17 Self-Directed IRA FAQs
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Announcer: Have you thought about becoming financially free through real estate investing, but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red hot Texas market. John Larson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John.
John Larson: Hello, this is your host John Larson with another episode of the Real Estate Cowboys. This week we will be talking about something that we are very big fans of here at the Real Estate Cowboys and we talk about quite a bit on each show and that’s going to be the self-directed IRA or 401k. And so this episode is going to be all about some frequently asked questions when it comes to the self-directed IRA or 401k process and we want to cover those today. So we have 17 frequently asked questions that we get here at the Real Estate Cowboys. Just general stuff about self-directed accounts, how it works, how they’re set up, who can help me make decisions, what can I invest in? So on and so forth. And so I believe the self-directed IRA or 401k, to be one of the most powerful investment vehicles if invested in the right opportunities, markets and most importantly the right team.
And so I believe that because the investment dollars earned go right back into the account, tax-free or tax deferred depending on the type of account you have. And so with a self-directed Roth IRA, the money going back in that’s generated from the investment is going to come back in completely tax-free. And so that’s one of the big reasons why I’m such a proponent of at least self-directing some of your funds within your retirement accounts to diversify and take control of that money and put it into things like real estate or, you know, start doing hard money lending, lending through your IRA or 401k to get those fixed returns back to you tax free if it’s a Roth or tax-deferred, if it’s another type of account, just a regular self-directed IRA or solo 401k. So one thing I also want to talk about, uh, this was a question that came up with one of our investors on whether or not you can self-direct 401k or do a solo 401k if you’re working at the company where the IRA is held. And the answer is no if you’re still employed at the company where that 401k is held and you’re not 59 and a half, you are not going to be able to self-direct those funds. It’s only if you leave that company, then you would have access to that 401k and you’d be able to self-direct it with the amount of funds that are in there if that’s what you chose to do.
And so let’s just get into it. You know, number one general, what is a self-directed IRA? A self-directed IRA is very similar to a traditional IRA except for these three things and one being you decide what to invest in. A custodian handles the transactions instead of a traditional brokerage account and you have a much wider range of potential investments with a self-directed account. You’re not just locked into the traditional investments out there like stocks, bonds, mutual funds, so on and so forth. You’re able to invest in other things like real estate or hard money lending on real estate assets.
So the next frequently asked question that we get is, can I change an existing IRA to one that is self-directed, and the answer is simply yes. And in fact, this is the usual way in which investors get self-directed IRAs. Once you choose a custodian for your self-directed IRA, they can take care of transferring your funds and converting the IRA to a self-directed account. Typically you’ll need to do some paperwork and things like that, but other than that you’ll be ready to go. So we work closely with a number of self-directed IRA custodians who we can point you in the right direction and companies that we’ve had a good experience with companies that our clients have had a good experience with. And in this type of transaction just communication and being readily available to answer investor’s questions and also people that can do the process efficiently is very important. And so we’ve identified a couple of companies in the U.S. that we work closely with and that we would refer to you if you came to us and decided you wanted to purchase real estate with your retirement funds or if you wanted to become a private lender with your retirement funds. I have some great companies that we work very closely with, uh, that can help you with the process and they’re really easy to work with, very attentive and they know what they’re doing and so they can get things done efficiently because trust me, wherever your money is held, Edward Jones, Fidelity, wherever it is, they don’t like giving up those funds. So you want to work with a group that’s very seasoned in terms of how to get the funds moved over, how to work with these other traditional brokerages where the money is currently held. And so we’ve identified a couple teams that can really assist you with that and are very good to work with.
And the third question, this is a popular one. What can I invest in with my self-directed IRA? And so a self-directed IRA offers you the option to invest in alternative investments like real estate as well as traditional investments. You can still invest in traditional investments. Some of the instruments you can invest in include CDs, stocks, bonds, mutual funds, tax, lien certificates, real estate, hard money lending opportunities, which is a popular one with us here at the Real Estate Cowboys, digital currency, precious metals, structured settlements, business enterprises, and much more. So you can, you can do a lot when you self-direct your account. You essentially take control of the money. And so yeah, you can still invest in stocks with the money, but you know, you’re going to take more of the role of the person in charge of where the money goes.
