Rachel Stolrow: A quick disclaimer, the Entrust Group or Entrust, does not provide any investment advice. We do not endorse any products. All information and materials covered here today are for educational purposes only. All parties, as always, are encouraged to consult with their attorneys, accountants.
Rachel Stolrow: Or any financial advisor that they may have before entering into an investment.
Rachel Stolrow: On today's agenda, we have Ms. Whitney here. We'll be going over understanding equity versus debt.
Rachel Stolrow: Defining real estate debt funds.
Rachel Stolrow: Key factors to consider for each of those. Analyzing market cycles, key questions to ask yourself.
Rachel Stolrow: how to invest in a real estate debt fund, and then, as always, we will have a Q&A at the end.
Rachel Stolrow: A little bit about me, I've had over 9 years here at the Intrust Group, actually coming on 10, so I've been with Intrust for quite some time. I love to educate investors and professionals on how to use a tax-advantaged retirement plan to invest in alternatives.
Rachel Stolrow: We, as a custodian, were IRA administrators, or the interest group is IRA administrators. We have very knowledgeable staff, many that hold a CISP certification.
Rachel Stolrow: And we host monthly webinars just like this one to continue educating our clients.
Rachel Stolrow: We hold $6 billion in assets under our administration.
Rachel Stolrow: We have over 24,000 active investors, so we work with quite a few clients. We've been in business for over 45 years, and we pride ourselves on one point of contact, meaning every client and company that works with us gets a singular team to be able to work with, and ensure the best experience possible.
Rachel Stolrow: Right, so without further ado, I will hand it over to Whitney, our guest speaker today with Passive Investing.
Whitney Elkins-Hutten: Awesome. Thank you so much, Rachel. Yes, and you know, we're going to talk about how to get debt and equity allocation right in your self-directed IRA in 2026. As Rachel already alluded, I feel like one of the most powerful investments you can actually have in your IRA right now is a debt investment. So we will have a, you know, pretty heavy conversation around debt, but both are tools to be used in the tool belt.
Whitney Elkins-Hutten: And especially if you're looking for an investment right now, maybe you're trying to figure out, oh, you know, when's the right time to get back in the equity side of the market? That can be a really good stopgap as well. Now, I went ahead and gave you my contact information, so you don't have to wait until the end to get it. You can join me, you can simply email me, whitney at passiveinvesting.com. You can also go to passive
Whitney Elkins-Hutten: of investing with Whitney.com and schedule time with me for a one-on-one consultation.
Whitney Elkins-Hutten: Now, a little bit about me, if this is the first time you and I are meeting. Again, my name is Whitney Elkins-Hutton. The picture here on the screen is the whole reason why I invest in real estate, but more importantly, passive real estate.
Whitney Elkins-Hutten: Since 2002, I have scaled an active, portfolio, and that includes over $800 million in assets, 6,500 residential units, 2200 self-storage units, some car washes, I did a lot of fix and flipping, so I am very versed on being an active player in real estate, but I will tell you that the golden handcuffs started to unlock for me
Whitney Elkins-Hutten: When I figured out how to take this active income and savings and turn it into passive income and build a wealth-generating machine. And one of my key tools in my tool belt is leveraging investment accounts, or excuse me, retirement accounts, like a solo 401 , a self-directed IRA, or even a Roth self-directed IRA.
Whitney Elkins-Hutten: Now, we're going to be talking about, you know, how to use debt and equity within your self-directed IRA, but nothing we talk about here today should be construed as financial advice, legal advice, tax advice, so make sure you take all this advice to your investing team, because they're going to know your own personal situation and be able to tailor it for you.
Whitney Elkins-Hutten: Now, the reason why I feel this is a very important conversation right now to have, you know, about, you know, do I go into equity or do I go into debt, especially in relation and how I'm going to use the funds within my IRA, is, is because of the timing we are in the market. Normally, and I'm going to get into this, I'll show you some data, but, you know, what I still see investors doing right now
Whitney Elkins-Hutten: Now, is that they need income, so they're… but they're buying equity assets.
Whitney Elkins-Hutten: Okay? In order to get cash flow, right? Yes, and ideally, the markets will start to recover, but as you know, we've kind of had a little bit of a hiccup, and I'm going to explain to you in clear terms what our hiccup is right now in our market recovery.
Whitney Elkins-Hutten: But conversely, you know, we have the other type of investor that, wants…
Whitney Elkins-Hutten: you know, to get invested, wants to get some growth in their portfolio, but maybe they're sitting in debt. So, we have investors doing kind of the opposite of what they need to be doing with their portfolio, or you actually have a good idea what you're going, want from your portfolio to perform over the next few years.
Whitney Elkins-Hutten: But you're using the wrong structure in order to invest. So I see a lot of investors that actually go into an equity asset or a debt flow asset expecting to get the returns and benefit from those returns right now, but they misplace their strategy within the structure.
Whitney Elkins-Hutten: Alright, so we compound that with what's happening in the markets right now. We still have a lot of capital sitting on the sideline. It's still pretty hard to understand, are we at the bottom of the market? Okay, is equity returning, or do we need to wait another 6 to 18 months before these deals actually, are good deals to go into?
