Jeff Barnes joins Jason Hartman in this episode to talk about retirement plans. Jeff is the author of “The Ultimate Guide to Self-directed Investing & Retirement Planning.” He shares the different types of qualified retirement plans and gives more information on his specialty: Self Directed IRA and 401K. Jason and Jeff also talk about diversification of income property, being a passive investor, and Jeff’s experience in Wall Street.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.
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Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in 1000s of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day, you really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:03
Welcome to the creating wealth show, Episode Number 584 584. Thank you so much for joining me today. And today, our guests will be Jeff Barnes talking about self directed investing and retirement planning, and kind of some unique strategies on you know, what to do with solo K’s, 401K’s, IRAs, other types of retirement plans, and so forth. So I think you’ll like that and just some of the advantages of being self-directed. This, from a recovering Wall Street guy. And you know, I interviewed another recovering Wall Street guy today as well. So that episode will be coming up, we got a lot of great episodes coming up. So Flashback Friday, we’re gonna do a debriefing on an event we had a while back, actually quite a while back. And then on Monday, we’re gonna have Megan green chief economist for Manulife and John Hancock Asset Management. Well, just a whole bunch of other stuff coming up. So with me, I haven’t had him on the show for a while, but that is Fernando, and he asked today if he should come on and share this, and I got to give him a lot of credit for kind-of baring his soul because Fernando, you’re talking about a maybe a mistake you made. A missed opportunity, huh?
Fernando 2:25
Yeah, it? I think it was it was a mistake based on the numbers that I’m looking at.
Jason Hartman 2:31
Yeah, well, well. So for those of you who don’t know the story, I’ll give it to you in a nutshell here real quick before Fernando jumps into this new story that you haven’t heard. So Fernando was one of our clients. I met him about four years ago, I guess. And he was with Apple and had a big job there and a nice paying corporate job and decided he wanted to retire and achieve his financial independence state. He had a plan, just like an engineer would. A very detailed plan, Fernando. And we sat at that bar in Tempe, Arizona, and you pulled out your laptop and showed it to me. And then you proceeded to buy 70 units over the next couple of years and retire from Apple. Everybody was amazed that you did it and you thought, well, maybe I need to be an investment counselor. Because all these people are asking me how I did it. And they all want to buy properties. So I’m in my retirement, I might as well dabble in investment counseling. So that’s what you’ve done. But today you were talking with Oliver, another one of our investment counselors, who by the way, is going to be on the show soon. We’re gonna have Oliver on. What did you discover and are and are you? Are you sad? Are you mad? Are you? How do you feel about this?
Fernando 3:45
Well, I think it’s a mixture of both, but it’s always learning. Learning, I think overall is a positive thing. But we were talking Oliver and I were talking about having many of our clients, including myself, have an engineering background, you know, some exact science type of background and, and I think by definition, we’re very analytical and tend to spend quite a bit of time looking at numbers and comparing different possibilities and options. And in the, as we were talking, I recalled back when I back back before I had found your podcast. This is in the summer 2011 I was watching some late night TV in in New York state of all places, and I was looking at homes being sold in auction through American auction network TV. And these were being sold.
Jason Hartman 4:45
I you know, I remember you telling me
Fernando 4:48
Yeah, yeah, so these were being sold in southwestern Florida. This is a Lee County, Fort Myers, Cape Coral Lehigh acres and the prices were incredible, you know, 60 $70,000
Jason Hartman 4:59
The auctions were in Florida, but you happen to be in New York State watching it. That’s what you’re meant, right?
Fernando 5:05
Yeah, well, the TV, it was kind of a virtual. It’s, you know, virtual auctions that were being done, you know, through this network, the properties were in Florida and I was watching the show in New York. And the properties were sold for 60 70,000. And were being rented out for 750, $850. And, and to me, that was just shocking, you know, having a California mentality with the prices here, that just blew my mind and really piqued my interest. And at that point, I decided to study these auctions and put a spreadsheet together as a good engineer. And try to look at the numbers. So I shared the spreadsheet with you today, it was kind of a nostalgia moment that I did with Oliver as well, in looking back at how much data I collected, and all of the different properties that I analyzed over a period of six months or more. In this spreadsheet, I kept track of all the addresses their locations, you know, we know how the state of the property was, any links are associated with it. All of the indicators for the home The year was built, you know, square footage, price and so on. And I was looking at that spreadsheet today in and I wanted to look at how how did I do you know, should I have, should I have bought these properties or not in looking back and and the results are just astounding. I went back in I just just picked a few properties at random here. And I’m looking at one property in particular there is in Lehigh acres. And this is 733 Newhall street Lehigh acres. At the time, when I looked at this property is almost a year ago to the days October sorry, not here four years ago, October 10 2011. At that time, the property was being auctioned for $76,230. The rent at the time, there was already a tenant in place for 725. So the rent to value ratio here is slightly below 1%, you know, 725 monthly rent compared to 76,000 property price. I looked at that address just a few minutes ago. And that same property is now through Zillow. Zillow offers the Zillow estimate value for the property. And that’s not a definite number, a very accurate number in many cases, but it gives you an indication of what the property’s value is. And Zillow says it’s worth $125,000 today.
Jason Hartman 7:52
Wow. Yeah. So so this is the reluctant investors lament it’s the shoulda coulda woulda, you know, it’s the kind of like the paralysis of analysis issue. And Fernando, I gotta tell you, this spreadsheet you’ve done, I asked you to send it to me before we recorded this. So like, and I just popped it open, like a, you know, maybe maybe had three minutes to look at it before we started recording. Wow, is this ever detailed? I mean, it’s incredible. You know, it really is incredible.
