Hey everyone, it’s Mark Ferguson with InvestFourMore and welcome to another episode of the InvestFourMore Real Estate Podcast. Today, I have another great guest on, Belinda Savage, who is an expert in the IRA retirement side of the business, specializes in a lot of real estate investments for investors. She’s an investor herself, has a long history on Wall Street. So Belinda, thank you so much for being on the show. How are you?
Good morning and thank you, Mark, for having me. I certainly appreciate this opportunity to speak with you.
Great, happy to have you on the show. With all my guests, I always try to provide a history, a little backdrop for where they came from. So do you mind giving us a short bio on how you got started into the IRA business and how Wall Street led to that path?
Absolutely. Raised in New York, introduced to Wall Street at the age of 17, work for Standard & Poor’s statistics department and gradually evolved into becoming a bond trader when I was 24. One of the first six women to ever trade in the Street and so you can say that it’s a little bit old history but it’s all right, it was a great time. I then stayed within the financial markets through some of the most historical times, meaning the transition from literary where everything was manual to a very electrical electronic and computerized market place. And then 15 years ago, I was hired in San Francisco to be part of a senior management team at PENSCO Trust Company, which offers Americans the opportunity to obviously take their IRA, 401(k) or any type of retirement account and bring it over to a very neutral position or platform.
So I was part of that team for seven years and then transitioned into consulting. So that’s what brings me up to today where I am educating the American public on how to use their tax-deferred dollars within the real estate private notes and private stock market place. So that gives you an idea what kind of background I have. I actually focused on compliance, mitigation, private placements, operations and trading. So I kind of cover the gamut.
Yes, you’ve had quite a history in the financial sector it sounds like, very cool. Now with your background, I’d also like to talk about real quick, you’re an investor yourself. Can you tell us a little bit about some of your investments about why you like real estate as an investment vehicle?
I believe that America is firmly entrenched in real estate because 70% of Americans actually own their own home. Now that doesn’t mean that they’re all single family. Obviously, there are condominiums, but then there’s also mobile homes and Americans are very challenged by the fact when I give them this particular statistic that 30% of all Americans live in mobile home parks or pre-manufactured homes on [A-grids].
So it’s a great invest so because of the fact that Americans are providing shelter to others or for themselves and their families. So I don’t see any better way to get involved and then, of course, to piggyback that, you hold the paper on real estate to be the bank. Within the last seven years since 2008, I should say the last eight years, there’s been a real transition from the bank’s lending to where Americans are lending to one another and that total comes to 65% of the marketplace in the private sector and I think that’s quite a shock for most people to handle.
I’m shocked by both those numbers myself actually. I didn’t realize either one of those, the amount of Americans living in mobile homes and or manufactured housing and then also the 65% is private financing. Do you know how high that number was 10 or 15 years ago by chance, the financing number?
The financing number was reversed where banks had actually been within 70th
percentile where they were the resources for the Americans to borrow from but that has obviously taken a huge change based on the face of what the Feds was trying to do and the banks were trying re-calculate where they were going to make their money and they were underwater in terms of putting out some very bad loans.
So nowadays what you’re finding is in the private sector people are actually negotiating and I’m talking about when I think people hedge funds, private investors, venture capital are buying pools of notes, private notes, private mortgages and then renegotiating those with the homeowners. So it’s a huge market. We’re talking about over 12 million notes.
Right, yeah that is a giant market. I know I myself am a real estate agent as well as a real estate investor and I’ve listed houses for HUD, many banks’ REO foreclosure properties, and even HUD was selling those notes. I don’t know how much they’re selling them now but they were selling huge pools of notes to the private investors and many of the banks as well were selling huge pools of notes. From what I understand is because it’s so much easier for the private hedge funds to comply or to sell them without going through the compliance the banks have to go through.
I believe also that their whole philosophy or the way they wanted to allow this part of the financial world to transition is that they put it in the hands of people who are much better negotiators and understood where the homeowners were coming from and the banks have already been paid off with TARP money. So why not sell those notes off to private investors, hedge funds and then I’m talking about 40, 50, 60 cents on the dollar? And then obviously, work it out with the homeowners or get them out of the house, in other words by transitioning them into a rental situation of some sort.