Whitney Elkins-Hutten: If you're looking for income right now, especially in an equity deal, if you're trying to get that all-in-one investment, place capital in one investment that's going to give you capital preservation, cash flow, equity growth, and tax benefits.
Whitney Elkins-Hutten: Getting income is a lot harder to find, especially consistently in high-quality assets. You might be taking on an incredible amount of risk in the asset in order to get cash flow.
Whitney Elkins-Hutten: And still, the markets are shifting pretty quickly right now. Now, I just took a look right before we got on the call, I looked at the S&P 500. Today's a rosy day, right? Everybody is loving their stock portfolio, we're at all-time highs.
Whitney Elkins-Hutten: However, you know, we are… got some major, key points in the market that is setting up for a recessive, if not a stagflation type of environment.
Whitney Elkins-Hutten: But most importantly, right now, in this type of a market, is it is possibly a, you know, investors can get into what seems like a really good deal, but if it mismatches where you are at in the market, it can still have really bad outcomes.
Whitney Elkins-Hutten: Alright, so, understanding that on a high level, I just want to kind of take a step back and make sure everybody here understands what, you know, investing in debt actually means, what investing in equity actually means, okay? They have two different jobs in your portfolio, and this is independent of what you are doing in your retirement account.
Whitney Elkins-Hutten: Alright? Debt investments should be looked at initially like an income engine. They, you know, when we have our capital stack, we're in the lowest tier of the capital stack.
Whitney Elkins-Hutten: They should be giving predictable income, again, lower risk, position, shorter duration, limit… but they're going to be limited in their upside. But that debt, think of that income engine as stabilizing your portfolio.
Whitney Elkins-Hutten: Now, what's sexy to invest in is equity. Everybody… we are trained from a very young age to go to school, get a good job, invest in your retirement account for growth, and then, like, you wake up 30, 40 years later, you got this huge nest deck, and you ride off into the retirement sunset.
Whitney Elkins-Hutten: Okay, but, equity, like, if you're going to go into real estate equity, again, that is a growth engine, okay? You have appreciation-driven returns, but you could expect some delays in cash flow, especially in this phase in the market. You know, equity assets, by nature, are going to have higher volatility. They don't always go up and to the right in valuation.
Whitney Elkins-Hutten: Sometimes they respond to the markets as well, where they have, asset, or valuation corrections, and then eventually they'll start going up again.
Whitney Elkins-Hutten: Equity assets should always be viewed with the lens that they are a longer hold period. So, most equity assets that are high quality that I'm looking at, I'm anticipating that hold to be 5 to 10 years, at least. Especially where we're at in this market cycle, I would pencil out a long hold period.
Whitney Elkins-Hutten: Now, those equity assets are for growth in your portfolio, and we should treat them as such. So, as you can see, we actually need both in our portfolio. One, to stabilize it, create that income engine, and another, type of asset in order to grow it.
Whitney Elkins-Hutten: Alright, so here's just a quick snap of the capital stack. If I mention the word capital stack, and you're just like, I don't know what that means, it simply means, the different layers of money that go into a deal.
Whitney Elkins-Hutten: Alright? So, the common… or, excuse me, the senior debt usually is going to be bank money, right? You go to the bank, get a loan. Mezzanine debt is going to be, say, like, a home equity line of credit, or a home equity loan, or some sort of other second loan position.
Whitney Elkins-Hutten: Alright, and then you flip into the equity, right? This is where the highest risk, highest reward, returns are, generally, in an equity deal.
Whitney Elkins-Hutten: Now, we can also use the capital stack to understand where risk lies in an investment as a passive investor. Alright, so if you are investing for cash flow, or you say you're close to retirement and you want to take a low-risk position.
Whitney Elkins-Hutten: Okay, getting it closer to the debt positions, or in the debt positions, will carry generally less risk than going into the equity positions.
Whitney Elkins-Hutten: Okay? We can get stabilized, predictable cash flow sometimes in these debt positions, whereas we should view equity as a higher risk position where we have to have a strong market and deal performance in order to coupe a deal.
Whitney Elkins-Hutten: Alright. So…
Whitney Elkins-Hutten: How do we understand what part asset we need to actually have, debt or equity, in our portfolio, okay? And does it change with market conditions?
Whitney Elkins-Hutten: And the answer is yes to both, okay? We need both debt and equity in our portfolio, but also that what we are investing in, there might be a better time to go into debt, there might be a better time to look at equity.
Whitney Elkins-Hutten: So, if you're looking at a market, you know, let's break out the four different phases, general phases, of a market.
Whitney Elkins-Hutten: So, we'll start at the top. Say, like, in 2021 through 2023, what we were seeing is the hypersupply. We had a huge amount of deliveries come online, especially in, multifamily real estate, self-storage real estate. We're starting to see this happen in industrial real estate, so we've got, each of these asset classes cycle differently from each other.
Whitney Elkins-Hutten: Not perfectly altogether.