Fernando 8:24
But you know, that is a problem. That is a problem. I spent too much time on this, right. And I think this is a best pitch to anybody, any one of our clients that has this analytical mentality because you you can, you can study this to that. And and what really, what really happened was I wasted a lot of time, I should have just, you know, bought the properties much earlier. The the right thing to do in retrospect is make sure that you’re buying in the right direction, you’re buying in a generic, you know, right market. And in the trend dispositive in all of the indicators are that that this is a good time to buy, but don’t spend so much time analyzing each property individually, because the law of big numbers will determine that if you build enough of a portfolio, it will average out so that you fall back into into into the average. So you know, it really doesn’t doesn’t help to spend too much time on it. Now, one other thing that, you know, we talked about the prices have gone up quite a bit right from 76,000 to $125 for this particular property, but their ranch Jason at the time they were $725 a month. Now, they are at $1100 a month. That’s the rent ze estimate.
Jason Hartman 9:53
Okay, and we’re talking four years, right?
Fernando 9:56
Four years. Yeah, four years ago. Yep.
Jason Hartman 9:58
Unbelievable. Yeah. That’s just that’s just incredible. And you know, I tell ya, this is exactly what happens. Our human psychology is so strange and interesting, you know, Fernando, because, like, we all think that well, you know, it’s just not happening fast enough. You know, it doesn’t happen quick enough. But four years goes by in the blink of an eye. I mean, I remember when I was 25. And now I’m 29. Oh, wait, maybe
Fernando 10:31
you misplaced the numbers. Yeah,
Jason Hartman 10:32
You know, I got like, a decade wrong or something there. But you just had a birthday, too. So we’re both October. Yeah, we’re both older.
Fernando 10:43
But, but here’s one thing that I I got wrong. Right. And I will admit, I thought that that region in Florida and this comes, you know, one of the other reasons this is timely, is we’re having our Orlando tour in about a month or less than a month now in Orlando, Florida. This is important. When I, when I decided not to purchase these properties, one of the reasons I decided not to purchase is, at the time, there were a lot of properties that were for sale in that region, you know, Lehigh acres and, you know, Southwest and Florida. And my thought was that because there are so many houses for sale, you’ll put pressure on rent prices. So I shouldn’t expect rent prices to increase and they might even, you know, decrease, because there was a lot of competition. Well, as I look at the data now, it has increased quite nicely. You know, like you said, in four years, it went from 750 to 1100. It appreciated quite a bit. This is not just one property, you know, I looked at several properties in that in that area. And they all have similar trends, many have appreciated even more than than the one that I that I described. And, and in some have appreciated, the ramp headers have gone up more than I described. Now, you know, it was, a time where I think you would agree, Jason, that people could, in general, buy properties cheaper than they can now because the market was still flooded with foreclosures. But we still see, especially in Florida and Illinois, I think we still see quite a bit of inventory.
Jason Hartman 12:34
In other words, markets that are judicial foreclosure markets. Where the price discovery is much slower than it is in markets where you have the faster foreclosures, and then there’s price discovery, you know, the market gets beat up, and then it comes back. But in these markets, where there’s still a foreclosure inventory, that’s having the effect of, of keeping the prices from rising a lot. And you know, when that foreclosure in inventory ends, and it is kind of, you know, coming to its end, unless we have another shoe to drop, I will not say that that won’t happen, because you never know. But that, but that’s really kind of part of the lesson here is, see just as you made this incredibly elaborate spreadsheet where you analyze everything about these properties, you know, you could have just as easily Fernando, you could have made a spreadsheet about economic factors or real estate market factors and tried to analyze all of those. And the point is, you really just with all of this analysis, nobody but nobody, not even the chairman of the Federal Reserve really knows, you know that there are too many forces in the market. This is why they call economics, the dismal science, you know, nobody really knows you just can’t predict and evaluate all the actions of all these different players of, you know, 320 million people in the US and, you know, 7 billion people around the world and what does it all mean? You know, it’s just too hard. So the point is, you got to just put your money on the table and let it ride, make the most educated guess. You can at the time, without overanalyzing and becoming a victim of the paralysis of analysis, right?
Fernando 14:31
Yeah. Yeah, that that’s definitely, that’s definitely the lesson. You’re asking me if I wasn’t happy, or if I was sad when I looked at the data in the beginning. Well, one of the properties I looked at, this is in Cape Coral, you familiar with Cape Coral. It’s a beautiful place, a lot of canals and you know, some properties were very nice. This particular property, just I mean, it’s a duplex. And you know, the price that I show here for the duplex in November 2011 was 106,000. Now, I’m not sure if that’s for one unit or for both units. But regardless, I just looked at that address just now. And the Zillow estimate is 562,000.
Jason Hartman 15:28
Oh my gosh.
Fernando 15:31
Even if, even if the price was 212,000 for the duplex, it’s still an unbelievable increase in in prices.
Jason Hartman 15:40
Well, so let’s take an example. Look at let’s look at that little first house, you mentioned not anything as extreme as the duplex example you just gave, which is phenomenal. More than doubled. You know, so say you bought that property and you put 20% down, and it was $75,000. So you would have put, you would put her? Well, I’m just rounding off. Okay, so let’s say it’s 75, it would have been $15,000, down, right, plus some closing costs, but we’ll just call it 15,000. And if you would have made 50 on just the capital appreciation part, you would have tripled that. Well, you would know you would have quadrupled it because you would have made an extra 50. Above Yeah, 50 above, right. And then you would have had the tax advantages, you would have had the rental income and some significant rent increases. I mean, that return, you know, with the leverage, it’s it’s unbelievable. It really is. It’s just, it’s just amazing how powerful, you know, we deal in the most historically proven asset class in the world. It’s, it’s phenomenal. You said you had a phoenix story, too. We, we’ve been in and I got to explain to listeners, we’ve been in and out of Phoenix, I’d say three times, since I’ve been in the national real estate investing business. And, you know, I’ve owned several properties there. And of course, I live there for four years to that market is just, you just can’t stay in it. Because it just gets too expensive at times. But you know, when there’s a half-price sale next time, we’ll be back there, and we’ll tell all of your listeners when to go in or when we think I mean, we’re not always right, either. But give us the example there.
