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if you're a self-directed our investor and you might be investing with more than just your own ira you may have other partners um you might be investing in multiple assets and you might have multiple streams of income coming in and monies needing to go out to pay for different real estate taxes and repairs and things like that a self-directed ira would be absolutely impossible so what you can do is create an llc [Music] [Music] all right ladies and gentlemen it's aaron fragnito here with another episode of the passive cash flow podcast and we're here with a great guest we're james jones how are we doing today james good i'm great aaron thank you for having me how are you oh very well very well my friend so james i wanted to have you on the show here because you work with auto ira and alto ira in my opinion is really uh changing the game a little bit changing the space in innovative ways uh with self-directing your ira and uh so i want to just introduce also to our guests introduce you as well but how is also different from uh differ from other ira custodians well great again thank you so very innovative they really were the first custodian to embrace this entire uh change in what we call fintech right so it's it's applying technology to financial service companies and the self-directed ira industry is a 45 year old industry right not something new but the underlying accounting and administrative uh platforms were based on decades-old technology so alto came along and saw the the friction points uh what were the challenges to completing a transaction in these new online investing platforms and so they built up a platform from scratch that really again embraces technology using uh different api touch points now and that's amazing i work with so many different ira custodians and it is amazing they all kind of do the same thing at the end of the day but they do it very different ways some of them need to read through the whole operating agreement and every single document and approve it and then it takes like seven business days to let it come back to you and they're like oh by the way you missed a comma here we'll need to review for seven more days once you send back the fixed version with the comma and i'm just like this does not make sense and what i liked about alto iras it seems like you guys have found a way to kind of speed up that process um and uh so kind of like walk me through it so i'm someone who's looking who's in ireland it's with fidelity and it's riding the stock market i'm like you know what i want to take a third of my ira and i want to put it into professionally managed real estate with people's capital group because i've been watching their podcast and that host is so handsome and so energetic and trustworthy i feel like i want to invest in people's capital group that's the most people are saying i hear on the street and uh so you know how would they thank you how would they go about doing that exactly right so to the first point you make is really interesting so traditionally uh the average retail investor is 99.9 percent invested in public security stocks funds mutual funds and eps and what we've seen over the last five six years finally uh thanks to the jobs act and the new ways to raise capital through regulation a plus d cf is now we're seeing customer portfolios increase 5 to 10 in some cases as much as 25 to 30 percent investing in alternatives because in essence that's the reality and the makeup of institutional portfolios right private equity firms family offices institutional investors on average have about a third of their portfolio so as a retail investor how do you do it there are three steps and i'll outlay them and it's really about an eight to ten minute process wow period and so the first is opening the account so you would go to alto ira you would put in your name and the email address that begins the mechanism for opening an account instantaneously you come back fill in your address your date of birth and social security number about five clicks complete and you're done the account is open literally in about two minutes that's amazing step two is then funding the account right by by initiating a transfer from his resigning custodian so you would just simply check on the box drop down it's coming from fidelity schwab e-trade merrill lynch morgan stanley etc you click that button you put the amount that you want to come over you upload your latest statement bang that transfer process is in place and alto is the only custodian that actually is able to pick up and take on the responsibility of completing that transaction and then number three here's the really neat spot when somebody is investing on the alto platform they've already are working with one of our assigned partners so the deal sponsored documents are already uploaded into the system so they just simply click on the deal sponsor they sign any subscription agreements ppms etc with the digital signature done that is about a total 16 click process which takes again about eight minutes um in order for that actual transaction to take place um we've done it if you're just moving cash over in three to four days as opposed to three to four months yeah yeah that's incredible i mean i've worked with some ira custodians who i won't mention here but they've taken over 30 days to open an account fund the account move it into an investment i mean they'll take a week and a half just to get back to your email and again it'll be like one little thing and it'll be another week and a half for them to like be like oh good work putting that comment and you're now approved and yeah so i i really uh