175. STOP Owing Taxes on Your Real Estate Gains! Interview with Ryan Bakke

0:00Natalie Palmer:Hello, welcome, and thanks for checking in today to No Vacancy, the podcast. I'm your host, Natalie Palmer. I'm an Airbnb ambassador and 17-time superhost, and I've hosted over 1 ,000 reservations. I'm a stay-at-home mom of two and manage my eight listings remotely. My mission is to help new and experienced vacation rental hosts turn their listings into fully booked, profitable properties that can be managed from anywhere so you too can have no vacancies. If that sounds good to you, let's get right into the show.

0:51Natalie Palmer:Hello, everybody, and welcome back to another episode of No Vacancy, the podcast. I'm your host, Natalie Palmer. Today's episode, let me quickly brace you guys. We have back on Ryan Bakey, and I don't know now if this is like the fourth or fifth time. He's my number one most repeat guest. So first of all, we were due to just have him back. But I texted Ryan the other week and I basically said, hey, I have a bunch of CPA text questions for myself. Can you come on the podcast and answer them? So I guess, Ryan, this is going to be like Natalie's private consulting hour, but we're just recording it for all of you to listen in on.

1:24Natalie Palmer:So hopefully you guys find this helpful and maybe you guys have some of the same questions that I've been having. So Ryan, welcome. Like I messaged you when I texted you the other day, a lot of my questions are specifically about, you guys know that I've started doing capital raising and finding partners for a lot of different deals. And at the same time, my husband and I want to start becoming private money lenders and we want to join some partnerships. And I'm trying to figure out what is the best way to fund these kinds of deals. I've had a lot of investors and partners ask me if they should open a self-directed IRA or they should be funding from a trust or opening an LLC to do it from.

2:04Natalie Palmer:So I want to get more educated in that space. And then I also want to know for myself, should I be opening like a solo 401k to fund these deals from? So that's kind of the bulk of my questions. But Ryan, how about like, where should I start? Should I like ask you a question or do you have some thoughts already based on what I said. Well, I would say just as a start, you want to be armed with all the information that's out there about these different types of accounts. What are the pros? What are the cons? And at the end of the day, the best money is the money that you have access to that you can utilize, whether it is inside of a retirement account or not.

2:41Many people believe that the money that they have that's inside of their 401ks, IRAs, they're not able to access that money until they're 59 and a half unless they want to pay a huge penalty and then while that's true they can access the money for real estate like private deals private lending deals now they may not be able to take the earnings from that but they can use that money to grow their retirement account even further right and i'll start off by saying like the one reason why I really enjoy IRAs and 401ks from using like a self-directed IRA is it allows you to stay in the game. Okay. So let me set the scene of the story.

3:26It's let's say you're an investor and you bought one or two properties in a certain area and everything's going well, but you ran out of cash. You ran out of cash and now you have to manage those properties, work a W-2 job, build up some money. You have to make more money so that you can go buy another property, right? Well, one of the things that I like to do to quote unquote, stay in the game is I like to use my IRA or 401k to either buy the next property directly or potentially partner with somebody to buy a property in that area. Or maybe I loan on a fix and flip project that's in that area.

4:04Whatever I can do to not be like pencils down, I'm not doing real estate for another two years because I need to save up the money to buy the next property. Whatever that means, I can do like I want to do that. I want to do whatever keeps me in the game, analyzing deals, sharpening my tool, you know, sharpening my tools. I want to do what keeps me in the game. And if tapping in or using your IRA or 401k keeps you in the game, by all means do that.

4:32Natalie Palmer:Okay, so this is one question I had. So I was looking into this and one thing, maybe I'm wrong here, but one thing I saw was that I was trying to research the difference between self-directed IRAs and a solo 401k. And what I saw, I was asking ChatGPT to help me break this down. ChatGPT was telling me that there are more restrictions on investing in real estate from a self-directed IRA. Is that correct? And then it told me that a solo 401k would give me more flexibility to invest in partnerships or real estate, maybe even like crypto or something like that. But it did tell me that with solo 401ks, if my account is through something like Fidelity or Vanguard, they might have more restrictions.

