We will be sharing the successful investment stories of some of our clients. You’ll see examples of people investing in all kinds of real estate, the private equity world, precious metals, and more exotic investments such as patents and other intellectual property and offshore.
Most were done with the Check Book IRA structure, but since the same investment rules apply to the Solo 401(k), all of these studies are possible with using the Solo 401(k) structure. Remember you get even MORE freedom with a Solo 401(k).
A client in Illinois has amassed over 20 rentals in his Check Book IRA. It took him about 8 years to do it, but he’s built up a sizable cash-flow with those properties, and is now beginning to take distributions.
This client approached us in 2006 worried about the state of the financial markets, and wanted to understand how he could get his retirement money away from Wall Street, and into an area he had a lot of experience in; namely real estate. He had an old 401(k) from a previous job, and intended to build a rental real estate portfolio with his Check Book IRA. We set him up, and he got to work immediately. He bought two houses almost right away, and has continued to purchase new properties over the last number of years.
He told me that he would let the rents come back to the LLC, and sit there until he had enough to buy another property; then off he’d go to look around and see what the marketplace had to offer.
With so many properties, he can’t manage them himself, so he employs a property management group that handles all of the day to day affairs. Once a month, he looks over their statements, makes suggestions if he feels they’re needed, and cuts one check to the management company for their services.
I received a call from this client in August of 2014; he had just reached the age of 59 1/2, and was ready to start receiving distributions. We went over what he needed to do, and how it should be reported. Before the call ended, he told me he was very happy to be able to enjoy the fruits of his labor, expressed his enthusiasm for the Check Book IRA, and thanked us for the assistance we’d provided throughout the years.
Even though he’s beginning to take distributions, he has no intention of slowing down. He plans on buying other properties, and he has the cash-flow to take advantage of a lot of good deals.
This client called us in 2010 asking about the ability to buy commercial property with retirement funds. He had the opportunity to buy a commercial office building with two other friends. The building was relatively new, but was nearly fully occupied, and penciled out to a very attractive investment.
Right off the bat, he asked if he could rent space in the building for his architecture firm, but after going through the prohibited transaction rules, I helped him see this would be self-dealing, and therefore prohibited.
We spent time with the client and his two friends and future partners, going through the best way to structure the deal both for the client’s Solo 401(k), and for the other two partners who were using personal funds. In the end, they were able to purchase the property, and have been doing well ever since.
Finally, once the client’s Solo 401(k) began to accumulate some cash, he chose to invest some of that in American Eagle coins, which he stores in a safe in his house. He’s pleased that his retirement funds are out of the market, and that the assets owned his Solo 401(k) are real and tangible.
Since 2004, one of our clients in Florida has been investing in nothing but trust deeds, and suffice it to say that he’s done very well.
This particular client was familiar with self-directed IRAs when he called us, which helped him better understand the structure and how it works. He’d already set up his IRA as self-directed, but he wanted the freedom that checkbook control brings and saw that it would allow him to be much more nimble with his investments; if he saw a good deal, he would be able to take advantage of it right away, without worrying about submitting anything to the Custodian. The fact that he would save enormously on transaction and asset fees was also a deciding factor in choosing the IRA LLC.
He’s been conservative through the years, and only invests in areas he is familiar with. He’s invested in a number of States, and despite the fact that he’s over 70 years old, he’s still going. He told me the key to building wealth is to do it slowly but surely. He’s certainly followed his own advice, as he has now several million dollars in his account, and plans on leaving it to his granddaughters to ensure they can pay for a top notch education.
Those are the exact words a client on the East Coast said to me the first time I talked to him. He was talking about precious metals, and not feeling comfortable with the idea of having a depository across the country store his retirement metals.
Now, not everyone feels that way, and some of our clients choose to store their metals at one of the larger depositories, regardless of how far away it might be from them.
After we set up this client, he bought American Eagles through the plan, and stored them locally. Then, later he bought more American Eagles, but he bought them from a firm in Switzerland, and had them stored in a private storage facility in Switzerland. He said he likes the idea of being diversified jurisdictionally. He feels comfortable that if something terrible were to happen in the US, his metals would be safe in Switzerland.
We set this client up in 2011; I knew that he was primarily interested in buying metals. Three years down the road, he let us in on his investment strategy of earning a consistent cash-flow return on his metals.
We had dinner with the good Doctor when we were passing through Las Vegas to Scottsdale, AZ for the winter; he went through how he turns precious metals into cash-flow. Its a novel way of doing things that I’d never heard of, but it works.
He owns physical metals; some are stored at his house and some at a private storage facility. However he buys some of his metals on the COMEX market, and then sells covered calls on those metals. If you’re not familiar with a covered call, its essentially an option you sell to someone who has the right to buy the precious metals away from you at a certain price. You receive money for the sale of the option, and depending on how the price turns out, the metals may be called away or they may not be. You can click here for a pretty decent explanation of covered calls at Investopedia.
There’s certainly a strategy to it, but when metals are trading flat, meaning there isn’t much volatility, or if you think metals will stay down in price, writing covered calls is a great way to generate income. The Doctor doesn’t mind owning the metals (obviously), so he just sells his calls each month, collects the proceeds from the sale of the covered call, and doesn’t particularly care if the metals are called away from him or not. Precious metals have been down for the last bit, and he said he’s been making a solid 8-15% per month doing it. Not too shabby.
In an earlier email I mentioned that a client had bought an 18 wheeler to haul oil in the Dakotas. What I didn’t mention was that he bought two more trucks to haul hay.
This client lives in New Mexico, and had seen firsthand what the drought has done in Arizona. Crops are shrinking, water is being rationed to farmers, and as a result hay production has been way down over the last five years or so.