Fernando 17:26
Yeah, so you probably remember when I when we first met. That was, that was the first place that I went to two properties. And the reason I didn’t buy properties in Phoenix is honestly the the provider was too busy selling property the market was too hot, and he just didn’t have enough time to, to show me properties. And, you know, I was completely inexperienced. And and I wasn’t quite ready to make decisions without some guidance. So I think that that didn’t work out because mostly because of that,
Jason Hartman 18:02
Right? I’m not a fan of our Phoenix provider. We’re not doing business with him anymore.
Fernando 18:09
But it’s unfortunate that that somehow I didn’t overcome that because I’m looking again at that same spreadsheet. If you look at the Phoenix tab on that spreadsheet, I’m looking at the just the very first property This is
Jason Hartman 18:21
you have a lot of tabs on this. There’s quite a few spreads. Yeah,
Fernando 18:23
Yeah. I’m looking at the first property 11980 West Taylor Street in Avondale, Arizona, right?
Jason Hartman 18:34
Yep. I know, Avondale.
Fernando 18:36
So this property is actually a newer property was built in 2011. It’s a four-bedroom, two-and-a-half bath. It’s 2000 square feet. At the time when I put this spreadsheet together as 2012 I think, this tab anyway, the listing price was 120,000 119.
Jason Hartman 18:58
119. Yeah, okay.
Fernando 18:59
I’m looking at in Zillow right now, Zillow estimate is 169,172.
Jason Hartman 19:07
Okay, well, let’s let’s just dive set up for a moment. This house is 2057 square feet. So over 2000 feet, and back then originally it was $58 per square foot. So you know, that’s still not bad. It’s not even at $100 per square foot yet.
Fernando 19:23
It was very, very well priced. Yeah.
Jason Hartman 19:27
So here’s the question I ask our listeners and you know, the answer is kind of unknown, really. But is that appreciation or is it just regression to replacement costs? Because Fernando’s spreadsheet shows this property when he first looked at it at $58 per square foot. And where’s my calculator? I just put it down. My trusty HP 12 see my ancient anti calculator that’s all beat up here. What did you say this estimate price was now?
Fernando 19:55
It’s 169
Jason Hartman 19:57
169. Okay, so let’s take 169,000 divided by 2057 square feet, it’s only 82 bucks a square foot now. I’ll bet you that has a little bit of juice left, but certainly not as good as our other markets. I mean, Phoenix is really, you know, it’s a little too expensive to make sense. But
Fernando 20:18
yeah, well, the the rent to value ratio is the problem. If you look back in 2000 level, that same property, the RV ratio was point eight, eight,
Jason Hartman 20:27
Because it was renting for 1050.
Fernando 20:29
So it was below 1%, which is, you know, not as good as we’d like to see at least 1% in general, but when I look at the rent estimate for it today for that same property today, it’s 1200. Okay, so the RV ratio is worse now than it was back then.
Jason Hartman 20:47
Which is totally normal, by the way, because rents always lagged price increases. So that’s absolutely normal. Yeah. Yeah. Very good. Well, Fernando, thank you for baring your soul and sharing this with our audience that was really nice of you to to let them know, you know, so I got to ask you. Should we call you a recovering engineer now?
Fernando 21:10
That doesn’t feel right now.
Jason Hartman 21:15
And just so the audience
Fernando 21:16
I’ve been called worse but
Jason Hartman 21:17
Yeah, there you go. So the audience knows your specialty engineering was chip design, you design integrated circuits, right?
Fernando 21:25
Yes, I did. It was I was managing the intellectual property for Apple is working with third-party vendors and trying to incorporate their intellectual property into our mobile chips.
Jason Hartman 21:39
Mm hmm. Good stuff. Good stuff. That is the one peril of being an analytical is that you do miss opportunities because the guy who just jumps in sometimes kind of recklessly you know, I always say you want to cultivate rational recklessness be a little bit reckless, you know, just a little bit not too much but rationally reckless. If there is such a thing and I interviewed Michael Masterson recently, that’s his pen name. His real name is Mark Four. But I interviewed him and he’ll be up on the show. Soon. He wrote this awesome book called ready, fire aim. Ready fire aim. I would highly recommend that book to anybody had a big influence on my life. So he’ll be on the show soon. And I don’t think we ran that one yet. I hope I already ran it. No, I don’t think we did. I don’t think he’s been on yet. But he’ll be up soon. And anyways, Hey, thank you for sharing this Fernando. That was great. And we got to get to our guests. I hope all of you will join us for our Orlando property tour. That’s coming up quick. Go to Jason hartman.com. Get your tickets. Also for meet the masters of income property. We got rich dad adviser Garrett Sutton. We’re working on another big speaker that hopefully we’re gonna announce and confirm soon for meet the Masters in San Diego early bird pricing. And we will look forward to seeing you at those events. And let’s get to our guest and talk about self directed investing.
It’s my pleasure to welcome Jeff Barnes to the show. He is the author of The Ultimate Guide to Self Directed investing and retirement planning. Control your financial future self director investments, create a tax-free, bulletproof wealth plan and live the life you want. Jeff, welcome. How are you?
Jeff Barnes 23:25
I’m doing great, Jason. Thank you very much for having me today.
Jason Hartman 23:28
Good to have you on. Give our listeners a sense of geography and tell us where you’re located.
Jeff Barnes 23:33
Yeah, I’m up in the Seattle Washington region.
Jason Hartman 23:36
Ah, good. Good stuff, beautiful place when it’s not raining.
Jeff Barnes 23:40
Absolutely, even better when the Seahawks are winning, too.
Jason Hartman 23:42
There you go. Okay, well, hey. So you know, as I mentioned to you before, when we were just doing our little pre show, pre brief. We’ve had many people on the shows before that talk about self-directed IRA investing. Maybe a little bit just to touch on self-directed 401K’s or solo K’s in these different plans? Can you give us like first, the high-level view. You know, how many types of I guess I should call them retirement plans or tax-deferred savings plans? Are there?
