raise capital for their projects, their companies, and to make their dreams happen. So it's a beautiful time.

Thomas Young:

I agree with you. And the topic of syndication and teaching people how to raise money, I think is fantastic because you have a lot of good individual investors and the part that they don't know is how to raise money, right? They know how to invest. They know what the numbers look like. They're creative, they're looking for these opportunities and there's a lot of money out there right now. We talked to a lot of fundraisers, we call them syndicators, that they're not necessarily interested in the Self-Directed space right now because their deals are filling up so fast with their existing investors. They're not looking for new ways to tap into capital. They're not looking for new investors. They are just trying to not get oversubscribed. There's just a lot of money.

Bryan Ellis:

It's, it's not uncommon for our oil and gas deals to fill in a day or two.

Thomas Young:

That's fantastic. Well, Bryan, how can someone get in touch with you if they want to talk to you about oil and gas or investing with you guys or learning just more about what you guys do at Self-Directed talk or-

Bryan Ellis:

The best way to do it would be to just drop me a text message. Our phone number is 678-888-4000. 678-888-4000. Let me know you heard me on the Rocket Dollar podcast and we'll respond to you and figure out exactly how we can help you best. That's the best way. Text me at 678-888-4000.

Thomas Young:

Fantastic. Bryan, thank you so much for being here and I look forward to having you back on the show to talk about the goings-on this year.

Bryan Ellis:

I would love it. Thank you so much, Thomas. I appreciate it.