Bernard Reisz – What You Don’t See is What You Get in Financial & Tax Services

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Multifamily Commercial Real Estate Show - Bernard Reisz

Bernard Reisz – What You Don’t See is What You Get in Financial & Tax Services

Our guest for today is Bernard Reisz, Founder and Chief Executive Officer of, which supports investors on investments through retirement accounts. Bernard covers a lot of areas in this real estate space, which we don’t usually talk about. He will demystify qualified retirement plans, share the secrets of different tax services, and give us tips to leverage all these in real estate investing. Let’s tune in now and learn more about financial and tax services in real estate!

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Bernard Reisz 0:00
If you don’t think you’re going to do much better on real estate, then don’t don’t do real estate. Right? Yeah. So you obviously you have come to the recognition that the real estate deals are a better fit for you. That tax factor is not a decisive it is not a determining factor at all in pulling the trigger on using retirement accounts.

Abel Pacheco 0:29
Hello, hello. Welcome to the Five Talents Podcast. I’m your host Abel Pacheco, I interview the top commercial real estate investors and industry experts so you can learn from their experiences. So if you’re an investor, a high w-2 earner or real estate or tech sales professional that wants to invest in real estate without having to manage properties or leave your day job, then this podcast is for you. Or if you’re already investing in real estate, but you’re doing it part time and you want to become a full time, multifamily or full time commercial real estate investor. This podcast is for you too. You’re going to learn a ton. You will learn from real life multifamily investors and other professionals in the industry. They’re gonna share their blueprints for success. And I’m super excited that you’re here. So I hope you enjoy the show.

Hello, hello, this is Abel Pacheco, your host for the five talents podcast. We have one of those guests, one of those experts, one of those individuals that you are just going to learn a lot from I’m very excited to have him on our show because we haven’t really dove into a lot of this expertise around. If you’ve heard the word self directed IRA , ubit taxes solo 401k, QRPS all of this stuff and you’re like, I want to leverage something to invest in my multifamily commercial real estate syndications. Bernard Reisz is going to be an amazing guest. So again, my name is Abel Pacheco, welcome to the five talents podcast. Bernard, thank you so much for joining.

Bernard Reisz 2:08
Abel, thank you so much for having me, I am pumped about this discussion. And let’s get rocking and rolling.

Abel Pacheco 2:14
Thank you very much, man, it’s gonna be an awesome show. So if you don’t have a pen and a piece of paper or get one if you’re running or jogging or something, it’s okay. When you get to the house, you can rewind, but this is going to be an awesome one. So Bernard, I know that you, you know really take an active approach to like Empower investors, you build rock, solid financial foundations. And you’re really added to kind of break the cycle of dependence fostered by financial sales ops. So, you know, I was referred to you by a really, you know, just one of those authority kind of figures in the social arena, Mr. Yona Weiss, and he said, you know, many multitude of great things about you, but, you know, kind of have that that mindset of man, you’re an expert in this space, just honest, very unbiased approach to how you advise clients. So giving really good background in the tax, the accounting, due diligence, and really provide like the consulting advisory services as well. You’ve got a number of accreditations behind you. So I don’t want to pretend with all these letters VBAT. Well, I know CPA but cpcu ARM, ACI insurance and Security license. Let me turn it over to you. Why don’t you give us a proper background? Tell us who you are and what you do. And we’ll just jump into a great conversation. I’m excited, Bernard.

Bernard Reisz 3:33
Okay. So the first thing I say all those titles are almost meaningless. I’d be the first one to say that, that they really in and of themselves don’t say all that much. But I’ll give you the context. How did I get to where I am? What drives me? And what is it kind of different. So most people in the financial services space, and a lot of different professions kind of come into the space, you get your degree, the basic stuff you need to break into the industry, you get placed in your cubicle, you do the thing that you do, you do it for a couple of years, you move up in the ranks, maybe if you’re somewhat more entrepreneurial, or you see hey, you’re not going to make partner in the CPA firm or the consulting firm. Then you go out, you hang your own shingle, and you keep doing what you’ve been doing for the last couple of years. But that was not for me. I’m always trying to learn, read, explore, in depth and in breath. And that’s what those designations are about. So I went to test myself and anything that I touched. I’m really going to master this. And one of the ways is prayed out practically, is that when I first got my CPA license, and I came out of school, I got a job offer at the holy grail for accountants and consultants at PWC. I’m familiar PwC

Abel Pacheco 4:55
PricewaterhouseCoopers PwC right. All right. Yeah, that’s it. I know. We knows a little guys

Bernard Reisz 5:02
That’s like everybody’s dream. Yeah, is to be at PWC. If you have an accounting degree and you write and so I came out, I actually got my CPA license, I took the exams in three months. And I was like a newly minted CPA. And I initially accepted the offer. Okay, from PWC. And in two weeks, for I was about to see how supposed to start. I realized, you know what, I’m not gonna be able to hack this, they’re gonna stick me in a cubicle, it’s a real, it’s gonna stick me in a cubicle. And they’re gonna say, here’s what you do. And if you’re gonna have questions, you’re gonna want to suggest another way to do things or a different way to look at things. There is going to say, Hey, keep to yourself, Man, you’re new here. You just came in, you know, don’t open your mouth for three years. You know, you can surface for a year and three years, and then you can start maybe asking questions and having suggestions. So I said, No, thank you. These guys didn’t know what hit them. Because this is like, this is the first time I think anybody like a new graduate and is calling them up and saying now PWC? No, thanks. So that’s what it’s really all about. So titles, designations, even CPA, if you’re not going to be somebody that really learns the title itself. In the designation certification doesn’t mean that much. It’s more about what you are as a person. So that’s what to answer your question. Letters and alphabet soup are important, but they have to come together with a lifelong commitment to learning.