Jeff Barnes 24:19
Oh, sure. Jason. Yeah, that’s a great question. There are actually several different ones. I mean, these range everywhere from your traditional IRAs, your Roth IRAs, which I’m sure everybody’s familiar with. Your 401 K’s you have your 403 B’s, which are generally for large government style pension plans, you have your 457 plans, you know, a wide array of these, as well as your defined benefit plans, which are your pension plans. So there is a number of different types of qualified plans what the IRS refers to them. The big two, of course, being the 401k and the IRA. That’s what most people use. Most people know about. Self Employed individuals have have the SEP IRA available to them. So the list goes on and on. But from you know, for ease of discussion, I guess for today’s call, IRAs and 401 K’s are really my main wheelhouse, even though we could talk about all the other ones if you really wanted to.
Jason Hartman 25:13
Okay, so let’s talk about your specialty. So again, rename your specialty. Self-directed IRAs, and 401 K’s.
Jeff Barnes 25:22
Yeah. So we really focus on self-directed 401k. Solo K’s is what a lot of people call them. The IRS has a term for them. They call them one-participant 401k plans. So you can actually go to the IRS website and look that up. And we’ll talk all about that.
Jason Hartman 25:37
Most people think that if you’re going to have a 401k, you know, they associate that with a, you know, working for a large company. Do you need to work for a large company? Or is this for entrepreneurs who have their own businesses? Or can anybody do it?
Jeff Barnes 25:53
Yeah, that’s a great question, Jason. And let me back up for just a second. And we’ll think about the IRS in general and the tax codes. And you and your listeners all realize that there there are really two tax codes out there, right. There’s the business owner tax code. And then there’s the employee tax code. Of course, we have investors as well, which fit in a little bit differently. But from the tax code perspective, the IRS is much more lenient towards businesses, right. And I think we can all agree on that there are a lot of deductions and write offs there. The consumer tax code, you know, for earned income, is the highest tax rate you could possibly be at. No one really wants to be there, you want to minimize your tax obligation as much as you possibly can. That’s where the 401k plans come in. These are business style qualified retirement plans. The IRA is a consumer-driven retirement plan. And it was brought about because consumers individuals wanted additional ways to save money. Well, if we look at the top level of these plans, and use the contribution limits, for example, IRAs are tapped out at $6500 a year; 401k plans can be 10 times that much. So when you’re thinking about it, yes, they are designed for businesses, and business owners, and especially the corporate America, because that’s who really lobbied for this and who really wanted it. But when it comes down to it, the IRS has a specific page and section on their website that talks about a one participant 401k plan. Meaning that as an individual, if you want to go out there and start up your own business and be a solo entrepreneur when you’re getting going, you can have a 401k plan. So no, it’s not just the Fortune 500 thing, or a big company thing, anybody can actually have one. But of course, when you have the business income, that’s where you can funnel that money into a retirement plan, sheltered from taxes. And then of course, use that for various investment opportunities.
Jason Hartman 27:49
Okay, so is the only advantage, the fact that you can, you can contribute more to that plan and grow it faster and, and have more, you know, tax-deferred income in there?
Jeff Barnes 27:59
Well, you know, that’s one of the biggest advantages that you could put away a lot more money. And of course, if you are a real estate investor, you’re successful at it, then you want to put away more money because you want to save more. And, you know, especially when you’re a real estate investor, you want to grow that money tax-deferred. So of course, if you can put more in that you can buy a bigger investments, grow that money faster, tax-deferred, which is great. The beauty of the 401k plan is that you can also do employer contributions. So for example, if I am an employer, and I am a single entrepreneur, I’m a solo entrepreneur or a solopreneur, or whatever you want to call me, and I’m making money in my business, then I can contribute at the employee level, and the employer level. And on top of that, I can take up to 25% of my net profits, for a total contribution of right now it’s $53,000. Unless you’re over 50, then it’s $58,000. And then if you couple that with if you have a spouse, you can double that amount. Okay, so you started thinking about the contribution limits, its massive compared to the IRA, because the IRA, you can’t have an employer contribution. It’s just the individual plus, IRAs have a cap, you know, if you start making too much money, you can’t put anything in there. Right? If you’re. So that’s a big advantage that the other side of it is if you set it up the right way, you know, the way we try and train people to do you have a self directed portion of that, which means you can invest in anything, you’re not limited to what Wall Street gives you.
Jason Hartman 29:25
what is the limit for the 401k or the solo K or whatever we want to call it?
Jeff Barnes 29:32
Sure. Well, like I mentioned, it’s it’s $53,000 if you set it up as the business owner and the employee and you’re profitable. Now, if you’re just an employee, then it’s $18,000 if you’re 49 and under. Or it’s $24,000 if you’re 50 and older, all right. That we call those ketchup contributions. So as an employee, if that’s all you are, you can still contribute three to four times as much as you can with an IRA.
Jason Hartman 29:57
What sort of income do you have to make that big contribution, though, that’s related to the amount of income, isn’t it?
Jeff Barnes 30:04
Yeah, it does. It does relate to the income. It’s all about the business, right? So if you have $100,000 in income for your business and your you don’t need any of that to really live on, if you don’t have mortgages or personal expenses, which we know people don’t, they generally have those things, then you can contribute a lot more. So you can take the employer contribution, which will be the $18,000, I’m sorry, the employee, which is $18,000. And then the employer can match that dollar for dollar. So you have another $18,000. And then if you have profits, because you have minimal expenses in your business, and you can take up to 25% of that. And the cap is of course like I said the $53,000. Or if you’re over 50, then it’s 58,000.
Jason Hartman 30:47
Okay, good. So do you want to talk any more about the contribution methodologies or limits or anything like that? Or do you want to now move the conversation to talk about how best to self-direct the money in your account?