5:22Natalie Palmer:But that there was a company called my solo 401k.net. I don't know if you've heard of them. But like BiggerPockets recommended it and said that like that's a really good option that lets you put the funds out basically to real estate deals. So like thoughts on this. This was literally just me going back and forth with ChatGPT. Are they on to something or do you have like context you can add? To give some context, your IRA, if you just have a regular IRA account or a 401k account, that cannot directly own real estate. It can only own stocks and mutual funds, right? Vanguard stocks, Fidelity stocks, Charles Schwab stock.

6:03It doesn't mean you can't do it. It just means you have the wrong vehicle. It's like going to McDonald's and expecting a Whopper instead of a Big Mac. You can get the Whopper. They sell that over at Burger King, though.

6:16Natalie Palmer:Okay. So you have to take your IRA or your 401k and you have to self-direct it. once you self-direct it, whether you do a self-directed IRA or a self-directed 401k or a self-directed solo 401k, right? Now you can take that money and use it for private placement deals, buying properties, private money lending, right? So IRAs and 401ks that you have with your job or your previous employer, not going to be able to buy real estate or do any of what we're talking about today with okay got it um my solo 401k or i like to use directed ira trust company directed ira trust company yeah directed ira um those accounts allow you to self-direct and use the money for pretty much anything that's legal and not considered life insurance like you can do You can invest in businesses.

7:17You can invest in crypto. You can invest in you could be a private money lender. Literally do whatever you want as long as it's legal and it's not life insurance.

7:28Natalie Palmer:OK, I'm going to ask you a very basic question, but what is the difference between an IRA and a 401k? So an IRA stands for an individual retirement account. Now, a 401k is normally a some type of sponsored plan. If you're working at a W-2 job, your company opens up a 401k plan. You can contribute to it. Sometimes they match it, right? An IRA is completely on the individual's task to-do list. An IRA is you and I can both go on Vanguard or Charles Schwab or Fidelity and open up an IRA account. A 401k, there needs to be a vehicle in place. Either you need to work with an employer that has, you know, 20, 30 employees and you need to you need to contribute to their 401k plan.

8:17Or if you're self-employed, you can do what's called a solo 401k. You can set up your own 401k for yourself.

8:26Natalie Palmer:Is one better than the other? I'm self-employed, so I was looking at doing a solo 401k or the self-directed IRA. And I was kind of confused on like which one's better for me. well ira versus 401k um generally speaking an ira is going to have definitely lower fees to to administrate than that of a 401k so that's something so for example when i was when i worked at deloitte for almost two years my expense ratio and my deloitte 401k plan was 0.28 percent which meant like out of every$100, I was paying$0.28 to administrate, which doesn't seem like a lot. But when you're talking 20, 30, 40 years and hundreds of thousands of dollars later, it adds up.

9:17When I left Deloitte and I opened up my own IRA on my own, I was paying a 0.04 % expense ratio. It was seven times cheaper for me to invest my money on my own than it was to contribute to my employer's 401k plan. So IRAs are normally cheaper than that of a 401k. The downside to IRAs though, is you can only get so much money in it per year,$7 ,000 compared to a 401k, you know, you can get 23 ,500 into it for 2025. So they have their, like they have their pros and their cons, but IRA is definitely way more flexible. All you need is earned income. Who cares what your employer does or says because it's on your own to be able to contribute?

10:03You also, with an IRA, you have time flexibility. So you have until April 15th of the following year to contribute to an IRA. So say I wanted to contribute to an IRA for 2025. I have all the way until April 15th in order to contribute to it. 401k, it's got to be done by December 31st, right? So they all have their pros and cons. I'll give you one more thing too. IRAs are not what's called ERISA protected. So ERISA protection is Employee Retirement Income Security Act. And it prevents people from losing their retirement savings due to lawsuits, malpractice. I just finished watching the OJ documentary with my wife and I was explaining this to her and when OJ he was found not guilty right yeah not guilty federally but in the state civil court he was found guilty and Nicole Brown Simpson's estate had like a seven million dollar judgment against OJ for her life but because OJ had every all his money in a his NFL 401k and his NFL pension which is ERISA protected, they didn't get any of it.