Whitney Elkins-Hutten: Once you have the hypersupply, you gotta wait for the absorption, okay? You gotta wait for all these units to get absorbed into the market, okay? But that drives down, you know, we get increased vacancies, more completions online. Once we start getting the bottom out.
Whitney Elkins-Hutten: On this, we're in the recessive part of the market. One could say that we're probably somewhere in the recessive part of the multifamily market, whether we're, certain parts of the United States are just now heading into it, other parts of the United States are coming out of it.
Whitney Elkins-Hutten: Okay? Then…
Whitney Elkins-Hutten: once we see all this absorption happen, all those hypersupply units being absorbed, alright, then we start seeing, you know, declining vacancy, new construction starts will happen, and then we get a new expansion phase all over again. But as you can see, it's just a matter of not if, but when we start hitting the next hypersupply phase, and the cycle repeats again.
Whitney Elkins-Hutten: Alright? So, debt and equity are going to play differently in the different parts of the market cycle. If you're in a hypersupply market, this is probably not a great time to get into equity, okay? Getting into an equity investment is probably somewhere in here, halfway through the recovery, up to the top.
Whitney Elkins-Hutten: Right? These are good times, maybe not quite to the top, but this is a good window to get an equity investment. And so, it's right for an investor to start positioning themselves right there.
Whitney Elkins-Hutten: If… to get into an equity deal, if that matches your, plan for investing.
Whitney Elkins-Hutten: The other part that we have to take a look at is the credit cycle, okay? So if… if investing in equity in the recovery and parts of the expansion phase are good, it is good to invest in debt, especially in this, where less credit becomes available. So we hit that hypersupply part right up here at top.
Whitney Elkins-Hutten: This is where we see the bank pullback on credit, alright? And then there's less credit right here in the hypersupply and recessionary parts of the environment. This is an amazing opportunity for the investor to step in and get… take over the bank's returns. So again, when we look at market cycles, you can simply take all your different asset classes you're investing in.
Whitney Elkins-Hutten: Plot them out where they are in this market cycle, and overlay the credit cycle on top of it, and they will clearly tell you which should you be looking at debt or equity right now.
Whitney Elkins-Hutten: Well, where I feel like we're at is close here to the bottom.
Whitney Elkins-Hutten: Right? So, we're in this kind of interesting phase right now, to where if you're really wanting to jump on it, equity could be a great thing to add to your portfolio, but debt's still very advantageous. I think debt, again, as an income engine, plays well through all parts of the market cycle, but is more advantageous in the last two phases.
Whitney Elkins-Hutten: Alright.
Whitney Elkins-Hutten: So…
Whitney Elkins-Hutten: We also have to take into account, not just physically where we're at in the market and the credit cycle, but what makes this time period so unique. Well, we're almost
Whitney Elkins-Hutten: we… we're not having a normal recovery like we would in a recession, even though the… we haven't called the R-word yet. We are heading in, in RERN, a more 1970s-like stagflation-type environment. So, our investor blue…
Whitney Elkins-Hutten: playbooks that we've built for the last 15, 20, 25 years for investing, they… they don't exactly fit perfectly this model, so we have to kind of discern what's happening.
Whitney Elkins-Hutten: So, what makes this unique is that we're
Whitney Elkins-Hutten: inflation's not done with us. We're… I think the last time I checked inflation, we're at 3.8, up from 2.9, okay? Now, even if the conflict were in Iran were to resolve immediately, we would probably still see that inflation working through our markets for the next 6 to 18 months.
Whitney Elkins-Hutten: Okay, that's if the conflict were to end today, and everybody packed up and went home, and the Strait of Hermos was open.
Whitney Elkins-Hutten: The other thing, what's causing the inflation is a energy driver. The cost of energy is going higher. Now, energy as a percentage, you know, what the average American spends on energy, say, like, gas for their cars, or energy to heat their homes, is less of a percentage of their total budget than it was in the 1970s.
Whitney Elkins-Hutten: We actually have more, plastics in, you know, packaging, in our environment. That also is going to impact, our, you know, the cost of goods. So we've got these two
Whitney Elkins-Hutten: These two, concomitant factors happening in the environment.
Whitney Elkins-Hutten: Now, we're starting to see a little bit of a slowdown in the GDP. It probably hasn't been as slow as some economists would think it would be right now, but the Fed actually has already made it very clear they're not going to lower interest rates for the remainder of the year. If anything, they may actually have to raise into a slowing environment.
Whitney Elkins-Hutten: Okay? What you can expect to happen if these three…
Whitney Elkins-Hutten: tears tumble together, is that credit is going to tighten very quickly. And that makes it a very good case for us to be… have that income engine already built out into our portfolio, because everybody will be scrambling to invest in debt.
Whitney Elkins-Hutten: All right? Now, that's kind of, like, what we're seeing in the market, alright? You know, setting us up for where debt can be really a good thing for us to be invested in right now, but if you're in an equity deal, like, what should you be paying attention to right now, especially as a passive investor, is you need to be paying attention on the operator's ability to execute, okay? And more importantly, for the business plan of that
Whitney Elkins-Hutten: asset. Make sure if you're going in any new asset that the business plan is stress-tested.