Jeff Barnes 31:03
Oh, no, I think the contributions are pretty self-explanatory. Pretty simple. I mean, I, I think that a lot of the folks listening to this will be pretty intelligent can figure out that they can just talk to a CPA or an advisor, at some point, figure out how much money to put in. But I mean, the real power comes in Jason, as you’re well aware, when you can diversify your portfolio and choose the investments that you like.
Jason Hartman 31:23
Okay, so let’s talk about that a little bit, you know, what’s allowed, what’s not allowed. You know, any special tricks and tactics. Like I said to you at the beginning, I really wanted this to be a more advanced conversation than the generic, you know, interest talking to us about this, which they have done before on the show, which is, which is fine. I just think that you know, many of my listeners, they’ve heard about it, it’s not a secret to my listeners, it may well be to the general public that’s being hypnotized, bamboozled and ripped off by the vast rules, free conspiracy, but I don’t I think my listeners are more savvy than that. So,
Jeff Barnes 31:58
Yeah, your listeners are probably not going to be prone to the next big market collapse that we are all pretty sure it’s coming because the feds just been pumping money into the economy. Right. So
Jason Hartman 32:08
Yeah, it sure sure looks like it’s coming.
Jeff Barnes 32:10
Oh boy. I tell you. You know, that’s a whole other topic for either later or another day. But yeah, that’s a big issue out there. So we want to diversify. And most of the people listening on this call probably diversify using real estate. Is that a fair assessment, Jason?
Jason Hartman 32:23
Oh, yeah. Income property is the most historically proven asset class in the world. And that’s what my listeners like.
Jeff Barnes 32:29
Yeah. And it’s, it’s great because it is, like he says, one of the oldest assets around, been around since before the tablets, probably carved in stone tablets, not the iPad. And people have been using real tangible assets, for as long as we’ve had currency, as long as we’ve had money, as long as we’ve had anything other than a barter system, and probably even before, so why not use that as a retirement vehicle, or at least a way to diversify your portfolio. And of course, we can invest in real estate in a number of different ways. Of course, you just have your typical fix and flips, your rehabs, things like that, you can do that. You can participate in wholesales, you know, buying and selling it to another investor quickly and easily and getting a little bit of profit in between. So many different ways. In addition to commercial properties, apartment homes, triple net leases, a wide variety, basically anything under the sun you can think of as it relates to real estate you can do inside your retirement plan. That’s, that’s the big picture. The don’t do’s the things that you’re not allowed to do. Don’t buy art, don’t buy collectibles. That’s really the big thing that a lot of people say, Well, I want to buy gold. And you can, you can actually absolutely do that. But you have to have the right kind, you can’t just go out and buy an Indian Head Penny and say, well, it’s a great collector’s item. So I’m going to put it in my retirement plan. That stuff’s not allowed. But almost anything other than that, you can.
Jason Hartman 33:55
Well, I’m no fan of gold. I’m definitely not a gold bug. You know, although I talk about gold a lot, because it is an interesting measuring stick. And it’s interesting to talk about, just touch on that for a moment, if you would, I know that a lot of people are, they’re out there breaking the law. And what they’re doing is they’re creating an LLC inside of their plan. And then they’ll just use that LLC since they have checkbook control to go buy gold or coins or whatever, and have possession of them. And that makes it not an arm’s length transaction. Is that how that works?
Jeff Barnes 34:28
Yeah, that’s exactly exactly right. You know, we like to say that the IRS is part of a big dumb bureaucracy that’s never going to figure it out.
Jason Hartman 34:38
Eh. They’re not that dumb.
Jeff Barnes 34:40
That’s what people think they think that Oh, well. They’ll never find me if if because I’m just one investor and they’ll never figure it out because I, I file my taxes I pay my taxes, right? That’s what so many people think but the reality is,
Jason Hartman 34:52
This does not sound like a good strategy. Go ahead.
Jeff Barnes 34:55
The reality is, you know, as they’re hiring more IRS agents out there, people that can do audits, they’re going to start digging into these things. And if they find that there are the shady transactions, things that are happening out there, that don’t really make sense, they’re going to dig into it. And if one of those transactions is my IRA, my 401k, bought an LLC, everybody seems to think that’s where the line in the sand stops, right? Everybody says, Oh, well, I purchased membership units and LLC, or I purchased stock in a corporation. And that’s all the IRS is going to care about. As long as I show that on my return, I filed out with my 5500. The truth of the matter is that they’re allowed to audit the LLC, too. So they’re going to go in, they’re going to look at the LLC, and they say, Okay, show us your books, show us, prove to us that these are arm’s length transactions that you’re doing thing is on the up and up, and you’re not buying illegal investments. And you didn’t just create an LLC, for the sake of buying and trying to hide assets from the government, you know, they’ve gotten pretty smart about that. They can figure out how to spot shady investments, and people that are trying to just hide from the government in various senses. And they’re going to go after those people. And as soon as they find you, trust me, they’re not going to stop with the first penalty, they find they’re going to keep digging and digging and digging. And if you’re going out there and forming an LLC, simply for the purpose of purchasing assets that you like, but are not qualified, the IRS is going to go after that. They’re going to find you, they’re going to penalize you, they’re going to tax you accordingly. And basically, you lose the entire qualified status of your retirement plan, which no one really wants to do that.
Jason Hartman 36:34
Yeah, absolutely. There’s, you know, there’s enough, there’s enough tax benefits out there, you just learn how to work the system and do it legally. And that’s a much better strategy. So I could totally agree with you. Okay, so talk to us about some good strategies, you know, what are some of the best ways to self-direct? You know, any little tips and tricks that maybe the typical self-directed investor doesn’t know?