The hay situation in Arizona is not good, as I can attest to, spending the winters in Scottsdale. Farmers and horsemen, not happy with the inferior hay that Arizona was producing, demanded hay be trucked in from California, Oregon, Washington, Nevada, and even parts of Oklahoma and Texas. It turns out that a friend of this client’s owns a trucking company and was looking for extra trucks to meet this rising demand for hay in Arizona.
This client recognized the opportunity; and bought two trucks with his Solo 401(k), and leased them to his friend’s trucking company. Originally, the client asked about hiring a driver, but he would have run into UBIT issues had he structured it that way. After talking with him, I pointed out that doing a lease arrangement with the trucking company would make as much money, and would be the form of income not subject to UBIT.
Now, he receives a check once a month from the trucking company. He doesn’t have to worry about taking care of the trucks, keeping track of the mileage, etc… All of that is handled by the trucking company, including insurance; all he does is collect the checks and put them into his Solo 401(k)’s bank account.
This is more of a collective story about three ranchers in Texas, Oklahoma, and Wyoming that have used their IRA LLC to buy livestock, although the same can be done with a Solo 401(k).
Its always a good idea to invest in what you know, and ranchers certainly know livestock; if they don’t, they won’t be ranchers for long. We set these three ranchers up in 2009 and 2010, and right away they started buying mostly cows, but a few horses as well. One rancher even registered a brand to their IRA LLC.
When we set them up, we discussed how they would need to structure their deals. Most importantly, they are not allowed to turn the cattle out on their own property, nor can they feed the cows, train the horses, or do any of the doctoring. Ranching is a small community, and each of them knew people who had property. For a fee they were more than happy to turn the cattle out on, feed and doctor them. When the cows reached their target weight, they were taken to the sale. The ranchers were able to use their Check Book IRAs pay the people who took care of the cattle; the rest stayed in the LLC account as profit.
This client called us in 2008 because she was quitting her corporate job and moving to Ireland. She wanted to know what her options were in regards to offshore investments, and she was pleased to find that the law allows investment of retirement funds into any country.
It didn’t take her long to find a nice property, and it turned out to be a little cottage that looked as if it had jumped off the pages of a storybook. There was also a field next to the house that could be included in the sale; she chose to go ahead and buy the field as well.
A month later, she met a farmer in the village, and during their conversation, it came out that he was looking for some land to turn a few of his sheep out on. The client immediately told him of the field next to the house she had bought and it after showing it to him, the two struck a deal to lease the land.
Now the client has good renters in the cottage, and a lease agreement with the farmer that pays the LLC a quarterly fee for use of the land.
A note on international/offshore investments: it is always advisable to have an attorney who is familiar with the particular rules of the jurisdiction in which you are planning to invest. Every country, and even parts of countries are different from each other, and its important to have someone to guide you through that maze.
“Is this even possible?” the client asked me when he told me what he had in mind. We had set this client up in 2005, and he was calling several years later to see about going into partnership with a chef in New York. He mentioned the name of the chef, as if I were supposed to recognize it, but not being from New York, I drew a blank.
This well-known New York chef and our client planned on going into the restaurant business together. They had figured they would start a company that would be owned half by the chef, and half by the client’s Solo 401(k). Was that possible? Of course it was possible, but the investment as structured, would has resulted in UBIT. We put our thinking caps on, and came up with the following:
Instead of one restaurant company that was owned by the chef and the Solo 401(k), they set it up so that the operating company was owned by the chef entirely. The client’s Solo 401(k) purchased all of the high end cooking equipment, all of the tables, chairs, cutlery, glassware, etc. and then leased all of the equipment and furniture to the operating company. Now the income to the Solo 401(k) was not business income, but lease/rental income. The client’s Solo 401(k) also purchased the name of the restaurant (it was trademarked), and then leased the name back to the chef’s operating company.
The original structure of the deal would have required the client’s plan to pay a UBIT tax each year on all the profits, file tax returns, not only for the Solo 401(k) and the restaurant company as well, and he would have had to deal with the regulatory issues of the restaurant.
Now, the client’s Solo 401(k) has a long-term lease agreement for the equipment, a royalty agreement for the trademarked name, and provides capital on an as-needed basis in the form of short or long-term operating loans. His Solo 401(k) pays no taxes, is not subject to any of the regulation incurred by the restaurant, and each month the plan is paid its lease income, royalty income, and interest income.
This is a good example of how creative structuring can save on taxes, and save a deal that would otherwise be unattractive.
I was surprised to hear this client tell me she was going to invest in shipping containers. At first she just said containers, and I was thinking of storage units. We have a few other clients that have invested in storage units, and its been very profitable for them; but once I talked further with her, I realized she was talking about those large metal containers that are put on the huge barges and shipped all over the world.
She became involved with a company based out of California that sells these containers to investors, and then handles all of the particulars of leasing or renting those containers out. Its a smart business idea on their part, but it also turns out to be a pretty good holding for the investor.
This client used her Solo 401(k) to buy three shipping containers. Each month she receives a report on who the containers are being leased to, where they are, and a breakdown of the costs involved. She doesn’t have to call anyone to rent out the containers, or keep track of any of it, because all that is being done by the management company. It’s a bit like a property manager.
I love this sort of creative investing, because I didn’t even know shipping containers could be bought! Yet, now one of our clients owns several through her retirement account!
What to Take Away
Ok, so maybe you don’t have the opportunity to buy livestock, or perhaps the idea of owning 15 or 20 rentals is out of the question. Irregardless, the point is that everyone is good at something, and with the Solo 401(k) you can invest in what you know, and by doing so better manage your risk, and ensure a safe return.
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Check Book IRA, LLC
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