Abel Pacheco 6:30
Yeah, I 100% agree. You know, I don’t everything that you just mentioned, regardless of what we’re doing, industry, entrepreneurial, you know, your family, you know, relationships, man, if you’re not feeding into like yourself, investing in education and trying to figure out how to get better, you know, we stay stagnant. And then we don’t know, you know, you just miss out on all this amazing, you know, resources, knowledge, education. And I had a mentor that says something along these lines, he, and this is Marcus Ives. And he goes, knowledge we know is power, but applied knowledge will change your life, right? And so I’m like, okay, cool that that’s the difference is if you continue learning, you get the accreditation, yeah. But you got to continue on the path and then want it to do for yourself, right, and not follow these rules. Well, that’s awesome, man. That’s a great start. So tell me more, man, tell me how it got started for you and what you’re doing now, and then we’ll get on it.

Unknown Speaker 7:25
So one of the things I saw is actually worked while I was in school. So I got a lot of awesome exposure to a lot of great stuff. So I worked at a management consulting firm. And so we were doing due diligence, work, audit work. And then even actually, on my own, I got to do some incredible high level tax consulting, to middle market businesses, their business that are running, you know, $250 million per year in annual revenue. But it all came from kind of a, they got to know me, and they’re like, Okay, Bernard, you’re a smart guy. They entrusted me with these tasks. And I got to see one of the things that I saw, working with these closely held companies, but that are large, private enterprises, is that the business and business owner were always being pitched these tax and financial products, and they did not have the wherewithal to analyze it. And even the accountants for these large companies, they really just weren’t familiar with all these things. And every day, there’s some other financial salesperson coming in saying do this, do that. A big one that they kept running into is captive insurance, which is why I ended up with cpcu, ARM, ACI. Those are all risk management and insurance designations. I was like, Alright, if I’m going to assess this, you got to know the tax side. And you have to know the insurance side as well, because it’s at the nexus of those two. But more importantly, I saw that people are always getting pitched products, rather than be a solution that empowers them. So the first thing that I did was I said, Alright, we’re going to set up retirement accounts for people that empower them to do what they want to do. We have to break that association between retirement accounts and financial sales industry. I like to call them sometimes naked retirement accounts. Because retirement accounts are created by the tax code, very complex area of tax code, once you look at qualified retirement plans, and IRAs, a lot of complexity there. But the tax code says very little about the investing side and the asset classes. Somebody else decided to dress up these retirement accounts and layer on these layers of clothing. Imagine somebody dressed for like the Arctic weather, that’s what we’re getting. We’re getting retirement accounts that are bundled up and wearing like 13 layers of clothing. And we got to create notes. If you want a naked retirement account, we’re just going to give you to the way Congress envisioned it and not bundled with any of these other layers. And you can invest in what you want. So that’s the kind of a What was my, I’d say anchor point for services that we we deliver? And to what extent are you familiar with the self directed space?

Abel Pacheco 10:10
So this is going to be a great conversation one because ton of investors asked me, when they know they want to invest in real estate, they know they want to get in commercial multifamily. They’re like, Hey, I’d like to invest with you. And when I start taking them down the path of what I did, when he asked me, What do I know, I invested first, passively. And I invested as with a self directed IRA. So I kind of got lucky here that, you know, my active operator, the guy I was investing with, he was like, Hey, do you know some people invest with their retirement accounts, and he just kind of happened to mention it, and I was like, they do. I didn’t know I could do that. I want it. So anyways, when I found it, I took my old 401k from my company that I left, so I was there for a number of years, had some 401k, I left, I directed that to a self directed IRA. And then that’s what I invested like my first, you know, 50k into my first passive investment, you know, 120 doors and, and about as much as I know about every heart, so you’re gonna share some good light here, about as much as I know, as I looked at it, and my money was not growing at a rate of 16%. Compounding, which I’m always looking at the rule of 72. The rule of 72 Does your money double in six years without you doing anything without you feeding it or whatever. And so I looked at my, my 401k I go, man, that thing has not doubled without me feeding it, even with me feeding it. I don’t know, if we really doubles, I look at the math and, and anyways, I go, Well, that’s I’m going to put it in something that does, and that’s why I invested in our first, you know, multifamily deal. But then all these terms come into play. You bet taxes, someone asked me, and I go, Well, I don’t know. It’s a unrelated business or something other taxes. And they asked me, Well, how much is that? How much is it gonna be? And I, I go, I don’t know it did to me, it was like, it didn’t matter. Because I knew no matter what tax they put on it, I was still going to be making more with commercial, I didn’t want that to slow my mindset down. It would have been a much better approach, though how to had an expert like you kind of explaining it. So that’s what I know. I would love for you to share some light with our listeners, because we have a lot of passive investors and people kind of in this world that are trying to figure this stuff out.