Jeff Barnes 36:56
Yeah. Well, I will tell you, there are two real broad categories when it comes to using retirement plans. And a lot of people when they’re thinking, especially about real estate, they think of being an active investor. And that’s the first big No, no, you don’t do that. If you are an active investor, it means that you are taking money from your plan, you are using it for your purposes, you are going out there and actively doing the work on the property. That’s not allowed. Okay. We don’t want to do that. So that’s, that’s a big No, no. The other way, the right way is being a passive investor. And that’s really the whole point of retirement plans in the first place. They’re giving us this incentive to put money away for our future, so that the government doesn’t have to support us. And we know that’s not exactly the way it’s working out for everyone.
Jason Hartman 37:44
Yeah, don’t go with that business plan. That’s not gonna work.
Jeff Barnes 37:47
Right. But unfortunately, you know, when people are putting their money away, they’re thinking, Okay, well, now I want to be in control of it, I want to do something with it. And that’s not really what the intent was, the intent was for you to put it away, so you don’t have access to it. So that you can’t screw up your retirement. I mean, because let’s be honest, the vast majority of civilians, consumers, individuals out there, just never got that financial education, they don’t know how to invest. And as a result, they’ve lost a lot of money over the years, you know, the Securities Commission came out in 1933 and 34, after the Great Depression, and as a result of people losing all their money. So that whole process, that’s a long tail, but the whole intent there is to hand your money over to somebody else, who is supposedly, and I put that in air quotes, they’re qualified to invest your money for you, right. So that’s the intent. The loophole is the self-directed aspect of it, which allows you to direct your investments, but you are still not supposed to be putting that money into your own personal bank account, right? So in the broadest sense, we want to be passive. Now, as far as strategies go, I mean, as many as you can possibly think of where it’s still an arm’s length transaction, and you are a passive investor. So one really good example is an individual that understands the real estate world wants to be involved in it, has done deals on their own outside of their retirement plan, but they really don’t want to actively manage their qualified money because they’re not allowed to. And so they find somebody else who’s also really good at investing, and they become Equity Partners, you can lend out your money, you know, become a debt partner, and just lend it out for a fixed rate of return. Or if you want to take an equity stake, by investing into somebody else’s LLC fund, syndication Corporation, whatever the case might be, as long as you are still a passive investor in that capacity, and you’re getting a return. That’s a great way to do it. Som
Jason Hartman 39:44
The only problem is you’re violating commandment number three, which is thou shalt maintain control. So you, you’re relinquishing control to somebody else, which you know, is I like being a direct investor but, but you know, some people do this stuff. No, I get it.
Jeff Barnes 40:01
Well, that’s my point you want to you want to go with somebody that you know, somebody that you know can do the business and you know, is going to do the investment the right way. So for example, in my business, we do real estate investments, and we do developments as well. So we actually raise money from people who are self-directed, if you want to stay. And we tell this to all of our clients, to stay self-directed to have it set up the right way, just to your point, you want to have control. When you invest in Wall Street, you have no control whatsoever. When you invest in a private company or a private deal, then you get a promissory note, you get a mortgage, sometimes you get preferred rates of return stocks, things like that. And you have a lot more rights when you are a private investor in a private deal than you do in any public entity.
Jason Hartman 40:47
Yeah, that’s, that’s a great point. I agree with you there.
Jeff Barnes 40:50
And so I think that’s, that’s one of the ways you can be very hands off as long as you trust the individuals that you’re working with. And, you know, I mean, the the investors that invested in Facebook before it went public, they were all private investors. Anybody can do that, too. But me personally, I, I would have to know Mark Zuckerberg in order to invest in him before he ever made a single dime and Facebook, right?. So that is one strategy. But of course, you know, it all depends on the individual. If you are Marc Andreessen and know a lot about the tech world and you’re investing in a private company. That’s pre revenue, go for it, but that’s not my wheelhouse.
Jason Hartman 41:25
Yeah, high. highly risky, though. A lot of those don’t make it.
Jeff Barnes 41:28
Exactly. Exactly right.
Jason Hartman 41:29
We hear about the ones that do. We never hear about the ones that don’t.
Jeff Barnes 41:31
Yeah, the 99 percenters.
Jason Hartman 41:33
Yeah. Exactly, exactly. Exactly. Okay, good. So what, what’s the strategy there that I’m not sure we made that really clear to the listeners, I we got a little bit diverted there. So what. Go back to the strategy? Like, what was the point of saying that?
Jeff Barnes 41:47
Sure. So well, the strategy is that you want to maintain control, like you said, Jason, and how do you do that? Well, you can write a check, you can have a checkbook control retirement plan, 401k IRA, however, you want to set it up, and you write that check for the investment. Well, when you write that check, you don’t just want some sort of stock certificate, you want some sort of ownership, that’s going to give you a voice in the company or at the deal. All right. Now, you’re not allowed to be the active manager of said company. But let’s say for example, there is a syndication of commercial property, that’s going to be a couple million dollars, and there’s five of you going in on it, one person is going to manage it, that person cannot be a retirement plan investor in that deal. But the other people are putting their money in, they have a promissory note, which gives them ownership in or they get that rate of return. Plus they have a mortgage, which means that if that person ever goes into default, then they get that property back as well, just like a bank. So you’re using the same strategies as a bank, but on a much lower, low, more local scale, where you have control.
Jason Hartman 42:53
Basically, that’s being a debt investor, a lender, a hard money lender, basically. Yeah,
Jeff Barnes 42:58
Right. Yeah. Yeah, you can be you can be a lender, in that case, absolutely. You know, other, you know, if you want to be a more a little bit more hands on, you can still do fix and flips or buy and hold strategies. The only thing to remember there is that you cannot take a salary from doing that. So if you are a fix and flip-style investor, you can’t actually be picking up the hammer and nails and going out there and doing the work and then paying yourself. And even if you think oh, I’m not paying myself, I’ll do the work for free. If the IRS ever audits, you they look at that and say, well, no one else would ever do this work for free. So you basically did this work for a salary, even though you didn’t take a paycheck. And as a result, we’re going to call that a disqualified transaction for him to transaction. And as a result, we’re going to take away the qualified status of your plan, tax you and penalize you.