So there’s been a multitude of smaller companies and groups around the country. I actually attend real estate investor groups, probably about 12 of them throughout the country and so you’re hearing from investors one on one. So I am not giving you information that I haven’t heard from local resources.
Right. No, it’s interesting you mentioned the banks giving that off to somebody who is a better negotiator. A long time ago, I used to do some door knocking for banks where I’d try to talk to the occupants, give them some paperwork to try to do a home loan modification back during the housing crisis and there was one bank, in particular, every person I talked to said, “We’d sent this in 14 times to the bank, they never respond. They keep asking for it.” And that turned out to be Bank of America.
And then, later on, a couple of years later, I read in the news that Bank of America basically had those people faxing that paperwork to an empty room where nobody monitored it and there are just piles of faxes heaping up. So yeah, I imagine most people would be better negotiators than some of the banks, the way they handled things.
Well and I think because the individuals as an investor, or even from venture capital firms, have a much more interesting position on this. They see where the home owner, I would say 95% of the time, wants to keep that house. They have an interest because they’ve raised their families and whatnot. So, therefore, they will take every measure to find a means of getting that house back into a financial position where it’s going to benefit both the homeowner and the investor.
So I see that as going on and that’s taking place right now across the country with different groups. So I’m really confident that this is going to, it’s a place where I believe the banking institutions were never believing that that could happen and what most listeners are not aware of is that hedge funds were holding $13 trillion worth of cash as of the fourth quarter of 2013, that’s only three years ago. So that’s a lot of cash to come into this marketplace and utilize.
Yes, for sure. I’m curious, have you seen an increase or decrease in the amount of pools being bought by the hedge funds? Does it seem pretty steady?
I think it’s pretty steady. I believe that they’re not quite sure of how to handle it sometimes but what they’re doing is siphoning it off to the more local — it’s coming down, it’s trickling down to where there are individual investors who obviously see the benefit of investing in these pools of bank notes and then they’re getting double digit returns. So the fact is that if you can see that kind of value and you can build your tax-deferred accounts and portfolio with double digits and there are 79 million baby boomers who are still trying to, if you will, begin to build and reapply another option within their tax-deferred portfolios since 2008 because of the loss of the credit crisis.
So I think what you’re seeing is the baby boomers literary need to find these types of investments. So the local real estate investment associations are going out to the baby boomers and they’re actually having one on one or perhaps group meetings, round table meetings, informing them of what kinds of assets you can buy and stay tax deferred and that’s the reason why this has become a phenomenal marketplace for investors.
Right, that makes sense and as far as investing in real estate or notes, do you have a preference yourself? Or do you see, you deal with a lot of people in your business who are buying notes or real estate? When you are buying in the IRA, which we will get into here shortly, do you see one that is easier to invest in than the other?
Do you mean in terms of location? Geographical?
Well as far as buying a house versus being the lender and buying the note on the house?
Okay. You know that’s a preference that has to be taken by each individual investor because can they see themselves as the bank? In other words, it’s secured, or do they want that piece of real estate that they can literally go and kick the tires on? So it’s a matter of what they feel most comfortable. Should it be multifamily? Should it be a duplex? Can it be an 8-plex near a university? In other words, I think what most investors are evaluating is what do they feel comfortable with? What do they see themselves acting as? A landlord or a bank?
And I believe that the sophistication of the American investor is widening dramatically every day because people want that opportunity to get double digit returns just like the hedge fund guys, just like venture capital guys. So why not do it even, like for instance 10 people get together and buy a multifamily where the value can be 10-12% per year? Why would you not want that in your portfolio? And then when you actually put an IRA or any tax deferred account in the real estate, are you aware of the fact that you can leverage it up to 70% with a non-recourse loan that has nothing to do with your credit score? It gets incredible in terms of what you can do.
Right and speaking of the IRA and the self-directed side of it, can you speak a little bit about just the basics and then yeah, getting a none recourse loan is huge because you are able to use leverage in that account as well. But when you’re investing in real estate or a note, what are some things to look for when you’re investing out of an IRA?