Bernard Reisz 12:30
Yeah. And so that’s awesome question and the ubit new the fi stuff is getting a lot of attention these days. And here’s the thing that I learned in the self directed space, even in the self directed space, you can’t get a truly naked retirement account, truly naked provider, which is what you want, you want somebody that has no, that’s kind of given you starting from the ground up, and tailoring the clothes to you know, giving you too many layers that you don’t need. But giving you exactly what you do need. And a way that it’s tailored to you, like this clothing metaphor is actually pretty cool, right? So you can end up with something that doesn’t fit you, you don’t want that, or you end up with too many layers or too few layers. So here’s the deal. You are spot on in the sense that for those that know they want to do commercial real estate with their retirement accounts, the tax is just not a factor in determining and selecting to do it. Now, there’s a secondary question, which is alright, what’s the best way to set it up? Yeah. And many people are getting scared away for like, No, I’m not using retirement accounts. Because I heard about this UEFI thing. Yes, mistake, because you’re still going to do much better. And if you don’t think you’re going to do much better on real estate, then don’t don’t do real estate. Right. Yeah. So you obviously you have come to the recognition that the real estate deals are a better fit for you. That tax factor is not a decisive, it is not a determining factor at all, in pulling the trigger on using retirement accounts. Mm hmm. That being said, there are different ways to mitigate and navigate the tax and to know what’s the smartest way to set things up.

Abel Pacheco 14:29
Yeah, I love it. I love it. I heard so through this process. You know, I did that once. I did it twice. My wife did a third time. And this is you know, a couple of years ago, and now that I’m in the world, I start to learn more and someone goes Hey, did you know you can avoid human taxes altogether by doing a you know, whatever the term was, it was a self Q RP and a solo 401k. And so we mean Bernard were talking earlier. I go I haven’t solo 401k I haven’t really exercised. I haven’t used it, you know, but I’m like I set one up. I guess I have it so anyways, yes, I would love you to shed some light on different, you know, different approaches different ways, the best ways to do this now that now that we have a little more education about us, so thank you.

Unknown Speaker 15:09
Yeah, let’s do it. And the best way is gonna vary from individual to individual. Right. So just like the stock market, we’re saying, hey, these folks that are kind of selling the same thing to everybody or not doing anybody justice, when you get a retirement account, that also has got to be tailored to you. So there are there is a neat carve out, you know, being foretold, but the carve out, let’s talk about you, the FBI have a role and mistakes that people are making. So some people are being scared into cashing out their retirement accounts. Right. So they’re taking a taxable distribution, paying taxes, plus penalties, and investing in their own name. Usually a mistake, Mark gonna say, Never say, never usually a mistake. Because firstly, the ubit tax, as we’ll discuss is not nearly as bad as people think it is, the bite that it takes out of your returns is not nearly what you think it would be. And when you after you pay income tax, and 10% penalty, you’re left with so much less power to invest, you know, so you’re getting into smaller deals, and over time, you realize we start with less, it’s a lot about the accumulation, the compounding over time. So if you’re going to lose half your money by doing a taxable withdrawal, the cost of that over time is going to be huge. It’s just the compounding. Yeah, hard to measure. And some of these people will think also, oh, I want to get the depreciation benefits. I don’t get the personal tax benefits. If I do it inside my retirement account. Yeah. Now that’s a factor. But for a lot of people, a lot of investors not really a factor. Because the real estate losses, you know, depends to what extent are you going to get to lose them, to use them to utilize them, because some investors are subject to the passive activity loss limitations. And some Are they familiar with that?

Abel Pacheco 16:56
I am. So maybe this is a good one to explain to, to even the passive investors or me, in my simple mind, explain where so should I pull money out of my 401k? Should I pull money out of my self directed IRAs and get taxed, and invest it in cash in a deal? And, you know, generally speaking, Bernard says, No, it’s better to keep it in there. But some people will, what about the losses when we do when we buy the property, we want accelerated depreciation on the property, we would do a cost segregation study, they pull it all together, they accelerate the depreciation. My example I put in 100k Cash one year, Bernard, and I get to write off like 69 grand in losses. So if I’m an investor cash, I’m like, hey, I want that. However, the next thing that Bernard mentioned is, man, if you’re not a real estate professional, you may not have the same tax advantages, as somebody who’s not, the material participation may not allow you to qualify some of the active or passive losses. So hopefully, that’s summed up a little bit of what you said, keep going.

Unknown Speaker 18:06
Because yeah, you put there’s a so much that has to be unpacked there. So I’m gonna try to distill it to a nutshell, real estate is tax efficient, whether you’re a passive active investor, whether you’re a real estate professional, or not a real professional, it is tax efficient. However, if you are not materially participating in the deal, or you are not a real estate professional, the losses are going to end up being suspended passive losses. So you’re going to accumulate losses and carry them forward, it’s very likely you’re not going to have benefits from the losses. So for somebody like that, sometimes people say, Oh, I cashed out my retirement account, I took the 50%, hit here, cut. And now if it wasn’t less to invest, and you’re not even getting the Envision tax benefits, so really, it’s better for the syndicator and the investor, to keep the money in the retirement account. Because you need more money for the deal to raise for the deal as a syndicator. Right, you need a bigger raise you need you don’t want the IRS to take 50% of the money. And the investor is going to do better over time, the more money they have in the deals. And if you take a 50% Haircut up front, that’s going to be a huge hit. So the only time I can see that taken a distribution from the retirement account make sense? If we’ve got somebody that say decided I’ve got enough of my nine to five and quitting cold turkey, cold turkey, starting tomorrow, I am full time real estate, I am going to qualify real estate professional for tax status, and I am going to be doing my own deals materially participating. Right? Then maybe it makes sense to pull the money out of the retirement account. Take the hit because you need the money. To start your enterprise, right, it’s not just the return on the investment, not just the ROI, you’re starting a business. And the ROI of that can be 1000s of percentage points, right? Because you’re launching an enterprise. But as somebody is not doing that, they’re going to be passively investing. Keep your money in the retirement account, in 99, out of 100 scenarios, you’re gonna come out way ahead doing that sound, right?