and at the end of the day what's funny too is uh the ira custodians that are reviewing all these documents so closely and you know they they also um don't catch things all the time either you know like one time there's a little term that needed to be changed in an operating agreement but like another ira study totally missed it after like seven business days reviewing the document and like you guys don't even really review the documents that well you know and so i i really actually like the process when you're self-directing your ira of being able to review the documents yourself click through the process open the account you know in 10 minutes fund the account another 10 minutes that's much faster than what i've seen most of these companies are are having you fill out paperwork you got to sign it you know scan it in send it back it's not even done through you know it is amazing so you're all online and that's why i want to have also you know james here come on with uh also and and talk about this because in mike's i've worked with probably a dozen custodians and i'd say you guys are definitely the easiest the fastest and you know let's be honest right now you know time is money right you look at these cryptocurrency markets you look at all these markets right you think oh my god if i got in 90 days ago uh i would have made thirty thousand dollars right you know so whatever you know i would have made another 100 of my money or something so if you're trying to get an alternative investment for example we're buying a building right now we had a bunch of investors wind in on the deal and then you know some of them missed out because they waited too long right they just didn't take action time they didn't sign the documents they moved the capital so now they missed out on the opportunity hopefully we'll have another one in the future but time is money if you're not moving your money fast these days then you're losing money because inflation is skyrocketing so the longer it sits in an account not riding with the markets the longer you're going to lose money uh so that's why this is important as well and right and not having the headache of uh i'll touch on that very quickly you know it's this is a interesting business school case study right so really the whole reason behind this is that this industry that was started really in 1974 when iras were created this is not something new this is just an irs provision that allows you to go to a ira custodian to invest in alternative assets right but that was really a business to consumer model in fact it was really a one-off so you would go to a local rhea meeting find out that you could be a hard money lender then you would go find the self-directed ira custodian and you would do a one-off transaction and so that that is how the whole platform for accounting administration was built and set up for one-offs right so now when we're in this online environment and we're working with a b to b to c environment with a deal sponsor such as yourself we need speed and execution so the entire system was not built for this model of a custodian working and partnering with deal sponsors such as yourself so that's that's really the business model has changed from a b to c to a b to b yeah and as an operator i love it i mean i can upload my documents right to your uh file there right online and you know i i did that it took me about 10 minutes you know i have all the documents ready to go offering memorandum operating agreement llc information and now the investors can go right on all to ira look up all the information decide if it's a good investment for their investment goals and proceed right there it's you know a lot of times as the operator i'm emailing back and forth to the ira custodian again they don't respond emails for days i may have to email in two or three times um often you're just emailing like a general info at email box and you're getting a different person responding every time who doesn't really know where the account's at so you know it can be very frustrating working with ira custodians i've even been to the point where we just close and we're like just send the money when you you know it can get your act together and send the money ira custodian and uh you know so that's always frustrating um and then you know but i also want to talk about the cost involved self-directing your ira so is it are you is also more expensive than your average iraq all these luxuries here what are we looking at to start so again this is a kind of an interesting business case study if you will um but it's in it's really pretty simple and that technology um allows for uh reduction in costs because of reduction in friction points meaning you don't need as many people behind the scenes running around doing things manually right so the the average self-directed iowa custodian has an annual fee of about 300 per asset per year 100 to open the account 100 for each and every transaction so you know if you take an average self-directed ira portfolio of three assets you're looking at about somewhere just shy of two thousand dollars per year so let's take a portfolio of ten thousand dollars that's spinning off ten percent return you're making a thousand dollars and spending two thousand in fees right it does doesn't work right so the reason that one percent to two percent of iras of the 50 million iras in the united states you know up into the last few years used uh utilized self-directed iras because it was not cost effective so this is after technology and the ability to uh have a good customer journey and experience the second issue is price and so the price becomes prohibitive in most cases under a portfolio