Whitney Elkins-Hutten: You know, and what do I mean by this? You know, you know, if we're going into an inflationary environment.
Whitney Elkins-Hutten: people are going to be able to pay, they're not going to be able to, you know, do 5% rent increases. They might only be able to do 1% or 2% rent increases on their property. So, make sure that the operator is looking at those numbers with that… that lens. Now, also, expenses could go up.
Whitney Elkins-Hutten: Right? Especially if you're investing in a value-add deal. We've got it, you know, there's a pass-through cost to be able to get materials shipped around the world, and if energy prices are higher, the cost of those materials are going to be higher. I'm actually building, rebuilding part of our fence, after a wind event.
Whitney Elkins-Hutten: And, I… what I just got quoted for two 6x6 posts to rebuild that fence just boggled my mind. I was like, wait a second, like, I paid a third of that when I initially built the fence, not but 6 years ago.
Whitney Elkins-Hutten: So we can expect to see more of that.
Whitney Elkins-Hutten: Also, as we move through this market, especially if you're looking at an equity deal, be it self-storage, multifamily, industrial, if your operator's looking to do a refinance, the refinance windows are going to be pretty short right now. So, when the Fed does
Whitney Elkins-Hutten: And if, when they do start lowering interest rates, they're going to have to keep a, you know, a really tight view on if they lower rates, will inflation pop up again? Remember, they have a dual mandate in order to stoke the GDP, but also keep inflation lower. And so, anticipate that refinance windows are going to be pretty narrow, and that rates will remain stubbornly
Whitney Elkins-Hutten: high for the next, you know, at least 6 to 18 months, if not longer. So don't, you know, don't expect a 4% refinance rate anytime soon.
Whitney Elkins-Hutten: Alright, now, also as an equity investor, make sure that you're looking at the lens, any passive deal you go into, that, the operator is underwriting several different exit scenarios.
Whitney Elkins-Hutten: Because they might be exiting in a market that is a slower market than what we're currently in today. So, meaning that valuations might be compressed, timing might be a little bit uncertain. So, what does that mean? The operator needs to have sufficient reserves in order to carry that asset,
Whitney Elkins-Hutten: And, you know, should they have to extend the timeline to get to a better market to sell?
Whitney Elkins-Hutten: Now, all three of these areas are under pressure right now, and that might seem really scary to an equity investor, if that's you, but these are just things that, you know, even if we were in a good market, you would still need to invest with an operator that has the ability to execute, that is using strong, debt strategies on the asset, and that has multiple exit scenarios for that asset.
Whitney Elkins-Hutten: So, we just need to make sure we're tightening up our underwriting, not so much being fearful, as we move forward.
Whitney Elkins-Hutten: Alright, so we covered where debt might… could be a good tool. We also covered where equity can be a good tool in our portfolio. We've also covered, kind of, like, the pitfalls of both.
Whitney Elkins-Hutten: If I were going to be deploying capital into debt or equity, this is what I'd be looking at right now, as far as making sure these questions are addressed in any deal that I go into.
Whitney Elkins-Hutten: So, if it were a multifamily asset, I would make sure that I am underwriting, and that the operator's underwriting higher expenses, anticipating that insurance costs are gonna go up, taxes are gonna go up, and the cost of labor are gonna go up. I would anticipate that they should be modeling slower rent growth. Again, you know, if they're modeling out 4, 5, 6% year-over-year rent growth.
Whitney Elkins-Hutten: Does the business plan work if there is no rent growth, or 1% rent growth? Okay, make sure you're stress testing that model, and you're okay with the returns at that level. And again, make sure that you're planning for longer hold times and less exit uncertainty. So, what would that look like? Does the operator have the ability to hold that asset for 3 to 4
Whitney Elkins-Hutten: years longer than they initially anticipated. Meaning, do they have enough, operational reserves, capital reserves? What does the debt structure look like? You know, do they have all those things in place? Do they have a plan?
Whitney Elkins-Hutten: When it comes to, like, debt or private credit, this is a great time in this phase of the market. Make sure that we're avoiding borrowers that have really tight margins on their products, on their projects. So, this is where, when I'm looking at debt funds, I'm looking at debt funds where they initially only lend 60% to 65% loan-to-value of the asset. They're not getting up in that 70, 80, or 90% loan
Whitney Elkins-Hutten: to value on the asset. Be cautious with mezzanine debt positions, that second debt position. If you're going to use debt as a pure income engine for your portfolio.
Whitney Elkins-Hutten: Let, you know, mezzanine debt positions.
Whitney Elkins-Hutten: are going to be… you need to look at them with a lens that they're far more opportunistic. Now, I see investors all the time, they'll talk to me about our debt fund that we have, and they'll be like, well, hey, I can get 4… you know, 400 basis point higher if I go into this other debt deal. And, you know, I kind of scratch my head. I'm like, you can, but the risk is showing up.
Whitney Elkins-Hutten: in a much different position there. Do you understand the risk you're taking? Okay? If you need predictable income, this is the place to, again, build that stable, predictable income engine.