Number four would be, is there anything I can’t invest in with the self-directed IRA? And there are things that you cannot invest in. And so you cannot invest in anything that is categorized as a collectible. And this is according to the IRS. And so this would include antiques, sculptures, collectible coins, works of art, gemstones, stamps, alcoholic beverages, furs, and life insurance instruments. There may be more restrictions than the ones that I just named. So please consult with your tax professional for more details. But I just gave you kind of some of the most popular ones in terms of what you cannot invest in with a self-directed IRA.
Are there any restrictions with self-directed IRAs? Well, the IRS governs the use of a self-directed IRA just as it does the use of 401ks and regular IRAs. There are several restrictions about how self-directed IRAs must be managed, of course; including several about the handling of related funds. There are harsh financial penalties for failing to abide by the IRS regulations; restrictions include using a licensed custodian to handle, not control, the fund, not purchasing property for personal use and not investing in collectibles. So with your self-directed IRA, you cannot go and purchase a property that you plan on using yourself. It must be an investment property. And then obviously not investing in collectibles like we just named. And other restrictions can apply. And so your custodian or tax professional can further advise you.
Number six would be Can my self-directed IRA custodian help me make investment decisions? That’s not what a custodian is there for, nor is your custodian licensed to do that. So, therefore, they’re not able to offer advice about finding or getting involved in a particular investment opportunity. For that, you’ll have to find or want to consult with a licensed investment advisor or work with a company who you trust, who offers solid investment opportunities like us, American Real Estate Investments, Real Estate Cowboys. We have great opportunities and great investment options for your self-directed account. But obviously, you would have to contact a company like ours. Do your due diligence, look over the opportunity, see if it’s something that makes sense for you. Obviously before pulling the trigger and investing funds into that particular opportunity.
Number seven, the question is, if self-directed IRAs are so great, why doesn’t everyone do them? That is a great question. Mainly it’s because people don’t know what’s available to them. Most people are just under the impression that all they can do with their IRA or retirement account is just invest in the traditional investments out there. So stocks, bonds, mutual funds, annuities like we discussed. But in fact, there’s so many other things you can do if you self-direct, but it’s just not a readily known thing. And trust me, the guys at Edward Jones, Charles Schwab and Fidelity are not telling you that, “Hey go self-direct your money”, right? Because then they don’t get paid because you’re taking that money and you are now becoming the advisor and you’re putting the money in whatever you choose. And so that way they’re not making any money. So it’s not something that’s really blasted out there publicly, which is why I like to talk about it a lot here on the Real Estate Cowboys radio show or podcast strictly because we like to educate investors on the power of a self-directed account. That would be the main reason, is that people just don’t know. There’s over $20 trillion, I don’t even know the exact, but it’s a lot of money in IRA and 401ks; only about three percent, maybe four percent now is actually self-directed. Only four percent of that money is self-directed. So that just goes to show to me that just people don’t know about it, right? You know. But then there’s also on the flip side, with self-directed IRAs, they’re going to require more involvement from the investor than a traditional IRA. The traditional IRA, your financial advisor, whoever you’re working with, at Fidelity Edward Jones, they’re kind of managing the money for you so it’s really hands off. Whereas once you self-direct, you’re going to have to be the one that vets out a company to work with, because like I said, the team is very important. You’re the one that’s going to have to analyze the deal. Uh, you’re the one that’s going to have to ultimately make the decision if that’s where you want to place your money and so it can be a little bit more hands on. And so many people don’t feel comfortable or knowledgeable enough about investing to handle those decisions themselves. And so with the self-directed IRA, it’s simply another option for those who wish to have more control over where the money is invested. Additionally, many people do use self-directed IRAs, but you may not hear about it. You know, after all, think about it, how many people discuss their personal financial arrangements with others? Not many, so even if someone is self-directing and they got a sweet deal where they’re making 10 percent by lending out money, 10 percent or more, that person might not want to be bragging about that, you know, they’re just kind of keeping that to themselves.
Number eight would be, how much control do I really have with a self-directed IRA? As a matter of fact, you have total control. Even your custodian cannot tell you whether or not to invest in a particular asset or when to buy or sell an instrument. All the decisions are yours, which is why self-directed IRAs are exciting to savvy investors. The only one telling you what you can and cannot do with your self-directed IRA is the IRS, which governs all financial dealings, of course. Now, certain self-directed custodial companies do restrict what you can invest in, but in those cases that’s not a true self-directed account, then. So be sure the custodian you choose has no such restrictions above and beyond what the IRS allows.