Abel Pacheco 20:26
That sounds great. Yeah, you’ve described me to a tee so far. But this is really good, because, you know, before I went to become an active investor, so you know, maybe two two mindsets are listening right now. One of them is your w two, you’re, you know, high performing, you’re professional, you make a lot of money, you know, you’re making a couple 100 grand a year, you’re not going to leave your profession, I just want to stick my money somewhere that it’s going to work, passive all the way go your 401k you know, move that stuff over if you have the ability to keep it in those retirement plans. And then you don’t have to take the the haircut like Bernard saying, and you can earn, you know, earn while you’re learning. And you can do it 100% passively. So is a great way to tap it. That’s what I did my first three deals like we’re talking about, and that’s like 400 doors. So when I, I tell people, I’m an active investor today, and now 500 doors, we closed on another property. And we have another one in our contracts. I’m like, Okay, we’re about to be at 600. But actually, I’m at like, 900, 1000 doors, because I’m a passive investor and 400. Now that I’m raising capital from other investors, it’s easy for me to explain some of these things and how we did it, because, like, I did it myself. So if you’re a passive investor, listen, you know, rewind some of that stuff. If you’re an active investor, you’re like, Man, I gotta tap some of this to get to go active. Well, there’s a good exception to that rule. But yeah, for the most part, like you said, generally speaking, keep it there. Keep it moving. Let’s go, you know, avoid capital gains taxes when we sell, right? Because the cash investor has to pay those do now. Okay, so anyways, this is great, Bernard.

Hello. Hello, this is Abel Pacheco, your host for the five talents podcast. After listening to a few episodes, deep down, do you know that multifamily and commercial real estate investing is one of the best ways to create financial freedom? If you said yes to that question, and you are where I was a few years ago, then I’d absolutely love to connect with you. A few years ago, I started personally consuming a ton of real estate education. I traveled all over the country, as many real estate conferences and seminars that I could go to, I took 200 plus hours of real estate education, I spent 1000s of dollars along the way. And I did this because I knew the path to financial freedom for me and my family was through commercial real estate syndication. So if you’ve made a similar decision, I’d love to connect with you. And potentially in the future, I’d love to partner with you as well. Take a moment, go to And I’d love to set up a time to talk.

Bernard Reisz 23:17
So now let’s go back, what are the

Abel Pacheco 23:19
other? What else do we need to know? Right?

Bernard Reisz 23:20
So the other mistake that’s made is there are three mistakes that this ubit leads to. So one is people will cash out their retirement account. And we’ll see that’s usually that’s a mistake as we described, because they’re not going to get they’re gonna come out way behind. That’s gonna come even to sharper contrast once we describe how you but actually works. Second mistake, which maybe we have addressed already, as people say, No, I’m not cashing out. I don’t want to take the hit. But I’m not investing in real estate mistake. Again, real estate, it’s gonna do you if you that IRR is there? Yeah, the ubit is not the deterrent. It just not a factor in deciding and talking

Abel Pacheco 23:56
about is that like a percentage point two points, three points. Okay. Let’s

Bernard Reisz 24:00
put that in perspective. I want to talk about the third error. Okay. Okay. Mistake is that people will do. So we set up every type of retirement accounts. Now qualified retirement plans have a carve out for the type of you bet that you’ll encounter in real estate. Okay, so the qualified retirement plans are not a fit for everybody. But that’s another mistake that people are making is going to set up a qualified retirement plan. When it’s not, it’s not a fit for them. So and the cost the potential tax liability on that is huge. Again, nothing compared to the UBIT, nothing compared to that tax. So that’s why I keep coming back to you want, you want naked, and then close tailor the clothing for you and in the space. So self directed IRA providers tend not to talk about you but a new the FBI, and it’s very, they’re in the fine print. So if anybody ever asks they’ve done their cya and like, don’t you see there on page 27 of the agreement that you signed up and the fine print, get out your magnifying glass. It says there that you acknowledge warrant and represent that you are aware of and responsible for all you, but you do find ubti. Right. That’s how they handle it. Now, at the other end of the spectrum, the folks that are focused on promoting QRPs, right, so they put, you bet new the fi, front and center. And that drives people to go into QRPs that are not tailored to them. And again, it’s not necessarily a good fit. So let’s talk about what qualified retirement plans are. Because people get a lot of confusion about this. And we’ll talk about how the UDFI actually works.

Abel Pacheco 25:46
You’re still describing me to TV, because I’m like, Yeah, I set up the QRP. I don’t know what it is or how it works, but I set it up. But anyways, keep going further.