Whitney Elkins-Hutten: Now, as we move through the 2026 through 2030 markets, in a DUD fund, expect deal flow to be a little bit slower and default rates to pop up, right? Markets are going to be challenged, and, we're gonna see that challenge not show… it won't show up equally across the United States, it'll show up differently in different areas. Do I have the crystal ball on that? I do not.
Whitney Elkins-Hutten: But, you know, just, you know, it is natural for deal slow to slow down, and for some defaults to occur.
Whitney Elkins-Hutten: But what we can control, what you and I both can control as a passive investor, is our own behavior around risk.
Whitney Elkins-Hutten: So, this is where I always encourage people, before you make your next investment, make sure that you've reviewed your portfolio. Are you over-concentrated in any one operator, asset type? Have you been chasing yield instead of durability with your assets? If so, this is the time to correct that before you go into your next deal.
Whitney Elkins-Hutten: And are you assuming liquidity in an asset that isn't actually there? Okay, so again, we can always take control of our own investment behavior.
Whitney Elkins-Hutten: Okay, so we've talked about debt, we've talked about equity, we've talked about some of the challenges of both, we've talked where we're about in the market cycle, we've also talked about, you know, what are some underwriting questions that I'd make sure to add.
Whitney Elkins-Hutten: both around debt and equity, but more importantly, our own investing, strategies moving forward. How do we, like, kind of combine this all together with utilizing our self-directed IRA account correctly?
Whitney Elkins-Hutten: The biggest mistake that I see with people leveraging or investing in a passive deal, be it debt or equity, with their self-directed IRA, is that they treat their IRA as a holding company, and they load it with equity assets because it's taxed advantage.
Whitney Elkins-Hutten: And they totally ignore their income need, and their investment timing.
Whitney Elkins-Hutten: Alright, so, I just recently, last week, got off the phone with an investor, you know, they're heavily into equity deals, and he's like, I'm gonna retire, I need to retire in 2 years, and I'm not sure if my equity deals will have cycled out by then.
Whitney Elkins-Hutten: And I'm like, okay, so what can we help you do? And he said, I need income fast, but I still need to grow. Okay, and this is where I really love putting debt into a self-directed IRA, a debt fund investment, is because your IRA is a compounding engine for you. Every dollar you put in your self-directed IRA is working at the highest tax efficiency for you.
Whitney Elkins-Hutten: not just part. It is not a holding account. So we shouldn't just
Whitney Elkins-Hutten: you know, haphazardly drop investments in there, but think of this as, how can I get repeated compounding over and over and over again in a predictable, systematic way?
Whitney Elkins-Hutten: So, let's talk about what those two different ways are, like, for debt and for equity, okay? For equity first, make sure any investment you… if you're gonna put an equity investment in your self-directed IRA, that you do not need it for near-term liquidity, okay?
Whitney Elkins-Hutten: One, that'll allow that investment to exit over time. Two, it'll allow it to compound over time, those returns. Things that you can use with your self-directed IRA to invest in are multifamily or residential real estate deals, private equity deals, other long-term hold investments.
Whitney Elkins-Hutten: Now, it is great to put an equity deal in your IRA,
Whitney Elkins-Hutten: Alright? It does get to tax shelter that, either forever or defer the taxes on it until you withdraw the income. But also think in terms of when do you need that equity deal to for sure have cycled out by.
Whitney Elkins-Hutten: Okay? If you have a set timeline in place, and you're unable to hold, okay, say that you need the money back in 5 years, but there's a potential that the equity deal is going to go 7 or 10 years.
Whitney Elkins-Hutten: I really encourage you, look at debt funds and investing, because I think they're entirely underrated, using debt in the IRAs.
Whitney Elkins-Hutten: Why? Because… Normally, let's think about it, debt strategies…
Whitney Elkins-Hutten: are taxed as ordinary income. You get a 1099, or you might get a Box 1K1 income. And if it's
Whitney Elkins-Hutten: taxed as ordinary income, it hits your highest, tax bracket. Now, if you put a debt fund or, you know, even individual notes in your IRA, it can actually compound without that current tax drag. So, say you put $250,000 in a debt fund investment and it yields 8%. You can allow that to compound monthly.
Whitney Elkins-Hutten: without that tax drag, okay? Whereas if you held it in a taxable account, you would have to account for the tax drag, or potentially, depending on how the fund's structured, have other passive losses that could offset that.
Whitney Elkins-Hutten: Okay? Now, this, if you use, like, a very predictable, you know, debt fund, you know, something that's paying out continuously month over month.
Whitney Elkins-Hutten: Alright, we leave those returns, we actually leave it compounding in the actual investment itself, it stays tax-free within the self-directed IRA environment, and you've got yourself a little income engine. It can grow, get equity-like growth until you need it, then we turn on… turn the spigot the other way, meaning we move it from monthly compounding to actually taking the cash flow off of it.
Whitney Elkins-Hutten: And that can be a really powerful strategy to use your IRA for.