Number nine would be, Can my current broker manage my self-directed IRA. So traditional brokerage houses do not typically offer self-directed IRA custodial accounts. That’s like the Charles Schwab, the Fidelities that I already discussed. Therefore you would need to transfer your funds and convert them into an account from a traditional IRA. So your new custodian can take care of the transfer and the conversion process for you. So when you select a self-directed custodian to move your money from a traditional IRA or 401k, they’re going to handle that stuff for you and make it as easy as possible. That’s nine of the top 17 questions that we get, so we want to run through these top 17 frequently asked questions just so our listeners are just more savvy when it comes to how the self-directed account process works. Because like I said, I have investors right now who own rental properties that have appreciated in value that if they sell those properties, those profits are going to go back into the account tax-free or tax-deferred. They’re also earning cash flow from the rental income. And then I also have investors who are lending money from their IRA or 401k on commercial developments in the Dallas market and they’re achieving double-digit returns that are going back into the account tax free or tax deferred and they’re taking the role of the bank, which ultimately is one of the most passive options that are available to you if you’re looking for a passive income stream. So that’s why we’re big proponents of the private lending model and doing private lending from your IRA or 401k. So let’s take a quick commercial break. When we come back, we’ll go through the next seven frequently asked questions regarding self-directed retirement accounts.
And welcome back from that commercial break. This is your host John Larson. We’re talking about our top 17 self-directed IRA frequently asked questions and we’re trying to get those answered for you today. You know that we’re very pro-self-directed retirement accounts here at the Real Estate Cowboys and It’s for a lot of reasons. But the main one being that, you know, the stock market was doing really well in 2017 but not doing as great here in 2018 and I do feel like there is going to be an economic shift here coming shortly that’s going to have an effect on the traditional investment opportunities that are out there, number one being the stock market and so I’m just trying to educate investors and explain to them that, you know, even if you don’t want to pull all your money out of the stock market, I get it. It’s kind of been a safety blanket for you. It’s kind of something that you know, it’s probably something that you’ve seen some profits from. But you should definitely look to take some of that money from your traditional accounts and move it over to a self-directed account so you can take control of where that money’s going and what investments are doing. Because there are opportunities out there if you find the right market and opportunity and the right team, most importantly, like I said. You can earn double-digit returns on your money and even triple-digit returns. I have investors who have invested in property with their IRA or 401k. They bought in Dallas back in 2012, 2013. These properties have appreciated 40, 50, $60,000. They sell those properties, that profit goes back into the account tax-free or tax deferred depending on the account that’s set up. With a Roth completely tax-free. That’s a great way to make money. You’re making money on the appreciation, the equity growth within the property, but then you’re also making money from the cash flow. And now with rentals, it might not be as passive as investing in the stock market because you’re going to have maintenance, because you’re going to have vacancy, because you can run into an eviction. There could be some heartache with rentals. It’s bound to happen, but with a private lending opportunity, you know, loaning money out to a real estate developer, a house flipper to do a commercial project or flip a house to sell on the retail market. These investors are making double-digit returns in the form of interest payments, monthly dividends being paid to them, and that money is going into those accounts tax-free or tax-deferred. So in my opinion, with the volatility of the stock market, you know, my uncle invests in the stock market and he says, you know, on a good year he’s making six and a half percent. Well, there’s options out there that can pay you double that and it’s going to be on something that’s actually safer where it’s going to give you first lien position on the asset. So you’re just taking the role of the bank. So the idea here, the reason why we talk so much about self-directed IRAs and 401ks is because I believe, like I said at the start of the show, it’s one of the most powerful investment vehicles out there if done with the right team, if done in the right market and if done with the right project. Now the issue is here, it’s just a little less passive in terms of, you’re going to have to actually find these teams and find these development opportunities. And make sure you analyze these opportunities, and if you don’t know how to analyze deals, consult with somebody that does and make sure that you feel comfortable with the deal and someone that you trust signs off on the deal before moving forward.