Well according to the IRS code in section 408, most, even CPA’s, I just got back from Chicago and it was alarming to find out in the Midwest that I would say 95% of those professionals who are licensed did not, actually they’re not aware of the fact that you could take a tax-deferred portfolio and invest it in real estate or into a private mortgage or note. So with that said, section 408 of the code that basically says it uses exclusionary language not inclusionary.
So it states that you can use your tax-deferred portfolio and invest it into any type of asset class with only two exceptions. So one is a life insurance policy, the second is a collectible being defined as wine, jewelry, artwork, antiques. But other than that, you are allowed to invest in real estate, whether it’s foreign or domestic, commercial or residential. It can be bare land, it can be a note whether it’s a promissory note, secured or unsecured.
It can be in a private business although you may not pay yourself. You may not be actual management over that business. You can buy private stock, you can invest in precious metal, intellectual property by the way. So the guys from PayPal that are very well known throughout the country, those gentlemen actually started PayPal with their IRA’s.
Yep, they bought the private stock inside their IRA, they bought it and put it inside their Roth IRA. So when eBay came along to buy them five years later, they sold it, they sold the stock and they were worth in the multimillion and it was all tax-free for the rest of their lives.
Wow, that’s crazy. I didn’t know that.
So the next time you find like a building or perhaps an idea that a friend has on a new company or an app, you can actually put those inside your IRA.
Wow, that’s a new one. I did not know you could do that.
It’s so interesting that you can — it’s been around 42 years, was written into law with [Arista] back in 1974. But obviously, do you think the financial institutions in this country, particularly Wall Street, want you to know about that?
Well no. I have talked about this before where I had an account, I bought a rental property with my IRA and it was with TD Ameritrade and they say they have a self-directed account but it’s not a real self-directed account. You ask them about real estate or other investments…
They wanted you to think that.
Right, “You can’t invest in those.” Well, what was going on?
So what part of that is self-directed? You see there are 27 asset classes Mark and Wall Street only allows you to use two, stocks and bonds. And no matter how you might put those, package them, it’s still — annuities, mutual funds, options — it’s still stocks and bonds. But once you come away from that and you look at the other asset classes like real estate, private notes, precious metals, private business, meaning just like the private equity and funds that are out there. You know, the private ones? That’s what Americans are entitled to invest in.
So I see all these other asset classes that have a much greater benefit to the individual investor. So why not participate in that whole platform? And you can only do it with a true self-directed IRA, 401(k) which happens to be lodged on a platform that a trust custodian or a bank chartered trust custodian holds for you. So they’re very neutral.
So when you come over to the trust custodial line, you’re not being sold anything. You’re not being provided with financial advice but you are given education just like we’re speaking about right now. So it’s a whole new world but it’s a great, great platform for Americans to enter into because they understand helping and they understand banking, part of their lives.
Right, that makes sense and I’m curious because you’ve talked to many different investment clubs across the country and you are telling them about this way to invest with tax-deferred money or tax definitely has huge benefits, what advice do you give them for getting started with investing or figuring out what they want to invest into?
I always give common sense advice. If you’re new to the working world and a lot of millennials and by the way, millennials only have about $1,000 sitting in the bank on average. 68% of the wealth is controlled by people over 50, which makes sense, correct? Because they’re there longer and they’ve been saving.
But to those who are starting out even with $2,000, does not constitute the fact that you can’t get involved in this sector of the economy. So the millennial who’s out shopping around looking at a duplex can get his uncle, brother, aunt, or a cousin together or a friend and they can invest together. So if he only has $2,000, let’s say the millennial, and his uncle has $50,000, between them, they can put the $52,000 down on the duplex, get the rest actually funded by what is called the non-recourse loan. It has nothing to do by the way with their credit score. It has nothing to do with the fact that they’re going to sign for loan because that’s not going to happen.
The property is the collateral for that investment and then the two of them get to benefit from the rental income and if there need to be upgrades that have to be made, they can either borrow the money privately from another member of the family. Pay them 8% on that money, upgrade it, give back the loan over a two year period but we’re seeing double-digit, meaning 10 to 15% returns on that type of investment. So I see it as a way of using small and yet larger pieces of money and putting them together, right?