Whitney Elkins-Hutten: Things to put in there, debt funds, promissory notes, other income-focused strategies, you know, say, like, dividend-producing stocks.
Whitney Elkins-Hutten: The most important thing is the self-directed IRA is shielding the high-income strategies from ordinary income tax drag.
Whitney Elkins-Hutten: Now, just because there are things you should use your IRA for, there's also things you should not use it for. Now, this is not, in combination with everything that interest is telling you about what you can't invest in. This is, that… those are the rules. What I'm telling you is more strategy. Okay, so if you have capital that you have to have access to.
Whitney Elkins-Hutten: You know, you know, think about, like, that, you know, do you want to tie that up in your IRA? If it's a short-term investment, that you're making, try not to tie it up in your IRA. Anything requiring flexibility or liquidity, probably not a good idea to put it in your IRA. If timing matters at all, it probably does not belong in your IRA.
Whitney Elkins-Hutten: And this is a big mistake, is that I see a lot of investors try to shove as much as they can into their IRAs.
Whitney Elkins-Hutten: But they ignore, because… and rightfully so, because the IRAs are tax-managed, but they ignore the timing.
Whitney Elkins-Hutten: That they need to get access to that money. So make sure that you're partnering with your financial advisor and creating a balanced approach there.
Whitney Elkins-Hutten: Alright, so we already talked about it. To sum it all up, what we would see in this market, you know, liquidity is actually one of the hidden risks, okay? Expect exits to be less predictable, income timing matters, and if all your IRA is equity, you're going to be caught waiting in an illiquid environment and hoping that those deals exit before you actually need the funds.
Whitney Elkins-Hutten: Now, real quick, I want to give everybody a framework.
Whitney Elkins-Hutten: you know, kind of, like, how to underwrite debt and equity. You know, we've been talking pretty theoretical.
Whitney Elkins-Hutten: And, really, you can take a screenshot of this. Really what we're trying… oops, sorry. What we're trying to do is, like, what actually belongs in the IRA? So, first, you have to understand what your fit is, like.
Whitney Elkins-Hutten: How do you want to use those funds?
Whitney Elkins-Hutten: Okay, then you have to come up with a framework on executing and underwriting, alright? Sorry, here's the screen. Okay, well, sorry, we have to determine our fit. Do we need debt or equity? Okay, where do we want to be in our risk in terms of the capital stack?
Whitney Elkins-Hutten: Okay, then we're gonna figure out how we're gonna execute all those questions that I gave you, to think, to add to your underwriting, whether it's debt or equity, and then you have to think about where you want that money. Do you want the money invested in the IRA?
Whitney Elkins-Hutten: Utilizing those tax advantages, or do you want to have it outside the IRA in a taxable account?
Whitney Elkins-Hutten: Alright, so, again, you could place debt or equity inside of your IRA. It's entirely up to you. But, you know, think in terms of, like, again, all these different things that we would underwrite with different, asset strategies, you know, be it a real estate debt fund, promissory note, or even hack, like, a multifamily equity deal.
Whitney Elkins-Hutten: You know, take a look at whether you're… what your goals are. Do you need the income? Are you okay with more opportunistic income? Are you using, you know, the asset for growth and diversification?
Whitney Elkins-Hutten: What are your liquidity? When do you need that money? Okay? What is your, return profile? Okay? Also, where, what is the asset at best fit for, for the, you know, your particular, time of life?
Whitney Elkins-Hutten: All right. All right, so let's open this up for, Q&A. You know, just kind of a recap of what we talked about today is, you know, what does debt and equity serve?
Whitney Elkins-Hutten: Why misallocation actually can create some stress and illiquidity and poor outcomes, and then more importantly, how to think through that fit, stack, and execute in location.
Whitney Elkins-Hutten: Awesome.
Rachel Stolrow: Awesome.
Whitney Elkins-Hutten: Yeah, I was waiting for you, yeah. Sorry for the one slide that was… that should have been at the beginning, that would have tied everything together. We got everything tied together there at the end, but thank you so much, Rachel.
Rachel Stolrow: Awesome, thank you very much. Yeah, so we will just scroll on through. I think there's a couple additional slides here. Perfect. So, wrapping up…
Rachel Stolrow: how to get started, with investing in… with your IRA. So, 3 easy steps. I'm a little biased, because obviously I do this every single day, but we are here to hold your hand. So, number 1, you would establish an interest IRA.
Rachel Stolrow: Number two, you would fund your account through a transfer, rollover, or a contribution. And then number three, you would direct interest to purchase your chosen investment.
Rachel Stolrow: So, what's next here at the Entrust Group? So, we'll be sending you a replay and any additional resources that go along with this video, so that you can go back, listen to it, rewatch it. Be sure to register for our June webinar, which is Gold and Silver Outlook, Risk or Opportunity.
Rachel Stolrow: for your IRA investments.
Rachel Stolrow: As always, a really great place to find more information is on our website at our Learning Center. Our marketing team does a wonderful job making sure you have so many resources, documents, webinars, etc, so please be sure to look there, and then follow us on any of our social media channels.