But like I said, if it’s in the right market, markets like Dallas, Houston, Austin, the state of Texas itself is just booming. Still the twelfth largest economy in the entire world. And I don’t see any signs of slowing down here. You know, Forbes just came out with a top 10 list of markets that are predicted to go through a housing crisis. And it’s all cities I’ve been talking about. Detroit, Memphis, Indianapolis, you know, you should see. Look that up. The markets that made that list. No cities in Texas made that list. Okay. And that’s because the market here, the economy here in Dallas has become so diverse. The state of Texas the economy’s become so diverse and it’s still affordable to live here. And so with that little recipe there, it creates such a good investment climate and just a great economy and great place to live in a place that I believe will be able to withstand this economic shift that’s coming or this market correction that’s coming.
You don’t hear about these major cities in Texas being on the housing bubble, being on the brink of a housing crisis, and so that’s why we selected these markets to operate in and these are the markets that we like to plant our flag in and these are the areas where we like to do development opportunities and present them to our investors because we believe that they’re as safe as possible. Now, no investment is completely risk-proof. There’s going to be risk in all opportunities, but when you have first lien position, it does give you that extra sense of security.
Either way. Let’s get back into number 10 out of the 17 commonly asked questions regarding self-directed IRAs and that will be, how is self-directed IRA income taxed? And so the profits that you gain from your investments from a self-directed IRA are taxed same as profits from a traditional IRA. In other words, they are tax-free or tax-deferred depending on your exact situation. Your tax professional can assist you with any tax questions you have about self-directed IRA profits. So your CPA can definitely provide more on this. But like I said, it’s going to be tax-free or tax-deferred income depending on the type of account that set up.
So number 11, why can’t I act as my own custodian? If I’m doing a self-directed account and I’m taking control of all the funds, why can’t I act as a custodian? Well, simply it’s because the IRS has a set of specific ground rules regarding the use of a custodian for your self-directed IRA. Individual investors are not permitted to handle, control or even touch funds related to the IRA. At no time, must of the funds from your IRA, self-directed or otherwise pass through your hands until such time as you make a withdrawal. If you were to violate these rules, those funds would no longer qualify as tax-free or tax-deferred, which would jeopardize your financial position. So that’s why the custodian is in place and that’s why you cannot act as a custodian.
Number 12, can I make an international investment with my self-directed IRA? Yes, you can. And that’s why we also do stuff, we do things in Belize what we’ve talked about here a lot on the Real Estate Cowboys, vacation properties, private island development where investors go and invest in these properties on a fractional model. Not a timeshare, but you’re buying in with partners. We’ve had investors use IRA or 401k funds that are self-directed to invest in those opportunities as well.
Number 13, can I borrow money with my self-directed IRA? And the answer is yes. You most certainly can. For example, say you would like to purchase a piece of real estate for your self-directed IRA account. You can use money from your self-directed IRA for the down payment and get a mortgage or another kind of loan to buy the investment property. However, the loan must be a non- recourse loan. The reason being, you’re purchasing with your IRA or 401k. You’re not actually purchasing yourself. Your IRA or 401k does not have a credit score. So in most cases, in all cases, if you’re getting a loan, if you’re just using your IRA or 401k dollars to use as a down payment to purchase a property and then you were using outside finance from a bank, it must be in the form of a non- recourse loan. And then you also need to understand that your investment is going to be subject to something called a unit tax, which is an unrelated business income tax. That means since you purchased the property, let’s say you purchase a property with a 30 percent down payment and use the loan for the other 70 percent, that means that all the money generated from that property would not all be tax-free or tax-deferred. Only 30 percent of it would. The other 70 percent would be subject to tax, okay? Because you didn’t use all retirement funds to purchase that home. So keep that in mind. And your tax advisor can provide further details on this type of transaction. Even with the tax, many investors feel that the benefits of being able to purchase their first big investment property offsets any initial tax implications. You can also loan a loan yourself up to $50,000 from a solo 401k account and many people do this to pay down high-interest credit card debt and pay their account back at a much lower rate. So that’s a really nice trick there that you can do with a solo 401k, and that’s to loan yourself. If you have $100,000 or more in the in the IRA or 401k, you can loan yourself up to $50,000 to pay down high-interest credit card debt. These credit card companies are charging 25 percent annual interest. Take a loan from yourself, pay that debt down, pay yourself back at an extremely low rate. That’s a popular option as well with the solo 401k vehicle.