Yeah, that makes sense.
Yeah, you want to think outside the box. I’m sure that happens when you as a real estate investor comes through the same thing, right?
Oh for sure. I’m curious, when you’re using your IRA, let’s say the person with the $2,000 has this money in their IRA and he’s got a private investor coming in as well, are there certain things you have to be careful of when you have partners and you’re investing in an IRA or is it pretty straight, cut and dry?
It is pretty straight, and cut and dry. The only issue is that you may not purchase the house for you to live in. But yet you can purchase the duplex and the millennial can even have a brother or a cousin rent from him. The only people he may not rent to happens to be his parents because he’s in their beneficiary line, nor his children. But other than that, you can use, you can actually rent out to other members of your family or your colleagues or your friends. So that’s not such a bad deal.
No, very interesting on that. Cool, so they obviously can be very easy to get started in the IRA investing. I know there are some restrictions like you don’t want to be doing a bunch of work yourself. You can’t pay yourself. Everything is going to go through the IRA when you’re investing with that, correct?
The answer is yes. Once you declare tax-deferred funds for the investment, then you must rely on none tax-deferred funds for everything unless you get another investor to come in and give you the extra money. So that’s why it’s always a planning situation. You want to strategize how exactly you’re going to look at the project and I go over that with clients. I discuss that, “What’s your strategy? Who’s involved? Where is it located? How long a period of time do you want to be involved?” So I can honestly say, you want to discuss this. You want to work it through and then once you have that in place, it’s quite simple. It really is, it’s a great strategy.
Okay. Now let’s go back to this situation with the person with $2,000 and $50,000, could that person with the $2,000 invest with their IRA and the person with the $50,000 just invest as an investor, their own money that’s not an IRA and then will the person with the $2,000 have a percentage of the property, is that a workable deal?
Yes, so you can definitely put personal money next to an IRA money. For instance, if a whole family wanted to go into a multifamily position, like a mom and dad and then the children each had small IRA’s like $5,000 each. So what would happen is that they all stand at the side of the pool as I call it.
So on the day where escrow now everyone has to pay and put their money into the investment, everyone has to jump inside the pool at the same time. So there is no benefit being given or any kind of benefit given to one or the other, everyone goes in at the same time.
Okay. That makes sense. All right.
By the way, all the contracts that go into a regular real estate deal, it actually applies to the tax deferred arena as well. So in other words, if there is a HUD statement, if there is an appraisal, all those documents including the purchase contract are reviewed by the IRA owner and by the trust custodian. It’s like a team sport, as I always call it. Because you as a real estate broker are involved, then your client’s involved and then the trust custodian is involved. It will always read the trust custodian’s name first, for instance, “IRA Services Trust, Custodian, FBO, Mark Ferguson IRA”. That is the registered legal name on the document that will own the real estate.
Right, that’s just about exactly what mine says on the property I own. Something to that effect. And what about notes? I know that a lot of people aren’t familiar with buying notes, with getting to that business with being the bank, what are some ways that people can buy notes and get involved in that side of the investment with their IRA?
Well that is a little bit more, I would say, it’s getting into relationship with certain people across the country who are doing this. So I would highly recommend going to see Eddie Speed who runs the Note School out of Dallas–Fort Worth, Texas and then there’s Scott Carson who’s coming out of San Antonio and Austin, Texas. They both have schools where you actually go and learn in a classroom for three days.
So that to me is an educational platform where you want to start the process and then you can become introduced to private investors in various geographical locations because this is a relationship based arena. It’s not as though you’re just going to a large institution and signing up. So I really encourage great business networking.
Right. Well just like with buying a rental property, you’re going to want to educate yourself and learn everything you can before you go out and buy and yeah, there’s no shortcut to notes either. You’re going to have to educate yourself and learn about the business before you invest your money in it.
Without a doubt. It’s all about education, knowledge and obviously having the right professionals surrounding you so that if you need information or if you need legal advice or CPA or someone like myself who knows self-directed IRA’s, then you would definitely benefit from that type of arrangement, always having somebody to call with a question. I mean to me that makes perfect sense in order to achieve your success.