Rachel Stolrow: And then now, opening it up, like Whitney said, to our Q&A, so please type away, ask any questions. If we're able to answer them, we will absolutely do that, and we'll be reading them off in just a moment here.
Whitney Elkins-Hutten: R.
Whitney Elkins-Hutten: Oh, yeah, yeah, I can go ahead and start. I can see the questions.
Rachel Stolrow: Perfect. Okay, yep, I see it now, too. You go ahead.
Whitney Elkins-Hutten: Yeah, so you mentioned… the question is, you mentioned short-term in the investment debt. What constitutes short-term in this space, 5, 10, plus years?
Whitney Elkins-Hutten: Yeah, so that's really great, a great question, because I think a lot of people might have been seeing in the news that private credit or private debt is struggling. You know, Blackstone has had some issues. BlackRock, Blue Owl have had issues in the private credit space.
Whitney Elkins-Hutten: Where we… so, let's think about the two biggest, when you're underwriting debt, you have to understand,
Whitney Elkins-Hutten: How is the asset valued? Is it, can it be valued by a third party, like a broker's price opinion, or an appraisal, or is it some sort of, like, multiple on value that we don't know if that multiple's gonna hold at a future date?
Whitney Elkins-Hutten: Also, you have to think about the term of it. Like, is the debt being held for, say, 6 to 9 months, or is it being held for 5, 7, 10 years? Okay, the longer the debt, and the more unclear the valuation, the riskier that debt will be.
Whitney Elkins-Hutten: I'm actually talking about the type of debt of adding to your portfolio is kind of… you might have seen, and this is what we have, is fix and flip debt. And so, we have a… we actually have our own lending arm, where we raise capital, our lending arm deploys it into fixing up
Whitney Elkins-Hutten: 3-bedroom, 1-bath homes, 3-bedroom, 2-bath homes. You know, these business plans are done in a very short time period. We can get a broker's price opinion of what the value of the home is today, also in, say, 6 months or 9 months.
Whitney Elkins-Hutten: Will the market move in that time period? Yes, but we're leaving ourselves
Whitney Elkins-Hutten: 35% to 40% cushion for that market to move. So these are debt instruments we can get in and out of readily. And long story short, that… those are the type of instruments that I encourage people to look at when they're building out this income engine machine, in their portfolio, whether you hold it in a taxable account or you build it out within your self-directed IRA, which, by the way, that's where I
Whitney Elkins-Hutten: I love holding it, because you avoid the taxes, or at least defer them.
Whitney Elkins-Hutten: So, but what happens is, a lot of times investors are like, you know, I don't really like 6%, or 8%, or even 10%. I found a debt deal that gets me 12%, 14%, 18%.
Whitney Elkins-Hutten: You have to think about that's probably a more opportunistic position, where you're concentrated in one asset and a much longer business plan that's valued on some sort of multiple exit that you don't have visibility into. So.
Whitney Elkins-Hutten: Debt does not mean it's risk-free, just risk shows up in a different…
Whitney Elkins-Hutten: way. And so, I personally love these short-term instruments, as part of my income engine.
Rachel Stolrow: Awesome, thank you so much for that. I think that is the only question that I see here. Are there any other questions?
Rachel Stolrow: That we can answer for you?
Whitney Elkins-Hutten: Oh, you're welcome! Thank you so much for asking.
Rachel Stolrow: All right, awesome. I don't see any additional questions. I'll give it another, let's call it 30 seconds, see if anybody else adds anything in.
Whitney Elkins-Hutten: Yeah.
Rachel Stolrow: be happy to get those answered. I do know, I think on the next slide is our contact information again, so, either yours, Whitney, or, yep, both of ours on there, so please do feel free to reach out if you wanted a more one-on-one conversation with myself or with Whitney.
Rachel Stolrow: I know she's really wonderful, always happy to answer any questions.
Whitney Elkins-Hutten: There was a question that came in about what about purchasing other businesses? You know, I'd need a little bit more
Whitney Elkins-Hutten: context, about that. You know, I think purchasing businesses, for cash flow is a… you know, one, you have to understand, do you have the…
Whitney Elkins-Hutten: you know, the wherewithal to buy a business, right? Not everybody, like, should buy a business. What are you doing at… oh, thank you, laundromats, that was a clarification. You know, for cash flow, like, I think those can be great investments. you know, do laundromats grow with equity? Maybe a little bit. But that, you know, that… that's a… you know, you're buying a stream of cash
Whitney Elkins-Hutten: cash flow there, and holding it long-term, I would imagine your growth strategy there is going to be how many laundromats can you, like, add to your portfolio, and then maybe sell your entire portfolio. But that, I mean, could you do that? Rachel, could you put that in your self-directed IRA?
Rachel Stolrow: Could you do it? Yes. Would you want to consult with a tax advisor? Because could you possibly also be… have, you know, getting yourself into unrelated business income tax?
Rachel Stolrow: Also, yes, again, it's something we always recommend clients doing, especially if they're unfamiliar in this space. Always have to talk with a tax advisor, but short answer is yes, you can put it in an IRA.