So question number 14, can I switch back to a regular IRA If I don’t like self-directing? And the answer is yes. If after working a self-directed IRA, you find that it’s not to your liking, you can switch back to a traditional IRA. So you’re not stuck, but most people find that they would never go back. But if you want, the option is there. There will be some transaction details to take care of, like paperwork, but for example, many traditional IRA brokerages, they’re not going to accept alternative investments that you may have invested in with your self-directed IRA, so real estate, digital currencies or business enterprises. In all likelihood, you would probably have to divest your portfolio of certain assets before switching back to a traditional IRA. In doing so, you run the risk of losing money. So if you are going to self-direct, I think you should be pretty committed to it. You know, it’s not for everybody, but it is for the entrepreneurial spirit, it is for the person that likes to control their funds. It’s people that like to invest in real estate, it’s people that like the idea of private lending. That is one reason why it’s so important to take your time and conduct all your due diligence before committing to a self-directed IRA. There are many benefits to having a self-directed directed IRA, but like I said, it’s not for everyone. So your self-directed IRA custodian can assist you in making the transition should you decide to convert back to a traditional IRA. So that’s good, you know. You’re not stuck.
15, What are the downsides of self-directed IRA investing? So like every other financial dealing, there’s gonna be some downsides. For one, you would need to be very involved in your investments. Your self-directed IRA custodian is not commissioned with advising you on investments. You would either need to do all your own due diligence, including finding the investment, hiring another professional to help you or working with a quality investment advisor partner like us. One thing, ensuring that all of your investments comply with the IRS regulations is not automatic. For every investment you make, you will need to confirm that it aligns with the government regulations for individually directed qualified plan accounts. If you invest in an opportunity and it’s not set up the right way, your custodian is not responsible for that. You are the one that’s taking control of the funds. They are going to do some due diligence in terms of if the docs are correct and where’s the money going? You need to fill out what they call it, direction of investment form that’s going to have to pass some eye tests over where your money is being held with the custodian, but other than that, I mean it’s your call on where you want the money to go. They’re not going to advise you on one way or another. Keep that in mind and if you decide to reverse your decision, you may be in a position where you have to divest some of your assets, like we said, in order to convert it back to that traditional IRA. And so this is why we recommend options like private lending with the self-directed IRA because it’s so hands off and passive. When investing in an actual asset, real estate, like a home, a single family home or a group of single-family homes, there’s a lot more that goes into that and it’s a lot more hands-on and so that would be one downfall for somebody that doesn’t want very hands on. They want the benefits of being self-directed, right, and using that money to invest where they choose, but you know, investing in rental properties and the management of rental properties, even when you have a property manager that’s looking after the homes for you, it could still become, you know, anything less than passive. So you gotta keep in mind, I mean if you’re going to go the self-directed route, and still want passiveness, still want a very hands-off experience, then I would definitely take a look at private lending.
Number 16. Where can I find a custodian that handles self-directed IRAs? We can help you with this. Like I said, we have a couple companies that we work very closely with and they are very well known companies and they’re very good at what they do and very efficient in what they do. And, and they will take the role of the hand holder and carry you through the process. And so we like that because you know, it’s paperwork and things that you have to get through, so these companies are good to work with and we can help you by putting you in touch with the right team to get your self-directed account set up. You can find self-directed IRA custodian services online. It’s pretty easy to do, but before you choose one, be sure to carefully vet out their services. Some of the companies are a lot more difficult to work with. To be honest, I’ve worked with quite a few and uh, like I said, I’ve narrowed it down to pretty much two companies that I like to work with. And so definitely do your due diligence, vet them out. Self-directed IRA custodians are required to be licensed in America. And according to the IRS, the trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as a trustee or custodian. So call any company you’re interested in to ask questions and evaluate their professionalism and responsiveness. Like I said, it’s very important and be sure to confirm that they do not restrict your investment options beyond what the IRS allows. Okay. And so like I said, if you are interested in doing this, contact us, you can go to RealEstateCowboysDFW.com or AREIUSA.com. Those are my websites. You put in your information and if you’re interested in learning more about the self-directed process, we can put you in touch with the right team that can help you with that. So I can kind of alleviate some of that initial due diligence in legwork of finding the right company. I’ve worked with many of them, almost all of them. And like I said, I’ve identified two that I really prefer. So I’ve kind of already done a lot of that legwork for you.
