Can You Invest In Real Estate With Your 401K or IRA?
The simple answer is YES! Many investors face similar issues stemming from their retirement accounts. More often than not, they are unable to access the funds due to them being either trapped in an employer 401(K) or held in a financial planner’s IRA until they reach 59.5 years old. Beyond this frustration, these investors are also fearful of market volatility and inflationary rises which can impact their potential future income. Yet at the same time, they wish to diversify into real estate but don’t have the time or desire to become a landlord. Instead choosing to invest their free time in family, friends, and hobbies.
What is not so widely known among the middle class or working class is that one does not have to wait until 59.5 to make use of retirement funds stored away in IRA or 401(k) plans. By rolling those funds into a self-directed IRA or 401(k), individuals can access the funds and make investments into alternative assets such as real estate. This can be an incredibly lucrative move, as the wealthy have been taking advantage of these opportunities for decades; however, this route isn’t widely known among the public. This is an excellent option for those wanting to further safeguard their financial futures.
Investing In Real Estate With Your Retirement Fund
Identify a company that will help you set up your account: Identifying the right self-directed account custodian is a crucial step in setting up self-directed accounts. To find an ideal custodian that meets your needs, ask your current plan administrator to see if they offer self-directed options, seek referrals from other investors, inquire with any fund managers you plan on investing with, or search online using keywords such as SDIRA, solo 401(k), or eQRP. Whatever option you choose, most custodians are often very helpful when it comes to providing guidance on which type of self-directed account suits you best and making sure the necessary paperwork for rollover is taken care of.
What You CAN and CAN NOT invest in with a Self-Directed IRA or 401K
Self-directed IRAs and 401(k)s can present a great opportunity for individuals to build their wealth, offering the ability to invest in assets outside of traditional stocks, bonds, and mutual funds.
Alternative Investments Include:
- Real estate
- Precious metals
However, self-directed accounts have stricter regulatory requirements that limit certain investments from being included in those portfolios. Therefore it is imperative to work closely with your self-directed IRA or 401(k) custodian when building your portfolio to ensure prohibited transactions, such as art collectibles, life insurance policies, and self-dealing investments are avoided.
Leveraging Real Estate Investing
Buying real estate can be a fantastic advantage for investors who want to increase their buying power and grow their assets. By taking a portion of your retirement account funds as a down payment, it allows you to borrow the rest via a mortgage which amplifies your wealth accumulation potential giving you leverage to use in the future. For example, if you invest $100,000 as a down payment on a $500,000 property not only will rental income increase but your wealth could potentially increase fivefold thanks to the appreciation on the value of the property. For those with small retirement accounts, it can be difficult to secure large loan applications. However, investing in a private equity fund or real estate syndication may give an advantage. These investments are generally passive and enable investors to purchase larger assets that qualify for larger loans. This strategy can be very beneficial when seeking to borrow from a lender who may have been hesitant otherwise.
Passive Investing With An IRA or 401K
Self-directed retirement funds can offer investors a key advantage when it comes to investing passively in real estate assets. These types of assets, such as multifamily apartment communities, retail, office space, and self-storage facilities are generally too large for an individual to acquire with their retirement accounts. Investors who wish to access these opportunities can do so by partnering with a sponsor or private equity firm that has pooled together the capital to acquire larger real estate assets on their behalf. This allows them to reap all the associated benefits without having to take on the responsibilities of being a landlord or managing the property themselves.
Investing in real estate through a self-directed retirement account can have advantages over traditional investments, such as protection from inflation and market volatility. However, self-directed investments are still subject to risk like any other investment. To reduce the potential for losses and make the most of your retirement funds, it’s important to be mindful of both common pitfalls and rules that govern self-directed accounts when researching potential investments. Diversifying your holdings across different types of assets can help you balance out the risks by creating a more secure portfolio.
Control Your Financial Future
Applying a self-directed retirement account to invest in real estate offers a great advantage that many people often don’t consider. With this option, you can have more control over your future financial picture and benefit from diversified investing strategies. You’ll still get all the benefits of a retirement account like tax advantage and potential for growth, but having the freedom to invest in something you know and trust such as real estate adds another layer of comfort and tangible knowledge. Taking advantage of this option can open up new opportunities to save so you can enjoy a greater sense of security when it comes to your financial future.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
About Jim Thorpe & Summit Capital Partners
Jim Thorpe is a Seattle-based entrepreneur, , and real estate expert with over 30 years of experience in real estate development. He works to find high-demand properties in low inventory areas for both developers and homeowners alike. One of his specialties is locating single-family homes in property parcels zoned for multi-family development. His rental portfolio now includes houses, apartments, and commercial properties. Thorpe’s dedication to his business has led to city-wide growth and development in the real estate sector.
Summit Capital Partners is a real estate development and management firm that operates out of Puget Sound and is owned by Seattle real estate expert, Jim Thorpe. They work to acquire off-market real estate and specialize in developing risk-adjusted solutions, allowing an assets’ value to increase over 6-12 months. Summit Capital aims to make a difference in the community where they do business.