Whitney Elkins-Hutten: Another question came in, what is a… During debt strategy?
Whitney Elkins-Hutten: If you could clarify that question, that would be great, I'd be happy to answer it.
Whitney Elkins-Hutten: And then another… oh, I think that one went away.
Rachel Stolrow: might have disappeared there. I think it was asking about pulling equity out of your IRA, so there's an…
Rachel Stolrow: please clarify the question if I'm not answering it, the way that you're asking, but you can pull money out of your IRA like anything else. It would be through a distribution. So you can take a distribution, you do need to be of retirement age 59 and a half.
Rachel Stolrow: In order to not have any penalties on top of potential taxes, depending on if you have a Roth or traditional plan. This is an IRA, so can you move money to another qualified plan? Maybe you were paid out on your investment in an alternative, you want to move money back and forth.
Rachel Stolrow: between retirement plans, you can do that as well. So there's several
Rachel Stolrow: Ways to move money, or again, you can take a distribution from your plan.
Whitney Elkins-Hutten: Oh, thank you so much for rephrasing your question. What is a strong debt strategy?
Whitney Elkins-Hutten: So, I…
Whitney Elkins-Hutten: I think that there's a lot of color there. Like, again, debt is, this is, like, a webinar in and of itself, but if we're thinking about building out, like, I call it Tier 2 income, that income
Whitney Elkins-Hutten: generating sleeve, predictable income that comes in like clockwork. It, it is what stabilizes our portfolio while our equity assets are cycling.
Whitney Elkins-Hutten: I like…
Whitney Elkins-Hutten: you know, fix and flip debt for that very reason, especially in funds that are unlevered, take on no leverage. And I'm talking about funds that have hundreds of loans in them, like, you know, 200, 300, 400 loans, that are very well underwritten and a very simple strategy. The reason why I like fix and flip funds is because, one, you know, the duration of the loan is really short, right?
Whitney Elkins-Hutten: when it comes to adding, you know, one of our biggest risks with taking on debt or using debt is the timeline, right? If we're using a short-term debt that, you know, and we get out of it really quick, we're the, like.
Whitney Elkins-Hutten: that time is on our side. But when we start extending our timeline, that's whenever the markets can move on us. Remember, as an investor, even as an operator, we cannot control the market.
Whitney Elkins-Hutten: We'd like to be able to think that we can predict everything that happens in the market, but we simply can't. And so, I like that bare-bones, predictable, you know, boring debt fund investment, and I look to kind of replace… for me personally, I start off, you know, creating, you know, financial security with my income there, that I generate from it. Remember, I don't have to take
Whitney Elkins-Hutten: take the income, I can always allow it to compound.
Whitney Elkins-Hutten: Whether in the investment itself, or take the cash flow and just reinvest back into the deal, right? Either way is compounding for me.
Whitney Elkins-Hutten: And then I can, you know, once I generally… for me, personally, once I hit financial security, then I might take on some riskier positions.
Whitney Elkins-Hutten: to kind of get that extra income bump. But what I… what keeps you financially free is the income your assets generate, the stable income they generate.
Whitney Elkins-Hutten: And I will speak for myself.
Whitney Elkins-Hutten: You know, having been a very heavy multifamily investor for the past 12 years, you know, I too, at one point in time, relied on all my rentals, single-family rentals, multifamily rentals, to provide everything for me. Capital preservation, cash flow, equity growth, tax benefits.
Whitney Elkins-Hutten: That works until you hit a challenging market, and then that's when you realize, Oh.
Whitney Elkins-Hutten: I need diversification across the risk layers of investing, that capital stack, and so that's where I built out a pure income sleeve. Is it the most tax optimized?
Whitney Elkins-Hutten: No, but I'll tell you, I, you know, my lifestyle's funded, and that's what I wish for everybody to have, for sure.
Rachel Stolrow: Awesome, thank you. It looks like the question was clarified, so can you withdraw your own after-tax contributions into an IRA without any penalty? So this would… after-tax contributions would be going into a Roth plan.
Rachel Stolrow: And there still are penalties for early withdrawals, which would be before 59 and a half.
Rachel Stolrow: Again, you can move money back and forth between plans before that time frame, but if you're talking about bringing that money back into your personal bank account, you would have to wait till you're 59 and a half.
Whitney Elkins-Hutten: So, I think I've heard many people say that you can withdraw your basis.
Whitney Elkins-Hutten: Like, if you… your after-tax contribution, or your basis, like, so I'm… I'm learning too here, Rachel. Are you saying that that's not true?
Rachel Stolrow: Alright, for a Roth IRA, the… the distribution still applies. You do have to be 59 and a half.
Whitney Elkins-Hutten: Gotcha.
Rachel Stolrow: Any other questions?
Rachel Stolrow: Alrighty, well, I think that's it. Whitney, again, thank you so much. The webinar will be sent to everybody, via recording, and then again, please do feel free to reach out anytime with questions. We are both happy to help.
Whitney Elkins-Hutten: Awesome.
Rachel Stolrow: Alright.
Rachel Stolrow: Thanks! Of course, bye.