of about 50 000. so when we're seeing a lot of deal sponsors now coming into the market and allowing investors to start at 500 a thousand dollars to invest it just doesn't work so our technology has enabled us to offer a flat 100 dollar fee for a year on a monthly subscription basis period and that's it that can be one asset three assets ten assets fifty assets one hundred dollar flat fee and if you're on our platform as a deal sponsor there's a ten dollar transaction fee so now a thousand dollar two thousand dollar uh investment across three assets absolutely makes economic sense sure so you're saying i could self-direct a million dollars in the alto ira and only pay a hundred dollar fee great wow that's really incredible i mean yeah because you're talking one percent that's a steep b and i remember when um compared to ira's companies would charge that like coming the space was just getting started they could charge that right now if that's your business model good luck right it was really you know it's a much more competitive space which is good for the consumer the cost to self-direct your iras come down which will allow uh more people to do that and you know we've seen anything in the last couple years or so the stock market i don't know it seems a little rigged you know i mean we look at some of these stocks that going up and you look at what the companies are actually doing and you're just scratching your head and then you have these mean stocks where they're just basically playing games you know and like and it's like you know the big elites versus us small guys putting our self-directed diary in if there's really a war brewing in a way you know you can call it that or just a division maybe of the elites with their big fortune 500 companies and their black rock and all their capital behind them who've been moving and controlling the markets for years and calling the shots it seems like the little guy's kind of getting his say again by being able to self-direct your ira pick out what you want to invest in maybe it's real estate maybe it's cryptocurrency you know maybe it's uh an opportunity in a small business a startup company or something so you know obviously the rules and regulations and what you can and cannot invest in but is this an awakening of like freedom of wealth you know it's almost like the middle classes figure out how to build their own wealth and take control their retirement account and you know a decade ago you couldn't do this you had to give your money to some big company that was thought they were better than you and knew how to trade better than you and you do you had no control of what your money's doing uh you know and so this is nice like an awakening isn't it it is what we call the democratization of wall street finally yes absolutely several years ago you did not have an opportunity to invest in the next google or microsoft right and now we do we have that opportunity we have the opportunity to invest in real assets like real estate that's collateralized that doesn't necessarily have to lose everything right because it's it's secured and again if we take a look at the average high net worth investor they have 22 percent of their assets in wall street their largest asset class is real estate and that's 40 to 45 so yes now we can invest in real estate and across multiple types of real estate assets so yeah this truly is the democratization of wall street this is this is the greatest thing that we've seen since the 1934 act yeah it's so important it gives the power back to the people and you know we have a sneaking suspicion in my opinion the government just keeps getting bigger and bigger and bigger and eventually what we've seen history repeats itself is that if government gets too big it almost eats itself you know and i think by this little rule i know it's a small in the whole big game but being able to self-direct your ira um is really a strong tool that i'm glad the politicians didn't take away now they were gonna take away the ability to self-direct your ira and really restrict that but that was essentially changed out of the current bill but just go over what was in the the current bill just a week ago and that's a scary thing that really wasn't on the headlines all that much i'm glad the politicians came to their sentences and took away the restriction to self-direct your iras that doesn't seem like it's going to be enforced now it's a fast track to get voted out of office anyway and what were they what were these silly politicians trying to push last week what was the law that was in the bill so uh part of this or or maybe much of it comes out of the peter teal 5 billion roth ira which meant um in the eyes of the irs this was uh an abuse of the system if you will um and because he made a bunch of money because he invested wisely successfully founded the american dream invested in companies that were starting very successfully cashed out and the irs said no no no you can't do that in america so annoying anyway go on and so true technically there was not an abuse um he uh followed the irs rules um where he grew a roth ira to a five billion dollar point so you know he he did um have uh great opportunities because of who he was in his network absolutely um the everyday investor doesn't necessarily have those opportunities although you know you can go um to any number of these platforms like an angel list and invest in startups you just have to be smart enough to know which ones so anyway without getting into the weeds um they decided to go after peter thiel by going after the everyday investors so the the the bullets basically that we dodged was any capital raise that required an