Self-Directed Investing: The Journey

Looking back to 2005, it’s hard to believe that a college internship expo would be one of the most pivotal moments in my career.  Like every other young and eager college student at the event, I stood in long lines at all the “brand” name firms just to hand over a resume, while ignoring the scores of small businesses scattered throughout the room.  I don’t know if it was curiosity or empathy that caused me to walk up to the lineless booth with a simple, pull up banner that read “Buy Real Estate in Your IRA,” but I’m glad I did.  I was fortunate to have a handful of interviews after the expo, but it was the company with the simple pull up banner that stood out from the rest. 

I interviewed for the internship directly with the CEO, Glen Mather, who started the company in 2003.  The company had only three employees – a far cry from my Fortune 500 ambitions.  Its purpose was to help people use their retirement funds to buy real estate and other non-public investments, which was an area I knew absolutely nothing about.  In fact, prior to the interview, I called my dad, who has always been my go-to for advice in my life, for some insight into the company. I vividly remember him saying, “I asked my broker about buying real estate in my IRA and he said it wasn’t allowed.”  I didn’t realize just how important my father’s words were at the time until I repeated them to Glen during my interview.  He didn’t bat an eye, as he said, “I hear that all the time.” Glen passionately shared his personal story of trying to buy real estate within his own IRA and why he started the company to help others, like my father, who wanted more than just stocks and bonds. I knew this was the perfect opportunity for me. 

That opportunity as an intern has turned into an amazing career.  A career that has given me the ability to spread the message of self-directed investing to people, like my father, who simply do not know that a retirement plan can invest beyond Wall Street.  A career where I could learn vicariously through clients, about all the creative investment strategies and opportunities that exist.

For those that may not be familiar with what a self-directed IRA is (a moniker the industry uses to refer to investing your IRA beyond the stock market), I will provide some context.  A self-directed IRA works just like any other IRA with two major caveats.  First, all investment discretion is given to the account owner, and second, the investments held within the account are typically non-public investments, such as real estate, private loans, or private equity.  What makes self-directed IRAs even more attractive is the fact that the IRA maintains its tax-deferred or tax-free status even when invested beyond stocks and bonds.  One thing to keep in mind though with a self-directed IRA,  is that all investments must be made at an arms-length, meaning the IRA must transact with unrelated parties (See IRC Section 4975) and the account is prohibited from investing in collectibles or life insurance (See IRC Section 408).  Traditional banks and brokerages don’t offer truly self-directed accounts, similar to the way that McDonalds doesn’t serve tacos.  It’s not because they can’t, it’s simply because it’s not part of their business model.  This is why self-directed IRA custodians like NuView exist – to give investors more investment choices and control.

To provide insight into the evolution of self-directed investing from where it was when I started to where it is now, I think it will be most helpful to break it down into four periods I call The Boom (2005 – 2008), The Bust (2008-2010), The Opportunities (2011-2019) and The Unknown (2020). 

The Boom (2005-2008)

As a newbie to the investing world, I remember being fascinated by all the different ways there are to make money, especially in real estate.  My only personal experience at the time was helping my dad clean out properties after tenants moved out – which as a kid, was a very unpleasant experience, to say the least. As an intern, I was like a sponge trying to soak up as much as I could to help me better understand self-directed IRAs through the lens of our clients, but also personally as I was eager to start making my own money investing in real estate.  I attended all the local real estate investor association meetings and met some incredible people – all who had a tremendous amount of experience in real estate investing. 

During this time, the message of self-direction was growing, and what seemed unknown in 2005 was becoming something that more people were at least starting to hear about.  This was largely in part to the reach of the internet age, coupled with many of the real estate gurus helping their students understand the part self-directed IRAs should play in their wealth-building strategies.  This increased exposure coupled with a mainstream interest in real estate propelled the self-directed industry forward as investors continued to seek new capital to gain exposure to the real estate market.