11:25So 401ks offer what's called ERISA protection versus IRAs do not. So there's another thing. Not that you plan on stabbing or killing your ex-wife, her lover, but just throw it out.

11:40Natalie Palmer:Okay. No, but that's actually a very good point because with real estate, there is the chance for liability in lawsuits, a slip and fall at your short-term rental or whatever it might be. Tenant sues you for something. So I get this right. The 401k has more protections than the self-directed IRA if you purchase real estate through there. Correct. Yeah. Okay. Okay. Got it. I'm laying the groundwork, the conversation. This is great. This is great. Okay. So I'm wondering now if that's why ChatGPT told me to do the solo 401k plan because this campground that we're investing in right now with partners Eric and I are personally putting in 25k and I wanted to do it through a retirement account that's like money that I'm like in no rush to see back like this may be a five to ten year project so I was like okay if we do get a big payout from a sale one day I want it kind of tax sheltered so I was wanting to do like a Roth solo 401k is that like the best strategy so I wonder if that's why told me to do that so that I could put in 25K by the end of the year rather than the 7K limit on the self-directed IRA.

12:50Right. Yeah. Because an IRA, you can only contribute 7K per year to it. Okay. Okay.

12:56Natalie Palmer:So this leads me to a question. If somebody right now wants to be like a private money lender or a partner or investor on something, and they're talking way bigger amounts, they want to put in like 100 ,000 in something. If they're just opening this for the first time right now or they don't have enough or even if they contribute another 25k it only puts them at 50 000 whatever it is if they don't have enough to fund their full portion can they split it up could somebody put like 50k from the 401k and then their other 50k just from move it from high yield savings or liquidate some stocks or something like can you split it up like that absolutely it just it has to be done on the front end meaning there would have to be like two separate wires going into the account what do you mean it has to be done on the front end it would be two separate wires at the initial start of the deal or the capital raise so they can't combine the funds first and say oh 50 of it came from this 50 from this and now i'm sending you one thing it has to be tracked like traceable which account it came from because there's two different terms of income the part that they the part that they contribute personally is going to be um subject to you know interest income capital gains uh whatever taxes are on that the part that they contribute to their 401k is going to be tax deferred right tax deferred money versus non-tax deferred money What the hell does it mean?

14:32Well, if I contribute$100 ,000, let's just keep it really simple. Let's say I'm earning 10 % interest every year in perpetuity. Well, the$100 ,000 that I put in, I'm going to get$10 ,000 on it. Now I have$110 ,000, right? If that's in a cash account, I get taxed on the$10 ,000. So maybe I'm up with$107 ,000 after it's all said and done. I reinvested$107 ,000. I earned 10 % on that. Now I'm going to earn$10 ,700 instead of only$10 ,000 the next year. I'm going to get taxed on that. Now there's going to be$115 ,000,$116 ,000 in the account. That's taxable money invested through cash. The way that a retirement account would look like is if I make that same$100 ,000 investment and I earned$10 ,000, it's tax deferred, meaning it doesn't get taxed.

15:34So now I have$110 ,000 rolling into the next year that I earned 10 % on. So I'm never paying taxes as I go. That's one of the big advantages of doing any sort of investing, whether it's private money or real estate, inside of a retirement account is because it's tax deferred. They don't chop at you every single year that you make income. It just rolls until you end up withdrawing it at a later time.

16:03Natalie Palmer:So do you, okay, and that's exactly what I was like trying to get at here with this, because I've already mentally with this investment, I've made peace that like, it's going to be several years before we see money back. I was like, I'm not even counting on this for cashflow. Like I just want the money to come in later and not have to pay taxes on that. So that confirms what I was trying to do. So do you have a recommendation? Obviously, this would be different for everyone's situation, but maybe there's somebody listening who has$250 ,000 in a retirement account and they want to invest in real estate.