Bernard Reisz 25:55
So there’s like this mystique, and vagueness and qualified retirement plans, you know exactly what it is, you know exactly what it is. And kind of once you pull away the Emperor’s clothes, again, back to our clothes, metaphors, you’ll may be a little surprised or disappointed. So qualified retirement plans is just a group of retirement accounts. So it’s calling something a QRP is a deliberate attempt not to describe it. Because a qualified retirement plans is just a group of plans. And the most well known of them’s our 401k plans. Right. And so every 401k plan is a qualified retirement plan. People have heard of profit sharing plans, those are qualified retirement plans. Some people may be familiar with kind of the older style pension plans, like a defined benefit plan, and cash balance plans. Those are all qualified retirement plans. Now, there’s a lot of compliance complexity associated with those. And so anytime somebody tells me Bernard, I’ve got a QRP and asked them what do you have? Like, I don’t know. I’m like, man, if you don’t know what it is, you don’t have a prayer of operating it compliantly. So here’s the deal. qualified retirement plans, that broad category of plans has a carve out for real estate acquisition indebtedness, UDFI, so all these accounts are subject to you. But sometimes people tell me, Bernard QRP doesn’t have UBIT John Doe told me no, UBIT wrong. They all have UBIT. But they do have the carve out qualified retirement plans have an awesome carve out, that’s usually impactful for real estate. So this type of UBIT that we’re talking about in real estate, generally, is a type of UBIT that you get because you used leverage. And we’ll get into the talatax actually operates here. So the way what happens is, whether you are an IRA, whether you’re a qualified retirement plan, or whether you’re Red Cross or United Way, these are all tax sheltered, you know, kind of entities don’t pay taxes, charitable entities, certain taxes that you get, because way back in the 50s and 60s, there were some abuses. So Congress introduced these ubit rules. And one of those is if you use borrowed money to create profit, investment profit, a portion of the return can be taxable. Right. So take, let’s say, an IRA, or United Way. And let’s take this syndication part out of it. Let’s just say I’ve got a choice. I’ve got an IRA, I can buy a single family or a duplex, a triplex or quad. I can. And so if there are two available, let’s say there’s a single family for 100,000. And there’s a quad for 400k. My Ira has 100k I can buy the single family 400k all cash deal, or I can get a lender to give me another 300k. And I can buy the quad. Now, the thing is views the debt, you’re going to have UDFI right, that’s going to be a key thing. If you borrow the money from the blender, your IRA borrows money, you’re going to have UDFI so should you buy the quad with the 400k or the single all cash? And before we get into the deep dive, it’s helpful. Abel, what do you say?

Abel Pacheco 29:26
I like the one with all leverage. Okay, as much leverage as possible. Is that kind of how my head goes to?

Bernard Reisz 29:34
Awesome. And that’s almost definitively that’s definitively the right answer. Okay, good. Here’s the deal. The UDFI tax is there to tax the return on the leveraged portion. So, your 100k so to speak, the IRAs equity in the deal that stays tax free no matter what. Right? So like if you were to say all right, the most You borrow $1, all of a sudden, everything becomes taxable. Or maybe you’re better with the all cash deal, right? That’s

Abel Pacheco 30:06
where so even me, I’m like, I know, I use leverage, I want to use leverage. But at the moment, I hear, Oh, you’re gonna get taxed on this thing. I like go, Oh, I could I could almost say I sit by the all cash deal. And then my head goes, no, no, no leverage leverage. Exactly. The moment taxes come out. Like, I’m like, I’m fearful. I’m worried. You know, anyways, go ahead.

Bernard Reisz 30:30
And that’s I think this is great to illustrate how people have to approach things. Yeah, we got to engage both our gut and our brains. And we got it, you know, where each one has its place. So that kind of reaction to the tax, that’s a gut reaction. But you’re able to engage your brain your cognitive abilities and say, No, right? Yeah. And like, it makes sense. Just, you know, in this case, we got to override the gut. Right. This

Abel Pacheco 30:58
was, that was good. That was a good illustration that, you know, that was exactly my mindset to self directed IRA, when someone told me UBIT. And then, you know, I think there’s a lot of people that have such a hard time taking action. And moving forward, I talked to countless investors and people that want to learn, they want to education, and they, you know, we’ll set up multiple calls, talk 30 minutes, 45 minutes, 30 minutes, 45 minutes, and, and then I’m like, Whoa, do you want to move forward? You know, what’s going on? And it’s hard for them to overcome that. And, for me, that’s where UBIT kind of came in, and then I go, Well, maybe I shouldn’t be doing this. Because they tell me I’m going to be taxing. You know, your logic has to go, you know, man, my money still hasn’t doubled in six years. Who cares about I don’t even I didn’t even know the number. Let’s just move forward. You got.

Bernard Reisz 31:46
And but it’s even more than that. Because it’s possible that if all of the profits would became taxable, that it would be an impediment. You know, you would take a step back, even your brain maybe would say, maybe not, let’s run the numbers through a spreadsheet. But if what your equity portion remains tax free, right. So yeah, so what anybody said, you know, I’m not taking a loan from the bank. Cuz you know, what happens? You got to take a loan for the bank. You got to pay interest. I’m not paying no interest. right. But of course, that is just the cost of OPM. And it makes sense. So the tax on the leverage portion is best viewed as some little another basis point. Another if somebody the bank said, hey, we’ll charge you another BIT or two BITS, would you take that you would do it, you would do it? Right. So you’re obviously gonna analyze it, but most guesses you do so moving forward? Yeah. And here’s the thing. Here’s why the tax though, is different than the bank. Here’s it. Here’s, here’s why, on the on the bank, they add 1%, you had to rethink it. Because you pay the 1% No matter how the deal performs, right. So you got to think about your upside and your downside. Right. So anytime you’re paying more interest, you got to think about what’s the impact going to be on the cash flow? What’s my downside risk? And right, of course, if the deal does what we envision it to do, we’ll plan on 5%, right? We’re expecting a 20% return. Yeah, it’s worth it. But of course, as as the investor in the lead, you know that we don’t have a crystal ball. And we got to have downside protection. When we think about the downside, you got to think about what’s it going to cost me? If we got it takes a little longer to stabilize this.

