Real Estate Nerds 08: Best Deals

The Power Of The Self-Directed Solo 401(k)

Dmitriy Fomichenko

Real Estate Entrepreneur & Investor

Listen to the Podcast Here:

Welcome back to the Real Estate Nerds Podcast. On today’s episode, our host and attorney Scott Smith welcomes Dmitriy Fomichenko, the founder of the financial firm  Sense Financial Services LLC. The two investors share an affection for self-directed investing of retirement plan assets, and listeners will get to hear exactly why. In addition, Dmitriy also shares about a pair of lending investments he personally made, and what made one a success and the other a failure.

Self-Directed Investing 101

Dmitriy sits down with Scott to chat about his business and self-directed investing generally. The two investors explore the role of retirement planning professionals and compare the self-directed options available to investors.

[2:00] Dmitriy is an engineer by education. After a lay-off, he transitioned into real estate. During this time, he handled conventional financial accounts. In 2010, he founded Sense Financial, a group that deals exclusively with investors. His clients include many real estate investors, but also lenders and investors in newer nontraditional assets like cryptocurrency.

[4:00] Dmitriy and Scott discuss the benefits of self-directed investing. Dmitriy points out that Checkbook Control accounts give investors the power to invest in nontraditional assets. He also shares the various ways to fund self-directed IRAs and 401(k)s.

[5:30] Dmitriy briefly compares the self-directed IRA to the Solo 401(k). He feels the self-directed IRA option is somewhat limited by its fairly low contribution limits Although the Solo 401(k) is designed for self-employed individuals and small businesses, many types of professionals can qualify. He believes it is a powerful investment vehicle that allows for a high level of tax savings.

[6:50] Dmitriy’s company sets up trusts to hold plan assets for clients who own Solo 401(k)s. The client becomes the trustee receives Checkbook Control. He mentions that “You need to be educated on what you can and cannot do, because with freedom comes great responsibility.”  

[8:45] The clients Dmitriy works with enjoy the ability to control their assets: “You want to be in control? Use the guidance of professionals with more experience than you, but you should be making the financial decisions. That’s what the self-directed 401(k) enables you to do.”

[9:30] Scott asks Dmitriy about how investors can evaluate providers of self-directed accounts. Dmitriy explains that there are three self-directed options: A truly self-directed IRA. This is an IRA that does not limit your investment choices. Most custodians will limit your options to financial products they offer, and require you to go through them to make or liquidate an investment. The checkbook-controlled IRA, or IRA-owned LLC. This is Dmitriy’s specialty, an IRA account with funds moved to an LLC that the client controls.The self-directed Solo 401(k). Dmitriy believes this vehicle is the “best of all” because of its many benefits, flexibility, and tax benefits.

[12:49] Scott asks Dmitriy about Solo 401(k) compliance, and which pieces his company handles and which are the responsibility of the clients. His company deals with plan creation, documentation, and maintaining and updating plan documents per IRS regulations. The client, on the other hand, must control the plan assets and keep accurate records of the investments. Clients can also get assistance with administering the plan from their professionals.

[15:00] Dimitriy clarifies the role of companies like his: “We aren’t attorneys. Our specialty is the 401(k), so that’s what we do. We don’t give you investment, tax, or legal advice.” While as an investor himself, Dmitriy certainly may have the experience to offer this type of guidance, he will generally know when to refer clients to a financial advisor or attorney.

A Tale of Two Notes: Dmitriy’s Best and Worst Solo 401(k) Investments

Scott asks Dmitriy about some of the best and worst deals he has seen made with the self-directed Solo 401(k). In his line of work, Dmitriy has seen plenty of both. But he’s here to tell us about a couple of his personal deals.

[16:50] Dmitriy decides to begin with an example of a bad deal. This particular example is of a private lending deal. He was advised to use a company offering investments in notes. He chose to invest in a small note for $20,000 tied to a property in Pennsylvania.

[17:31] In hindsight, Dmitriy can tell you exactly where he went wrong:  “The mistake I made from the very beginning is not doing my due diligence.” He overlooked his part because he trusted the individual who introduced him to the company.

[18:04] Dmitriy later invested an additional $43,000 on a separate property. Things went well for a couple of years, until there were major property management and late payment issues. Dmitriy reached out to the owner. It turned out his $20,000 property was in terrible shape, had never been rehabbed as it was supposed to be, and had been vacant.

[19:10] Scott asks if what happened with Dmitriy’s money was theft–but because Dmitriy was lending the money, it technically wasn’t. Again, he emphasizes the importance of doing due diligence on properties:  “When you invest in a note, there’s always a likelihood that it will be defaulted.”

[19:50] He feels he should have discussed his deal with a more experienced investor as part of better due diligence.

[21:09] Dmitriy shifts gears into one of his best deals, another note, which helped offset the loss from the first deal he talked about. He made a loan of $43,000 in exchange for the deed to a property worth close to $70,000. He became the landlord and had a tenant paying to live there, and the interest on the note was around the same amount as the rent, effectively doubling his income.

[22:03] “If you look at these two notes, I ended up winning. But what I want your listeners to learn from this is you’ve got to do your due diligence,” Dmitriy tells Scott.

The Takeaways: Good Communication and Due Diligence Create Wins

Our host and guest conclude by comparing the note deals and sussing out what made one so much better than the other.

[23:00] When comparing the two notes, Dmitriy highlights that the win covered the loss. He chose to keep the second property because it was a better value. He could have foreclosed on it, but the borrowers chose to deed it to him instead after defaulting.

[24:40] Dmitriy won in part because the people he loaned money to defaulted, and failed to manage their own portfolios well.

[26:00} Scott observes that Dmitry’s good communication with his borrowers played a major role in his investment’s success. In his own line of work with real estate investors, Scott sees a lack of clear, consistent communication contribute to unnecessary losses.

Connect with Dimitriy

Connect with Dmitriy through his company site, SenseFinancial.com, where you can find links to his personal social media profiles. Reach out to Dmitriy through his  Facebook account or on LinkedIn. He is also active on BiggerPockets, one of the premier investing communities in the world, where you can also connect with our host Scott Smith.

Listener Resources

Thank you for joining us on today’s episode of the Real Estate Nerds Podcast.

For even more free educational resources on real estate investing and the law, check out the Royal Legal Solutions blog. You can also reach our host Scott Smith directly, connect with him on LinkedIn, subscribe to the Royal Legal Solutions YouTube channel, or join our investor community on Facebook.

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