16:38Natalie Palmer:Would you recommend, even if they have more than enough, to cover their portion or their purchase or their partnership? I guess what I'm trying to ask is like, is there a percentage that you think is like this percent people should fund from retirement account and this percent should be considered like cashflow that they can live off of? Again, I know it's like that different depending on everyone's situation, but does that make sense what I'm asking? Like, should people just like start all their real estate through retirement accounts? Or do you think that there is still a portion that's like worth letting it come in and like being able to live off that in cash flow?

17:20Well, first, I like I try to get people to invest in only what they know and understand. Right. And if what you know and understand is real estate and you understand this environment very well, then I'll by all means do that. I like to take a more of a conservative approach. And this is what I created in my seven steps of financial freedom that I think we actually walk through on.

17:42Natalie Palmer:Yes, I will link all the past episodes with Ryan. You guys should go back and listen. But I like to when I think of investing, the safe route would be, OK, I'm going to max on my Roth IRA every year and I'm going to put seven thousand dollars into that. And here's what I'm going to invest in my employer match or my 401k. And so I'm creating these like healthy habits that allows me to invest, you know, say eight hundred to a thousand dollars a month of my disposable income. And I can project what that's going to be worth after 40 years, right? I can sit here today and say, hey,$1 ,000 a month investor for 40 years is going to be something like 5 million bucks, something crazy, right?

18:24Anything above and beyond that, what I call like that safeguard or that safe threshold, that's sort of your, I want to use this money to generate higher returns and industries and stuff that I feel like I know more about, like private money lending or like real estate investing. But for somebody to invest all of their net worth into real estate through their retirement accounts, that's what keeps me up at night. So I think it's very similar to, I give a recommendation. I don't think people should invest more than 30 % of their net worth into their first deal.

19:03Natalie Palmer:Okay. Right? So if I have a net worth of$500 ,000, I'm not putting more than$150 ,000 of my own cash into that deal. Okay. Safe measure. Especially now, if we add zeros onto that, it looks a little different. Somebody that has a$5 million net worth that's going to go invest a million dollars into a project, yeah it would freaking suck to lose a million dollars but it's not like they're going to be sleeping on the street or eating rice and beans because they have those they're still up with a four million dollar net worth right so it literally does depend on what somebody's net worth situation is you know sub 500k net worth like i'm not tying up more than 30 percent of my of my net worth into like my first deal whether that's okay i or use my retirement account to buy a property like i'm just not comfortable with that okay okay that's a good rule of thumb and yeah the more that you the higher your net worth is you have more cushion there you could potentially put in 50 to a deal because you still have so much left over um okay i like that rule of thumb okay what about i've had investors ask me this and say like should we invest in a partnership or something in should we form an llc and invest from that should we create a trust and invest from that account like this is a little off topic from like the retirement plan discussions but like what would you recommend on that is there a difference or a benefit of doing it that way 90 percent out of a hundred times if you're going to own real estate with somebody else you're going to do it through through a partnership right so ryan's llc natalie's llc are partners in a newly formed llc that's called ryan and natalie's campgrounds llc right so our we we can own our share of the partnership either directly in our personal names which i don't recommend that we can own it through through LLCs that we own.

21:11We can own our share through trusts that we own. You and I wouldn't form a new trust because we just wouldn't do that. But we would form a new partnership LLC to own that, whatever that property is. And typically the LLC that you form, you're going to want that to be in the state where the property is located at. So that way you have rights to be able to go to court and stuff if you ever get sued or have to you know, sue somebody else or whatever, whatever, wherever the property is located, that's where the LLC that owns the property should also be in. So I would never have an Illinois LLC own a Florida property, just like I would never have a Florida LLC own an Illinois property.

21:54The LLC that owns the property is going to be in the state where the property is located at.