Abel Pacheco 33:32
Mm hmm.

Bernard Reisz 33:33
But the cool thing with the tax, right, you only pay the you only have the tax when you actually have the profit. Right. So here’s what happens. Here’s how UDFI actually works. And you’re going to love this. So you get into a deal. And let’s you go back to our let’s leave the syndication aside for a moment. Right, we got our investor looking at this single family or the quad. So he goes into the quad, he’s gonna get a $400,000 deal. 75% leverage. Now, if the deal doesn’t go as they planned, are they going to pay you UDFI? No, you UDFI we got to pay the bank, but there’s no UDFI because you UDFI is based on net taxable income. And you know, what else happens in real estate? How often do you get net taxable income?

Abel Pacheco 34:24
I’m waiting for your answer. Okay?

Bernard Reisz 34:28
Real Estate, right? You don’t generally in the first couple of years, you’d be cash flowing, but your net taxable income is zero, right? You’re gonna have that loss if you can utilize it. So when you have what do the UDFI taxs set tax says is alright 75% of this return is going to be taxable. Right. But when you do your taxes, you’re when you do your tax calculations, you’re gonna say depreciation interest expense. Oh, no income.

Abel Pacheco 34:56
Mm hmm. Yeah, we’re writing off As much as freaking possible in the first really five years bonus depreciation, you’re one, it’s on paper. It’s a big massive loss rally for exactly all of us, you know, and we’re leveraging that as crazy as we can as much as we can.

Bernard Reisz 35:17
And so, the UDFI ends up being like this mythical creature that you don’t really see for the first five years of a deal.

Abel Pacheco 35:26
Okay, you guys, it all kind of clicked. Yeah. Because who cares? We’re not paying any freakin taxes on it. We’re having losses. So it’s we are leveraging we are borrowing, but there’s no really taxable income or net taxable income in the very beginning. So the taxes never really get hit for the majority of those investors.

Bernard Reisz 35:46
Exactly. So it’s played out. Let’s play it out further.

Abel Pacheco 35:50
You’ve just like demystified all this stuff for me. Anyways, thank you very much. It’s like, Oh, yeah. Okay. We were right there. Forget UDFI and UBIT is? Oh, yeah. Keep going. Let me keep going. Yeah,

Bernard Reisz 36:02
I know. It’s so true. It’s hard to get accurate info about this. Yeah. Because the SDI IRA people kind of try to slip it under the rug. Yeah, under the rug. I don’t necessarily judge them for that. One is they don’t want people to have that gut reaction. Yeah, they don’t away. Yeah. But of course it would, that would hit effect their revenue, if people are scared of you UDFI so they kind of, don’t really emphasize it too much. And then what the opposite and we got the QRP people and the other putting the UDFI thing, and you would think front and center, and exaggerating its impact to drive people to do QRPs, which is going to be a mistake as we’ll get to. But once we have it once we have this UDFI thing in perspective, though, we see that it’s not nearly as onerous as anybody would think.

Abel Pacheco 36:53
Yes. And is the same mindset is UDFI does it fall in that same UDFI category? Like that’s why I just never mess with it a lot. Because is it the same,

Bernard Reisz 37:06
it works the same, but here’s the deal. There are different acronyms being tossed around. Okay, by is there’s UDFI and UBTI stand for unrelated debt financed income and unrelated taxable business income, right? UBTI unrelated business, taxable income. So those are the kinds of incomes that can be subject to the tax. Yeah, UBIT is like this umbrella. That’s the actual tax. So there is another type of there’s UDFI and UBTI. So UBTI is a type of taxable income when you have an active business. So say you were doing real estate development. And you’re developing, subdividing and selling. So you weren’t in the rental income business, you were in the development business. So development is taxed very differently than multifamily rentals. So development is treated like an act of business. So when if you have development activity inside of QRP or IRA, no matter I know, every people will tell me Bernard, John Doe told me no UBIT in a QRP. But it’s not true. So there’s the exception is for debt on real estate. But if you’re doing an active trader business, like real estate development, you get hit with you, UBIT tax whether you’re doing a QRP or SDIRA, and in that case, all the income is taxed everything because that’s got nothing to do with the debt. It’s just this kind of business activity is an active business. And it’s all taxable inside of our retirement account. But in the space that we’re playing in, which is the multifamily rental space. That’s rental income, the tax is only based on the UDFI to the extent that there is leverage.

Abel Pacheco 39:04
Make sense? Yes, demystified a bunch of this stuff.