And finally the last question. Hey, I have a lot more questions. Where can I find the answers, right? We only went through about 16 questions here and uh, so for more information about self-directed IRAs, you can speak to a tax professional or a company that specializes in acting as the custodian for a self-directed IRA or you can call us, like I said, go to RealEstateCowboysDFW.com or AREIUSA.com. My team can answer a lot of those questions for you, but then also put you in touch with the custodians that we’ve approved that we work with and they can answer any further questions that you may have that we can’t answer on our own. So you know, the final decision is yours and there’s a lot of online resources for finding out about self-directed IRAs, including the IRS website.
And now I’m just going to end it off with, you know, there’s a lot to like about the self-directed IRAs, which is why more and more investors are turning to them, especially now that the stock markets more volatile and it’s not chugging along like it was in ’17. And typically when you see that happening, you’ll see an uptick in people looking to self-direct. And so that’s common, but I’m just, it’s my view on this whole thing and you could take my advice or don’t take my advice, but I just really believe in today’s market right now. Uh, I don’t think the stock market’s going to get any better anytime soon, and I do feel like there is going to be an economic shift. We talk about this a lot on the Real Estate Cowboys. There’s definitely going to be a market correction when it comes to the single family home market out there in many cities in the US. Not as much in Texas. I’m not seeing that. Although there are some pockets of Dallas and I’m sure other certain areas of Texas where it’s also seeing a bit of a slow down because of the rising interest rates. I think the Fed is trying to cool the home buying market right now just because prices have just ran really high back to where they were before the last recession. And that’s usually a telltale sign that, hey, the rollercoaster is gonna start going down. Even in a recession, there’s still opportunities to invest. You just have to pick the right markets and the right team. You know, like I said, and I still think that Texas is a safe area to invest your money, and Dallas being the main one, because of the fact that it’s home to the most corporate headquarters in America and that’s not slowing down anytime soon. So as long as people keep moving here, there’s going to be demand for development, there’s going to be demand for single-family homes. And the last recession showed us, you know, Texas wasn’t really affected. There may have been a slow down in homebuilding. There may have been a slowdown in home buying, but you didn’t see a drastic price decrease when it came to, you know, the market value of your home. And I expect that to hold true during this next recession that we go through.
So if you like what you heard on today’s episode, this week’s episode, we have many other episodes that you can tune into. You can do that on iTunes or all the other podcast platforms that are out there. Or you can just go to the website, RealEstateCowboysDFW.com, and all the past episodes are housed there. So yeah, if you like what you heard, you want to hear more episodes, feel free to subscribe this podcast. Go to the website. I also have a great book that can break down a lot of the stuff that we’ve talked about on the Real Estate Cowboys that you could get just out of the way in one quick read. And it’s called The Passive Income Guide: What is Your Return on Life. I am the author of that book. The foreword was written by Keith Weinhold of Get Rich Education who’s another bright young, bright investor, a good friend of mine, so it’s a good read to, uh, just brush you up on ways to earn passive income through real estate. And we talk about self-directed IRAs in that book as well. Talk a lot about private lending and debt syndications. Talk a lot about single-family rentals and what type of rentals to avoid, what type of markets to avoid, and a lot about property management as well, which I believe is so important. A lot of investors just think, hey, I’ll just hire whatever property manager and they’ll take care of everything. But the fact of the matter is there’s a lot of crummy property management companies out there and you need to really do your due diligence on hiring the right property manager to ensure that your experience will be as passive as possible with owning rentals. So this is John Larson signing off another episode here at the Real Estate Cowboys. Thank you for tuning in and remember out there, what is your return on life? I’ll see you next week.
Announcer: All opinions expressed by the host of the show are the opinions of American Real Estate Investments LLC and do not reflect the opinions of guests or sponsors. No personal or professional advice on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information, seek advice from your financial tax, mortgage or real estate advisor, as the information is not guaranteed and investment strategies have the potential for profit or loss.