21:59Natalie Palmer:Okay. Okay. So that's the LLC that's, that's going to own like whatever, have the property on title or something or the that that will be listed on the deed okay but then for the individual partners say you have five partners coming in do you have tips for them like should they is there a benefit to like opening a trust first and then wiring their funds into the new llc's bank account from there does that make sense like one step further away so we have the llc that owns the whole project but then the five partners that are coming in what's the smartest way for them to send in their funds well you're definitely going to want to not use your personal name and instead have a holding company and is this for liability purposes because technically wouldn't that one llc already be like a shield against that like if somebody were to slip and fall at the property there is already an llc in place before it even gets to the five individual members sure yeah but you want it's more of like an anonymity thing too is oh okay you don't you don't want to have your name show up anywhere really like okay so what a lot of people do is they'll have an llc in their home state like let's say you and i wanted to buy what state do you even live in nowadays california it was always let's say we owned a thing in texas we'd have a texas LLC own the campground and then my Illinois LLC would be a member in the Texas LLC and your California LLC would be a member in the okay right so I wouldn't have to open a new Texas LLC to be part of the Texas property but the holding LLC that owns the property should be Texas based and then the members can be from wherever yeah okay the the trust uh whether you own it or not it in a trust.

23:56We normally don't. I think everybody, regardless of net worth and income and whatnot, should have like at least a written will. But I would say if your net worth is over a million dollars and you're single. I would probably get a trust if you're married and you have a net worth of over two million dollars, I would get a trust, especially if you have kids, because you want to be able to say exactly what's going to happen to your stuff in the event that you pass away. I had a client pass away on me this year. It's probably one of the most saddest things. So like these things do happen and the trust is going to say exactly what happens to your ownership.

24:33Now I want to back up just a second on the partnership conversation. It's very important that when you do form the LLC, the Texas in this example, that you guys have an operating agreement that outlines like, okay, there's five people involved. here's the response here's the title and responsibility of everybody here's what everybody's going to contribute capital wise but also maybe even more importantly like what is each one of those members going to do as part of being a partner in a partnership right and most most importantly like what happens if stuff goes bad right like if there's a capital call if there's a bill that needs to be paid is it pro rata you know split based on ownership what happens if somebody gets divorced like all these things that you need to think about when you're gonna form a partnership with somebody and you want to do it when everything's like high and you know bright rather than wish you did it before and i've seen crazy stuff you know i've seen um like i've i've had a partner of mine now in the campground go through a divorce and luckily there was a clause that we because we took it to an attorney because i practice what i breach and we had a clause written in there that gave the surviving partners the first right or refusal to buy out that person's share otherwise their spouse would have had a 50 claim on their part of the share right um i've seen llc operating agreements where they just did it on legal zoom or I guess now ChatGPT where one of them in particular, it was two guys that owned a million dollar property in California that was fully paid off.

26:22And it said, if Joe dies, his interest goes to Jim. And if Jim dies, his interest goes to Joe. Those were the two guys in the partnership. And I called the client. The client was Jim. I said, hey, Jim, if something happens here, this property don't you want it to go to your kids not jim or joe he's like yeah i was like well your operating agreement says if one of you passes away the other person literally just gets

26:47Natalie Palmer:the full thing right it sounds like the start of like a murder plot yeah a lot of things to think about and consider if you're going to be doing partnerships with other people

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27:31Natalie Palmer:So then can you just clarify for me, what does it mean to move money from a trust account then? That would basically be in your, this is not a retirement account. You would just be moving it so that if something happens to you and you pass away, that investment then goes to your kids or whoever's outlined in your will and trust. Is that the idea behind that? Yeah. If you die without a trust, your assets go to what's called probate. And then the government gets to decide what happens. And anytime the government steps into something, it costs twice as much and it takes twice as much time to get your assets.

28:13So with the trust, it's a contract between you and the state. And when you set up a trust, you're going to set up a trustee, which can be a family member, It could be a son. It could be a daughter. It could be an accountant. It could be a lawyer. It could be a family friend. But then once that person passed away, the trustee takes that trust document to each of the responsible financial parties. Say that the person had a bank account at Chase Bank. Hey, per the trust, this cash gets distributed this way, this way, this way, per the trust. The trustee takes the document to Chase Bank and says, this is what they wanted to happen.

28:53Here's a death certificate. Here's the social security card or whatever. And then most of the time when somebody passes away, a trust is settled within six months or less, as opposed to probate can take three, four, five years sometimes. Okay.