accred an investor to be accredited would no longer be allowed to do that in an ira so that that would be a regulation d raise right so that's that's the first part that investors would no longer be allowed to invest but the reality is with a lot of the accreditation laws being changed right you don't necessarily have to have certain net worths and income you can become accredited by taking your series 65 so they're they've loosened those laws so what you're really doing is affecting more main street investors not just the super wealthy the the second part of that bill which would have been really devastating for many purposes would any uh investment that was a rig the investment would need to be unwound within two years so think about that you've got a private market with no liquidity you would be forcing investors to try and sell into a market that doesn't exist today um but in order to do that think about the companies that had raised capital you'd basically be decimating those they would be forced into bankruptcy and foreclosure and then that of course affects the employment mode so you would have people unemployed the results would have been devastating so that was a great thing um the second uh was that um there would be no more back door roth iras and again this is not just meant for the super wealthy if you have combined income over the ballpark about 180 000 you can't contribute to iraq right but what you can do is contribute to a traditional ira and then convert it to a roth now you still would have to pay taxes on any gains within that but the idea is you're taxing the seed versus taxing the harvest so for any everyday investor that may have done really well in business or had a good year um they still would be able to invest and convert dollars into iraq um the the other major point and this is very much in real estate investing with self-directed iras there would be no more llc or checkbook iras and the point there is if if you're a self-directed ira investor and you might be investing with more than just your own ira you may have other partners um you might be investing in multiple assets and you might have multiple streams of income coming in and monies needing to go out to pay for different real estate taxes and repairs and things like that a self-directed ira would be absolutely impossible so what you can do is create an llc and you can then have one checking account where you can partner your different uh investors you can partner on multiple assets and you can handle the income streams in and out and that makes absolute sense and those would be eliminated and that would be very devastating for the self-directed hiring industry of which 65 70 is invested in real estate yeah i mean what are these politicians thinking like do they even understand how business works you can't just make a law that says you need to wind down all of your investments in a in a huge space that is literally aimed at making long-term investments right i about a third of our investors self-direct their ira and real estate for our real estate fund and their view is is long-term a lot of these people are you know 40 years old maybe you know and they're and they're not going to be able to even touch their ira for another 20 years so why would they invest in something that they're going to pull out of in two years you know real estate for us a long term investment will be buying high demand markets it grows over time it's professionally managed when we buy it it's mismanaged we buy for a discount so but it's a maturity investment it takes time to make a good return on it because we refinance over about a four year period so our whole strategy would be thrown awry you know there'd be we have to sell the buildings or whatever to get them out i mean we probably do fine because real estate's so hot right now we probably laugh all the way to the bank but the bottom line is it would it would probably hurt them it would definitely hurt the market it's so crazy like if boy if i if i were any smarter i'd feel like the politicians are trying to force us to keep our money in the stock market with bunch of fortune 500 companies and it's almost like they're working for the corporations or something you ever get that feeling like politicians are working for corporations and not for you it's a sneaking suspicion i have sometimes it seems like this law may have reinforced that sneaking suspicion my wife says i'm not allowed to talk about politics okay [Laughter] you're right you're right we're we are agnostic here okay we love politicians they make great decisions you know obviously this is frustrating law obviously this corporation said hey you know what these pesky self-direct ira companies are allowing people to take their money out of the stock market now the s p 500 and we don't like that because we're the s p 500 right and by the way we funded your campaign so you got to you know so it's so obvious a a law to restrict us from getting out of uh the rat race of having to put your money in the s p 500 um which you know all those companies are now too big to fail anyway so they're not really acting like responsible companies anyway because they're too big to fail they know if they make a bad bet they're going to get bailed out by our tax dollars so like is that the you really want to have all your eggs in uh for your retirement and a lot of people are saying nay i'm tired of the s p 500 i'm tired of not controlling my retirement account not even knowing when i'm really being charged for what my broker's really even investing in or what value he's bringing you know there's a certain pride in taking control of your retirement account um i love it when i