One of the individuals that was a large promoter of self-directed IRAs and someone I learned a lot of my own personal investment strategies from was Augie Byllott.  Augie was a banker turned real estate mentor and coach who approached investments like a true business and encouraged those he educated to do the same.  Augie was one of the first clients I met when I joined NuView and he helped me understand some of the creative investments that he and his clients were doing through their self-directed accounts.  He was a big promoter of transactional engineering – a way to move the parts of the deal around until they work for all parties.  This has served me very well in many of my personal investments.  Augie and his wife, Audrey, established their accounts with NuView and have seen their old 401k plans grow to well over $1 million!

The Bust (2008-2010)

As the saying goes, all bubbles eventually burst and this one was no different.  While the great recession officially started in December 2007, the real shock and awe factor was felt in 2008.  The credit crunch eliminated companies like Lehman Brothers, Bear Stearns, and Washington Mutual, and in September of 2009, the stock market saw its worst point drop in history (at that time) of 750+ points.  Real estate inventory was rising, and prices were dropping– in some cases up to 50% or more. 

Despite the quick drop in real estate prices – many of our clients holding rental real estate were not affected nearly as badly as their counterparts in the stock market.  Many owned the real estate in their IRA free and clear, so they were not dependent on rent to pay their mortgage.  Furthermore, the increase in foreclosures only served to increase the rental demand.  Some clients sought a safe haven in precious metals during this uncertain time. Unlike stocks, which are typically held for their appreciable value, private loans and real estate tend to be income-producing, which can fare much better through correctional periods. 

Despite the doom and gloom over the investment markets in 2008-2010, NuView continued to grow rapidly in both net accounts and total assets under custody, proving that self-directed investors were much more flexible and able to pivot to asset classes that could weather the storm. 

The Opportunity (2010 – 2019)

As with any economic downturn, investment opportunities began to present themselves, and shortly after the 2008 crash, our clients began finding opportunities.  Some investments became attractive because of depressed pricing while new asset class opportunities began to take shape, and as a result, self-directed investing really accelerated.   We saw real estate begin to generate cash flow, tax liens pay premium interest, distressed mortgage funds clearing assets off banks’ balance sheets, and REO properties and short sales becoming common types of purchases.

It was also during this time that I met another impactful client, Greg Bond, who had an amazing story of real estate.  He invested passively in real estate outside his IRA while running a map store (for those under 30, you actually had to use a real map before smartphones were invented!) in the 90s and early 2000s.  I found it interesting that he stopped buying real estate in 2003 because the basic fundamental investment principles were no longer applicable during the boom.  Once he closed his map business, he decided to get back into real estate, this time full-time – now that he felt the basic investment fundamentals were implementable.  Greg started his self-directed account in 2009 with $58k and has grown it to over $1.5 million.  His wife, Jane, has seen her $27k account in 2009 grow to over $1 million today.  They did this through a disciplined approach of finding discounted assets and either cash flowing them or flipping them to maximize return.  

Just as our clients were taking advantage of market opportunities, so was NuView.  In 2012, we launched our institutional platform to provide financial advisors and investment issuers and syndicators a custodial platform for more Wall Street-like packaged product that was created for retail investors.  The Institutional division has seen exponential growth in the last eight years as more and more passive investors look to gain exposure to the private equity markets through larger group investments.

The Unknown (2020)

As the world currently fights off the Covid-19 pandemic, many investors are wondering where to go from here.  It’s a difficult question to answer as we have never experienced a pandemic related economic shut-down that landed over 20 million people on unemployment in just 30 days.  Financial markets and real estate markets alike are all trying to digest the information to see what the ultimate economic impact may be.  We are seeing many of our clients stay the course as they did in 2008.  They have investments that they believe can withstand a potential correction.  We have other clients that are accumulating cash and even selling in preparation of buying opportunities in the future.  Regardless of where you stand – self-directing your retirement accounts is the only way to stay nimble during economic uncertainty.

Stay safe, get educated, and remember, opportunities are available in good and bad economic times – you just need to know where to look!

Happy Investing!

Jason DeBono is the VP and COO of NuView Trust Company, a Self-Directed Custodian with $1.5 billion in assets under custody.