Bernard Reisz 39:08
Here’s the deal. Once we take this little further, let’s play it out a little bit. So if you’re you can take the for the four Plex or the single family got the four plex 75%? First couple of years all likelihood, no taxable income, say this is just a killer deal. After bonus depreciation after all these sweet tax benefits, you still have taxable income, right? Or maybe now you’re seven, eight years into the deal. Okay, right. But the portion of the of the you’re only taxed on the portion that’s leveraged. Now. If you have no income, net taxable income, there’s no tax. So it’s not like the bank where you pay no matter what. And if you are, if you are generating that taxable income, well, that’s awesome. That is the cost of OPM. When I try to tell people as like as like you to try this with Charles Schwab. How about telling them hey, I’ve got $100,000 in mutual funds? How about give me another 300k Not happening And if Charles Schwab or somebody does it, right, you’ll have UDFI. Right. That’s what you’ll have. So hedge funds, for example, I use leverage, create UDFI to self directed IRAs, and QRPS, because this leverage exception is unique to real estate. So if you use leverage, and a QRP, for anything other than real estate, you get hit with the UDFI. So it definitely can be very attractive to use a qualified retirement plan for real estate. But you got to know if it’s a fit for you. And if it is a fit for you understand the compliance work that this entails. So, Abel, if I were to ask you today, and then I’m gonna what save had I asked you a year ago, our QRP and solo 401k? The same different, what would you say?

I would say a solo 401k is a type of a QRP. And it really just has clothes on it was the difference. It’s bundled together? Probably some stuff. I don’t need something along those lines. Okay.

It’s, it’s hard to unravel this, but we’ll do our best.

Abel Pacheco 41:24
Okay, so versus back then to I’m like, I didn’t even know there was a QRP or solo 401k. So that’s how much I knew a couple years ago.

Bernard Reisz 41:33
So this is a solo 401k is not a really a technical term. So here’s the deal when you use qualified retirement plans, qualified retirement plans are subject to two areas of law, title 26 of US Code. That’s tax code, right, and title 29, which is labor law. Labor Law, and taxes are probably the two most complex areas of law. Now a qualified retirement plan can be sub is subject to both of those. But here’s the deal. If the plan is not required to cover anybody, other than the business owners and their spouses, most of that labor law, complexity goes away. And that’s what when you refer to solo 401k, we’re referring to the type of company that can create a 401k that doesn’t have to include anybody other than business owners and their spouses, and

Abel Pacheco 42:37
no full time employees and stuff like it’s just me, my wife, us in a corporation that we’ve created, etc. Okay, yeah,

Bernard Reisz 42:45
now there’s more, there’s a lot of potential pitfalls a trip people up. So maybe we’ll go down that that rabbit hole, but here’s the deal. So when somebody has, it doesn’t really matter, the people that are out there to say we’re doing solo 401k, q RP, this, that or the other, right, they’re just giving people a set of documents. Now the documents could say on it, whatever you’d like, whatever they write on it, it’s all kind of meaningless. What dictates is reality. So if somebody is not a fit for a qualified retirement plan, because a qualified retirement plan, by definition is a trust set up for employees, or self employed individuals. So if you don’t fit in that category, I don’t care what it says on your piece of paper. It’s not a qualified retirement plan. Because the definition of qualified retirement plan is a trust set up for the benefit of employees or self employed individuals. So we’ve got all these folks out there that say I’ve got a QRP. But they’ve got nothing that remotely resembles a business. They don’t have a QRP. They’ve got a non QRP.

Abel Pacheco 43:54
Mm, okay. illuminating this stuff for us, Mr. Bernard.

Bernard Reisz 43:59
ubNow, then the other side is if people if somebody say has a document on it that says solo 401k. But they do have they got a business, but they do have employee somewhere. Or maybe they’ve got a spouse may have a business that has employees, or some other family member, or maybe they’ve gotten multiple businesses, or affiliated businesses, and they’ve got employees and one of those, right? They’re very set of complex rules, right? So very often people said, Bernard, can I just send I’ve got employees, but I don’t want to give them this stuff. So I just want to set up a solo plan for myself. I’m going to create a little consulting company, and my business is going to pay me consulting fees. And that’s going to be my solo business. Tax Code says no, we’re going to look at all controlled groups and affiliated services groups, and we’re going to say no, they all get bundled and lumped together. So even if you got a document or somebody says, hey, you’ve got a solo 401k plan. If you have anything anywhere that the IRS would say, or labor law would say, No, those guys are part of this business. And the IRS takes a broad and expansive view of what is included in your business. Solo plan. You’ve got all the complexity. Yeah, a full blown ERISA plan. So the paperwork, everybody out there is kind of pushing paperwork. And people are like, I’ve got Bernard people, say Bernard, I’ve got this plan, I’ve got that plan. And I’ve got to tell people, sometimes the what you have is based on how the IRS and Department of Labor would view your reality. What it says on a piece of paper is kind of meaningless. And I want to strip away a little bit of mystique from this industry. Very few, there’s a big right that retirement plan space is huge, particularly the qualified retirement plan space. And the type of companies that dominate the space are called TPAs, third party administrators, and they’re here to help businesses deal with the complexities that come with having a qualified retirement plan. And having employees it is in a world of complexity. Now, nobody in the space, more or less, there are just a handful of companies that actually draft the plan documents TPAs that may have 1000s of companies that they’re servicing. They may have millions of employees that they’re servicing as a TPA. They don’t write their own plan documents. There’s no need for that plant writing the plan documents. There are a few specialized companies in the United States. Not that many. They write the documents that everybody uses. And

Abel Pacheco 46:51
so there’s kind of pre packaging, bundling some stuff out. That’s why he said, Hey, bundle, you know, they’re following these guidelines, and then there’s stamping their thing on it and use it as a product.