work with someone who's like an older person who's like hey for the first time in their life they're getting out of the stock market they're taking control their retirement account or um i was talking with a single mom the other day who was looking to self-direct some of her ira and saved up a good amount and it was a really exciting time uh for her to do this now and um you know it was really uh it's an amazing feeling when when someone takes control their retirement account that that excitement doing that and diversifying some of their capital into real estate um really it is an amazing uh experience for people um and i'm so glad the government didn't take that away for multiple reasons [Laughter] do you see that law coming back in place or has that really lost steam at this point hopefully um it lost steam i mean the our industry got together with a number of different um we created a number of uh non-profits and started to work with lobbyists to educate um our local politicians and congressmen and we um got several politicians involved and and i think you know part of it comes from when the government is looking to raise taxes they tend to look at areas where there might be either loopholes or areas where the irs might not be getting what they feel is their rightful and fair share of taxes paid and so you know one of those areas that people look to in uh checkbook iras is that um it's not always as visible to the irs what the valuation of those assets are and so the irs has what's called the dirty dozen list and that's the top 12 things that are flags that the irs can audit that has proven to be a problem in the past and specifically the abuses that the irs has seen with self-directed ira checkbook or llcs is in the conversions so i'll give you a perfect example let's take a house uh the real estate investment worth a hundred thousand dollars and they want to convert that ira from a traditional self-directed ira to a roth ira so what has been done in the past is they devalue that asset by getting an appraiser or somebody that will say hey it's a knockdown um house it's only worth ten thousand dollars right and so then when they do in what they call an in-kind conversion that house sits in the ira owned by the ira converts to a roth the taxes due on the roth ira is a ten thousand dollar investment so they only pay the irs three thousand dollars versus thirty thousand dollars so in other words it's when roth conversions are done in kind and the underlying owned asset is devalued in an improper way um the irs loses out on the money and that's the crux of the problem where if the assets aren't visible to the irs how do they know you know what the value is in there for the text that's the underlying problem so i think many congressmen have realized the benefits of being able to invest in these alternative investments to help our own uh retirement and be less dependent on the government so yeah i believe that will be in the rearview window okay no absolutely you know i understand that uh you know people are always trying to avoid paying taxes and tax fraud is is an issue um and we want to make sure everyone is paying their fair share but i almost feel like they set the rules the game the irs and then it's like oh no people are winning too much they're making too much money you know and uh we need to crack down on the success here in america it's just backwards it's just it i mean it's not the way it's supposed to be in this country it's not we found it on so hopefully they changed that mindset of trying to um restrict people from building wealth and uh honestly the more you try to restrict people from building wealth the less time you'll be in office quite frankly right so we'll see how that pans out um all right well that's that's good to know that you know there is some uh explanation behind that there and maybe they find a way to crack down on checkbook ira llc accounts and have you know a more of one extra rule in place you know the appraisal has to be done by you know a party selected by the irs or something like that you know and that would solve the problem instead of pulling out the whole carpet like nope no more of these so that's good yeah so you know the there's an annual form called a 5498 that sure needs to be filed right and so if if you have a 5498 for the underlying assets in the checkbook ira the problem solves yeah exactly exactly good good okay so uh one more question for you here james and we'll wrap up here for the morning so uh how would i i self-direct a solo 401k a lot of people i work with are small business owners and have a solo 401 k and what's the process of making your 401k into a self-directed ira essentially so you're you're talking about the perfect industry real estate where you have people that are involved as real estate investors or realtors et cetera but yeah you're speaking to an industry to a great degree is a 1099 right or it could be a gig worker right or combination of the above but you have uh the absolute opportunity to put away up to 58 000 a year and there are actually two different um programs where you can do that so we'll start with a solo 401k and that's really for business owners that do not have employees they may have a partner or a spouse but they're allowed to set up a plan where the employer and the employee can contribute um you can use a roth solo 401k so you're putting in after tax money but again the whole conversation like the peter thiel monies that come out of that are never taxed okay as long as there's a five year holding period on the underlying asset for capital appreciation but that being said the the distributions that come out are always tax free um again