Jason Hartman 43:49
Yeah, yes. See, see, our investment strategies really perfect for that. Because, you know, our clients, they’re never going to have a problem violating that rule. Because they don’t pick up hammers, you know, they they do armchair investing. Okay. And so that’s, that’s, that’s perfect for that. Exactly. Okay, good. So their investments are in diversified areas all over the country, so makes a lot more sense. Makes a lot more sense. They’re not gonna have a problem with those rules. Okay, so you know, any other tips that you want to share strategies people can use? And I want to talk to you a little bit about Wall Street in your former life next. So just to close up on the self-directed portion.
Jeff Barnes 44:28
Yeah, you know, I’d say if you’re going to have a retirement plan, and you want to have the best possible chance of succeeding in whatever investment that is, and you have to maintain a certain amount of control in order to do that. Most people just hand over control to somebody else, and they hope and pray that they’re gonna get the right type of return. And if you’re a savvy investor and you know what you’re doing, there’s absolutely no reason to do that. You, you can have a hands-on type of approach to retirement. As long as you take a backseat, like you said, armchair type of investment opportunity, then the sky’s the limit.
Jason Hartman 45:00
Good. Okay, good stuff. So I’m curious, I’d like you to share your story for the listeners, if you would, about how you got into this. I mean, you were a financial advisor or a financial planner before, right?
Jeff Barnes 45:12
Yeah, that’s right. I started out in financial planning in 2003. I actually bought my first property when I was 21 years old, and started out in financial planning the same year, ironically. And what I realized was that I liked real estate investing a lot more because here I am, I was in the Navy at the time, bought a property, no money down, use the VA loan, and then had my buddies paying my mortgage. So it’s perfect. In the process, I went out and I got my financial planning education, became a life insurance guy started helping people underwrite mortgages, and working on my security stuff. And I just realized that it didn’t really make sense. Here I am sitting in a house that’s basically paying me to live there. And I’m also trying to help other people invest their money, but my strategy is working out way better than the stock market. It’s because we had the.com crash, and just watching you know, 40 50% of people’s wealth evaporated. So I tried it out for a while, I thought, Okay, well, maybe if I learn more about finances and financial planning, I’ll understand financial education better, I can teach people so on and so forth. Then we get into the housing bubble, you know, real estate’s going great. All of a sudden, the carpet gets pulled out from underneath me and everybody else in the area, I was living in the Bay Area at the time, still doing my financial planning thing. So I’m thinking, okay, well, this really stinks because now the housing markets down and the financial markets down. What happened? And no one really knew that at the time, it was there were very few people that actually knew what happened. So I poured myself into learning as much as I possibly could about the Wall Street machine, you know, what was going on behind the scenes, and I just got so disenfranchised with the company that I worked for, you know, your listeners may have heard of it. It’s this little company called AIG. And somehow
Jason Hartman 47:06
I think they heard of that.
Jeff Barnes 47:09
Yeah, they’re at the heart of this whole mess. And I’m just thinking, What in the world am I doing? This is just not right. I never really felt good about it. Because, you know, I think I’ve told you this, Jason. But when I went to become a financial planner, do you know how much education I actually got evaluating and evaluating and valuing companies? Absolutely nothing. You know, I never learned anything about evaluating a company looking at balance sheets, looking at income statements, determining cash flow, anything like that.
Jason Hartman 47:37
What did you learn? I mean, was it just about the regulations and the laws? It’s probably all it was about, right?
Jeff Barnes 47:43
Oh, that’s exactly, yeah, you learn all about the Securities Act, you learn all about the life insurance regulation in each state, and the insurance authorities and all that. I mean, you learn how to take a test, pass the exam, because of what the laws are. Or you learned very little about how to evaluate companies when you’re becoming a light, a financial planner. Now, I do need to make a distinction here, I was a financial planner, which meant that I was getting my series 663 licenses, I was allowed to sell mutual funds. But I was not a stockbroker, I was not what I call a fighter, the industry called a financial advisor. And the distinction there is that a financial advisor is a fee-only kind of person, where they will educate you and help you understand the process. They have different securities licenses, they can sell not only the stocks, bonds, mutual funds, all that stuff, but they can also advise you in other areas, too. So
Jason Hartman 48:36
But do they have any other any, any education as to how to value companies, as you say, I mean. See, you know, all this stuff is done under the guise of consumer protection, which is BS, if you ask me. Okay, really what it is, is make sure you don’t create liability. If you wanted to protect consumers, you would help them evaluate stocks or the deal or the investment. I mean, that’s, that’s the protection they should have is, you know, but but that’s not that’s not what they teach you, they don’t teach you how to really help the consumer, right?
Jeff Barnes 49:10
No, I was learning how to be a great salesperson. But that’s, that’s about it. No, I will tell you that if you if you have listeners that are really confused about finances investing, then they should go seek out a certified financial planner, because they do have to get a certain amount of education before they can even get that designation. And that education does consist about evaluating companies now, if not,
Jason Hartman 49:33
Okay, so let me, let me interrupt you there. Okay. So one of my friends a few years back, and I think I mentioned this on the show before he was getting his CFP designation, okay, certified financial planner, and, you know, he had a bunch of securities licenses, 763, whatever, I don’t know what he had. And so he had those, and then he was going for a CFP. And I said, Hey, can I see all the books and stuff that you’re studying and he brought them in to my office, and I borrowed some of them. And I just spent some time looking at those books and there was like nothing about real estate. I mean, they did talk a little bit about like estate planning and taxation of it. But it was amazing to me that the most historically proven asset class in the world, income property. Income property is the most historically proven asset class in the world. It’s the elephant in the room that they’re not talking about, it’s just mind-boggling to me that they can get away with that, you know.