Nope, that makes sense to me as well. I do have one question on the notes that I’m curious about. Let’s say you educate yourself on notes, learn all about them and as the bank, the borrower would pay you — not every borrower will always pay on time or be able to pay in some cases. If you have an investment in your IRA, and let’s say the borrower defaults is it difficult to do a foreclosure in the IRA? Is it still the custodian would handle everything? How does that work?
Again, team sport. So the custodian has to work with the beneficial owner of the IRA. It’s a matter of every single document that would be included in a regular foreclosure as if you had invested with money in your pocket. It’s the same process but definitely, you are involved from square A to square Z so it’s a process that’s the way to look at it and every state, of course, is different as we well know. The timeframe and whether it’s judicial or non-judicial in the way they handle the foreclosure.
So I have to tell you that we take each and every individual case separately, but I think that the benefits outweigh some of the other issues and that’s the way to look at investing in general, am I correct?
Oh for sure.
So that’s what it’s all about. It’s learning and understanding and then feeling confident.
Right, nope that makes sense. Okay and so here’s another scenario for you, maybe you can help me out with. Let’s say I’ve got $500,000 in my IRA, it’s been building for a very long time, or I even rolled something over and I want to lend that to another real estate investor. I can do that as well, correct?
Absolutely. It’s a great way to explore the possibility. Say maybe you have found a property that you didn’t see or that you didn’t have any contacts with and you want to be the bank. So you lend it to that other person and obviously it would be a secured note based on that real estate. So it’s very simple to do, to draw up that kind of document.
Okay, awesome. Well, let me see here, I’m curious you said you’ve been around the country talking to different investment clubs. I’m sure you’ve talked to many investors all over, what are your thoughts on the current housing market across the country? I know some places are up, some are down, but for the most part, it seems like many areas are very hot right now. Do you have any ideas or thoughts on what’s going to happen here in the next couple of years?
Well I think what you have to do is look at the trends. If you’ve got 79 million baby boomers and they are coming into being empty nesters, they don’t want to live in a 3,000 square foot house with four and five bedrooms. So they’re obviously evolving into two and three bedroom townhouses or perhaps a single level home in Sun City, Arizona or a Del Webb Retirement Community because they’re looking to find people who they can identify with. They’re still active and yet they want out of the larger home.
So what’s happening is that investors are coming in and buying some of those older homes like let’s say is a 2,200 square foot house and it happens to be in Illinois or Michigan. They want out and perhaps the market is bad in those areas. So an investor will come in, pay the homeowner what he wants and needs to move to another property in another part of the country perhaps where the values are better and retirement home places are offering that between $100,000 to $300,000 for a really nice homes, with all the benefits and amenities that would behoove the retirement crowd.
So the investor is going to get a house let’s say a $200,000 house for $150, fix it up, her either tries to sell it over a short period of time or he becomes a renter. So in other words, he’s going to rent it out and use the rental income for now. So this again, I think what you’re seeing is people are looking for value. Whether it’s Memphis, Nashville, Knoxville, St. Petersburg, Charlotte, there’s just a multitude of great areas in the country for investment.
And the other thing to remember Mark is while these investors are out there putting their money into the real estate deals, they are also changing neighborhoods. They are literary uplifting the one house on the block that looks horrid because it’s been sitting there for such a long time. They are transforming the whole outlook and feel of what the neighborhood is all about. So we’ve seen where it’s really benefited everyone involved.
Right and one thing I keep hearing, and I don’t know exactly if I believe it, is that we’re in a housing bubble right now just because housing prices are high. Are you seeing that on your side? Do you think that we’re in another bubble or is it just market trends as you said, kind of leveling out?
Well great, great question. Bruce Norris of the Norris Group in Riverside, California and Sean O'Toole of Foreclosure Radar, which I think now is called Property Radar, have been speaking about this. They are two of the finest researchers in the country and they are stating, “Yes, we are coming into a bubble particularly on the east and west coast,” meaning the larger metropolitan areas like New York, New Jersey and then of course in California along the coast.