Bernard Reisz 47:01
Exactly. So people out there said, Alright, get this get that it’s not proprietary, everybody in the space more or less, every TPA, every plan provider is going to one of a small group of companies to get their plan documents. Now, the plan document is not the magic sauce, what you really need is to help figure out what’s the best way to work, what’s the best plan for me, it’s got to be tailored, and we changed the way we operate. It used to be that we would operate before people signed on to work with us, they would kind of determine are they going to do an SDI or re-route. And that space, our focus, you know, most of our clients have checkbook control. But we don’t require it, we’ll tell our clients, the pros and cons. But we used to have people kind of they knew beforehand. These are like the four options. And then we were spending a lot of time talking to people ahead of time, like ours educating and we say it like it is and it’s not a sales pitch. So salespeople have all the time in the world to talk. But when you have when it’s not part of sales, and like we really want to give our clients unlimited attention. So we changed the way we operate. Right now people sign up with us. They don’t have to commit, you’re not signing up for an SD IRA. You’re not signing up for a QRP you’re not signing up for Wyoming LLC, or Texas or Missouri. You sign up. We’re going to take it from there. And we’re going to help you navigate all of this. Yeah, rather than like, Oh, you’re signing up for this piece of paper? Oh, sure. You at most the way the space operates is alright, you asked for it. You got it. Right. Yeah,

Abel Pacheco 48:44
yeah, that makes sense. That’s exactly what I’ve done. You know, for the most part, I was like, they this is what I heard was good. You signed me up for one of those. So Bernard, it’s been an amazing show. And I think our listeners probably have more questions. Because everybody’s situation is very different mine from their from everyone else’s. Where’s the best place we can reach out to you, our listeners, our guests or network, if they want to learn a little bit more about their specific, you know, the best plan for them the best suit. in this analogy.

Bernard Reisz 49:19
it’s so a couple of ways. You can just Google reshare financial, find lots of stuff. And That’s No spaces, no dashes or

Abel Pacheco 49:43
Nice. Okay, very good. And you have some resources, I’m sure in a couple of different spots where I can go find all this stuff there.

Bernard Reisz 49:54
So a lot of this stuff. It’s kind of in line what we did, we can’t try to simplify. So we do have Have a page you can still navigate to that has about 50 or 60 podcast recordings to dig in. There you go. A lot of it is retirement accounts, but also 1031 Exchange life insurance, real estate professional, estate planning, because we know what happens a lot. A lot of them even have the title to control your retirement accounts. But the actual content may be different, because when we booked it, people reached out to Bernard we want you on the show to talk about self directed retirement accounts. And then we ended up talking about all sorts of tax stuff. Now we got a bunch of webinars that are accessible. There are a couple that are actually pretty timely, the tax changes under Biden. So really deep dive webinar three actually did four their three, they’re up there, just have any I don’t want this is going live goes lives today, the law firm that we did it in conjunction with, they’re moving their YouTube page. So right now it’s not accessible, but it should be backed up.

Abel Pacheco 50:56
This will show up in about a month or so.

Bernard Reisz 50:59
Okay, but then they should be should be up and going.

Abel Pacheco 51:02
Okay, great. And then is there anything today that we didn’t touch on that you wanted to touch on anything else that we just didn’t cover? I didn’t get a chance to talk about here.

Bernard Reisz 51:14
It’s interesting, because we help clients with a lot of stuff. And sometimes they call in they’re like, so we’re talking about estate planning, tax planning, tax strategy, and what it gets to be a lot of moving parts. And what I say is like, hey, let’s start with one thing, and kind of take it from there. So we do entity structuring and planning, we’re active in all 51 us domiciles. But a good place to start, where we have something that is just totally unique in the market is the retirement accounts.

Abel Pacheco 51:43
Got it? All right. Well, Bernard, thank you very much for your time. It’s been a pleasure. I really appreciate it man, it says, like illuminating was kind of the word and demystifying and then encouraging that I just kind of fall into the mindset of like that. Okay, let’s move forward. Very encouraging to hear my experts say, Yep, that was the right thing to do. So anyways, this is awesome. Thank you very much. Again, my name is Abel Pacheco, I’m the host for your five talents podcast. if you heard something like what I would love for you to leave a rating, leave a review, subscribe to the show. Reach out to Bernard, he loves to talk to you. He loves to kind of help you in the right direction, whatever your your needs are. And then we look forward to having you on the next show. Bernard thanks for your time, brother,

Bernard Reisz 52:28
Abel, thank you so much for having me. I’ve been looking forward to this and it was awesome episode.

Abel Pacheco 52:33
Thank you very much. Bye bye. Thank you so much for listening to this episode of the five talents podcast. I’m your host, Abel Pacheco. Each week, we’re gonna bring you interviews from other industry experts and commercial real estate investors who followed their dreams and achieve massive success. If you enjoyed this episode, then you’re gonna want a copy of our passive investors guide. Tackling commercial real estate the easy way. It’s the guide we use to invest in $93 million of commercial real estate. It’s a 65 page ebook. It’s a great resource to learn the basic mechanics of multifamily syndications, and we’re going to show you how to evaluate your next passive investment opportunity. So if you subscribe to our podcast now leave us a review and a rating. I’m going to give you a free copy. So take a moment to do that now. We’d appreciate it and then you can register for the book at, let us know and we’re going to send you a copy. Thank you so much for subscribing to the five talents podcast.

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