Jeff Barnes 50:32
Oh, it is absolutely you know, I’ll give you a little corollary to that, I was actually going to get my CFP. And so I had to go back to school and take masters level courses on this. And we got through one section, which had a brief, I think, one, maybe two chapters about real estate. And I started bringing up this point, because I’ve been investing in real estate for a dozen years now. And I brought that point up about exactly like you said, This is such an old and proven asset class, why are we really helping people understand this. And the comments I got back was because the majority of investable assets or investable dollars are in Wall Street. And that was the last quarter I was in that program. So, you know, I agree with you 100%. And really what it comes down to Jason is that the the Wall Street marketing machine controls the money out there. And they, Securities and Exchange Commission controls investing in that Wall Street marketing machine. So there’s really no governing body that controls investing in real estate per se. So as a result, there’s no money to be made by the government.
Jason Hartman 51:40
Yeah, it’s done at the state level. And each state has its own, you know, Bureau of Real Estate or department of real estate or real estate Commissioner. But there’s just somehow I don’t know how it happened. But somehow, Wall Street just got all the money and all the attention. And real estate is considered this alternative investment. You know, like, if you hear them talk on CNBC, or any of these commercials you see about, you know, various financial companies, they’re all about, well, if you’re going to be an investor and investor, and what about being a real estate investor? It’s, you know, somehow that’s not an investor, I don’t get it. Yet that’s where everybody makes all the money. You know, it’s just mind boggling. It’s, it’s unbelievable.
Jeff Barnes 52:26
Well, I think that’s it. I think it’s it’s a commoditized asset class, right. So we think about it, and you think about how you can actually purchase assets, it started back with the Securities and Exchange Act of 1933 1934, where they established the Securities Exchange Commission. And they basically said, Look, you can only buy stocks and companies if they are licensed and registered to be a public company. And if you go through a licensed broker, so of course, that regulation came in and people said, Well, I want to be real, a Wall Street broker, and I want to actually sell stocks, because I can make a commission for every sock I sell. And, of course, the companies don’t want to go public, they’re reaching out to investment bankers who are going to raise a lot of money through these brokers. And it goes on and on and on. But in the real estate world, you know, Joe Black down the street can say, Hey, you know what, I see this crap property over there, I’m going to go ahead and fix it and flip it up and turn around sell it. There’s no commission, there’s nobody out there stopping him from doing it. And as a result, there’s very little money in that, aside from maybe the agents or the contractors that are working on that. So no one’s really clamoring to be in that industry, aside from those crazy people like you and I, that do see the opportunity there. You know, no one’s really marketing it out there as a great investment except for the educators, the gurus, that the people that actually want to do it. So
Jason Hartman 53:46
Yeah, and a lot of those gurus are scam artists, too. So you know, I don’t know what’s worse, Wall Street or, you know, they’re the real estate guru. That’s a scam artist at the same time. You know, another interesting thing is is, is that even though there are these real estate shows on TV, like, you know, million-dollar listing, and I don’t know, HGTV and house flippers, or, you know, whatever, right? There’s all these shows out there. You know, Wall Street has a couple of channels, right? They have Fox Business, they have CNBC, they have Bloomberg, and they have countless publications and magazines and newspapers, whether it be IBD Investor’s Business Daily, The Wall Street Journal, Money Magazine, you know, there’s just a Forbes there’s a zillion magazines, my god that are all pitching Wall Street stuff in look at who their advertisers are. They’re all these Wall Street firms. You turn the pages, you see who’s got the ads in there. You don’t see any real estate companies in there. So, you know, what do you think’s gonna happen, right? I mean, of course, that’s all about Wall Street, right?
Jeff Barnes 54:49
You just got to follow the money. I mean, that’s really all it comes down to. As long as you follow the money, you’ll figure out where it’s all coming from, why it’s the way it is.
Jason Hartman 54:56
Unfortunately, this is why the media is not critical of Wall Street type investments. There are zillions of scandals. Lots of investors getting ripped off all the time. Okay. But the media isn’t that critical of these companies? Because look at who their advertisers are, you know, they can’t. They just can’t do it, or they’re it’s a suicide pact.
Jeff Barnes 55:21
Right? Oh, yeah. And you know, there are some really scary statistics. And I wish I had these right in front of me. But did you know that 30% 30% of corporate profits in America come from the financial services industry? Wow. Right. So that means, out of all the companies out there in the United States, the companies that sell life insurance, so all sorts of insurances, and so stocks and bonds, they make up a third of the profits. So imagine how much money they have to be transacting every single year to make up a third of the profits. I mean, we’re the home of the largest companies in the world the Exxon Mobil’s The, the Walmart’s the Amazons, you know the Microsoft’s. Yet for some reason, the financial services market is making up a third of our profits. So that kind of gives you an idea as to why the media and everybody else is not going to bash on Wall Street too much. They’ve lobby more than almost any other industry out there. And Big Pharma is another one of those. And as a result, you know, you and I get beat over the head with advertising and marketing from Wall Street firms because they can afford to do it.
Jason Hartman 56:31
That’s the way it goes. It’s really amazing. It really is. Good stuff. give out your website, tell people where they can get the book.
Jeff Barnes 56:36
Yeah, self directed.com forward slash book. Yeah, you can go ahead and sign up there and get a free copy of the book. I’ll rush that out to you. And I really do appreciate it. Jason, you know, I love talking with people about real estate and investing and, you know, using self directed retirement plans with just one little quill little feather in the hat, if you will, of, you know, creating wealth. And it’s just one of those things that I think so many more people need to know about.
Jason Hartman 56:59
Yeah, good stuff. Well, hey, happy investing to you and Jeff Barnes. Thanks for joining us.
Jeff Barnes 57:04
Thanks, Jason. I appreciate it.
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I’ve never really thought of Jason as subversive. But I just found out that’s what Wall Street considers him to be.
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Really now How is that possible at all?
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Simple. Wall Street believes that real estate investors are dangerous to their schemes? Because the dirty truth about income property is that it actually works in real life.
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I know I mean, how many people do you know not including insiders, who created wealth with stocks, bonds, and mutual funds? those options are for people who only want to pretend they’re getting ahead.
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