Prices are too far up and so yes, they see a bubble coming into play. Sean O'Toole feels as though we’re like Japan right now, that we are flat. We’re going to be flat for a number of years, there’s not enough room to grow right now. There’s such a sluggishness with the economy. Not enough jobs, we know that. There’s so many underemployed in this country and you know that unemployment figures are skewed by the government.
So I think that there’s a definite problem and there is an issue with the bubble and of course, we’re going through a very dramatic time with the elections and the political realms so I don’t know. It’s really hard to figure out but I’m going to say I think we’re in for some tough times over the next two to three years.
Okay, what I’m seeing, it’s hard for me to figure out too, because I am in Colorado and we’ve had a crazy market here as well and even though housing prices have more than doubled in many areas of the state, there aren’t enough houses for people and they’re not really building very much either. I think they’re scared to build, the banks aren’t financing builders as much and so I don’t know what’s going to happen because, on one side, there’s not enough inventory for people, so the housing prices naturally go up. But on the other side, I don’t know if people can afford the high prices, so I don’t know how that’s going to come to a crossing road and when it’s going to happen and what’s going to happen when people just can’t afford houses.
I think the other cycle that’s involved right now Mark is that millennials are not buying homes. They see that it’s a tremendous burden to buy a home in some ways. So they don’t want to take 25 - 30% of their income and put it down on a house. So they’d prefer rental. So I was just up in Seattle and I saw what Microsoft and Amazon and Starbucks are doing up there. They’re actually building these quads of apartment condo places where they have multi-use. So they’ve got retail underneath, housing above, parking down in the basement in the subterranean portion of the buildings and they’re making it like a little village and it’s so much easier for them to live and get around.
So I am seeing a lot of that in the urban areas. It’s in Portland and I believe there are some cities along the east coast the same way, like Charlotte and Virginia Beach, places like that so we’re seeing cycles and then of course baby boomers are moving out to the southwest and the southeast. Simply because it’s easier to live and cheaper to live in Florida, New Mexico, Arizona and so we’re seeing these transitions take place. So we’re going to a huge change I would say over the last eight years but I think you’re going to see even more change over the next three years.
Okay, that’s something else, because I have stopped by my rental properties in Colorado because prices are still high compared to the rents that you can get and I’ve been looking in areas like Florida to buy in because the population increase is so, you know, they’re one of the fastest growing states in the country. Houses are still affordable down there. But I didn’t think about the whole baby boomer population coming up into retirement. That could be another huge push down there I just realized. So thank you for that.
Not at all. Like 10,000 a day apparently actually report in for social security payment.
If you could imagine that.
Wow, that’s crazy. Awesome. Well, we’ve talked about a number of different subjects, thank you for that. If someone is looking to get involved in investing in an IRA, looking at alternative investments, first off, what’s the best way for them to contact you and how can they get in touch if they want to get some advice?
Okay, tell them to get a hold of me at firstname.lastname@example.org
or they can actually contact me on my cellphone, which is 480-239-5539.
Great, well thank you for that. I will also have that on the site as well. I do a short article write up on these so that will be available. Any parting advice? Anything we’ve skipped or missed out on before we head out of here?
Do your due diligence, definitely invest with other people at first. One may have the money, the other may have the time and the energy to go out and look for the project that you want and just know that as Americans, we are the most gifted people. We’re so original, we’re so creative in the way we live and think and invest, so don’t hold back.
If Wall Street is only paying you two, three, 4% returns, it’s time to think about another arena. So the alternative asset market with real estate and private notes, that’s where you should be looking. It’s you one day that will have to retire and you want that tax-deferred portfolio looking mighty healthy.
Very true, very true. Well, Belinda thank you so much for being on the show. I really appreciate it. You taught me quite a bit and I know you taught our listeners as well. I really appreciate and yes, thank you so much for being on the show.
And thank you for having me, I really appreciate being here with you guys.
Well great. Well have a great rest of the week, I’m sure we’ll be in touch and thank you again.
All right, thank you. Take care Mark. Be well up there.
You too, all right, have a good one.