you can put up to 58 000 uh a year and for those that are 50 and older there's an additional 6 500 in the catch up provision um this solo 401k does not come under the heavy uh restrictions and provisions of erisa laws and so in fact um you can even set up um your own solo 401k so you don't need all the you know the heavy rules regulations admin processes it's very simple to do it's filling out um a simple form um and filing that with the irs um the other is what's called a sep a simplified employee pension program um you can also put away up to fifty eight thousand dollars a year um there um is very little administration it's technically it's just an ira so literally a set can be opened in minutes right um and it does become a business expense deduction so let's say you know you made you had a really good year and you made 200 000 58 000 would come right off the top of what you're going to pay so you can use the tax laws to your benefit by being knowledgeable really at the end of the day may have filters sounded like um you know we're kind of bashing the irs but you know the the irs says um that it's your ability to um pay taxes but it's your right to avoid taxes not evade but a void so you just need to know the rules and play by the rules but if you do um you're allowed to avoid taxes in the legal way by calling no i'm not i'm not bashing the irs it's important we pay taxes right we need to have you know military schools roads these are important things we all want to pay our fair share but yeah it is it is a little uh crazy sometimes you know with the fed and i mean you know i i it's it's really an interesting time right now you know and um our institutions that are in place to safeguard against hyperinflation to you know safeguard against uh being limited to keeping all your eggs in one basket i i hope they take the right actions in the near future to uh slow down inflation and you know i try to recognize that it's not a temporary problem you know if i hear one more politician tell me that inflation's just a figure of my imagination and it's temporary i i'm not really sure if i'm going to keep listening to them you know so it's just an interesting time right now uh with inflation where it's at but i'm really glad that we have the option to sell director ira uh it is a good option for many people to do to diversify and real estate is a tried and true asset class uh so that's why a lot of people are invested these days especially uh in high demand real estate you know we try to buy within an hour in new york city so we focus on apartment buildings that are mismanaged in north jersey and like i said about a third of our investors self-direct their ira out of the stock market into real estate um and uh by the way for our listeners if you want to learn more about that process you go to peoplescapitalgroup.com you can fill out an application form and learn more about how to get qualified to invest passively with people's capital group but uh james so how can people reach alto ira if they want to learn more about uh signing up with auto and self-directing their ira it's just alto com excellent excellent yeah the process is so easy i went to also ira.com i put in my information for a current deal i'm actually going to put another deal up in about a few weeks or so as well so we'll have two deals on the site pretty soon i really like the way the site works it was easy to work with on mayan very clean very fast and i think our listeners will have the same experience they choose to uh go with alto ira for their their needs there so i hope you do and uh thank you james so much for uh coming on here and explaining uh the situation here answering my questions and dealing with my uh vague political opinions i don't know if you can figure out which way i lean but uh well you have to you'll just have to keep guessing well yeah you know the greatest thing that you're doing is education right so we talk about the democratization of wall street that's allowing investors to diversify um but the other really is um from a tax issue when i worked at merrill lynch in the trust department we work with very wealthy individuals and families um and the biggest issue um interestingly enough was not how many basis points were they paying on their funds um whether they were getting eight percent or ten percent return biggest issues were taxes um and getting around taxes in a legal and compliant way um because you think about it that eats 25 to 30 percent of your returns so you bringing education to the masses is the best thing that you can do to work with your investors to retain as much of their retirement savings as they can so greatly uh appreciate everything that you're doing thank you so much thank you no absolutely i appreciate that as well and it feels good to help people diversify out of the stock market it really does it's like we're really doing a service here so thank you i appreciate your time here james and uh definitely going to uh encourage more my investors contact also ira and keep working with you myself as well on the operator's side and certainly if you're interested in diversifying that ira into real estate i think people's capital group would be a great place to look into figure out if we're fit for your investment goals so go to peoplescapitalgroup.com to learn more and keep listening to the passive cash flow podcast i'm your host aaron fragnito we have a new episode now every week for you so keep on signing up and listening here we have a web webinar tonight as well so check out people's capitalgroup.com to sign up for an upcoming webinar we do them every month also thanks a lot for joining us james thank you aaron take care