View of haven on the rail yard after remodel

Invest in real estate with your retirement account

This month we’re sharing how it’s possible to invest in real estate with your retirement account. 

Retirement savings and real estate investing does not have to be mutually exclusive. When most hear the term retirement savings, it is common to think of stocks and index funds. An alternative is to use something that has been around for nearly many years, a Self-Directed IRA (SDIRA) or Solo 401k.

A SDIRA or Solo 401k allows you to take control of your retirement savings and invest in almost anything you’d like. Some things you could invest in include livestock, precious metals, bitcoin, oil and gas, and real estate. We chose to invest in real estate with our retirement accounts.

We must start by saying we are not CPAs and encourage you to do your own due-diligence or consult with a CPA.

Here are two benefits and two things to look out for when using a self directed retirement plan.

  1. Benefit: Diversification

Before we got into real estate investing, most of our retirement accounts were invested into low cost index funds. While we still believe index funds are a great way to save for retirement, we saw real estate as another way to diversify our portfolio. 

Real estate has a relatively low correlation with stocks. Real estate is a physical asset and very slow moving during crashes. You won’t see a 20-30% crash overnight with real estate. 

  1. Benefit: Higher potential returns

“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it” – Albert Einstein

Investing in stocks typically return about 7%-10% per year over a period of 20 years or more. While those returns are admirable, it is common to see higher returns for real estate investments. Our projects target 14% per year or higher. 

Using a simple compound interest calculator, $100k invested over 20 years with a 7% return is $387k. That same $100k invested over 20 years at 14% is about $1.375M.

  1. Beware: Prohibited Transactions

With a self directed retirement plan, there are several prohibited transactions which are mostly caused by involvement with a disqualified person. That could include yourself, your parents, your spouse, or lineal descendants.

For example, you could not use your retirement account to invest in a real estate project that your spouse manages. That would be a disqualified person, making it a prohibited transaction.

  1. Beware: Additional taxes (And why we like the Solo 401k)

Most people do not buy a property in all cash. One of the major benefits of real estate is higher returns through leverage, such as a loan or mortgage.

To keep this at a high level, investing into leveraged real estate may incur additional taxes. The tax owed is called UBIT, unrelated business income tax. This is caused by UDFI, unrelated debt financed income. The higher the leverage on the property, the more taxes you will owe. This tax may slightly lower overall returns.

The good news is that UDFI does not apply for Solo 401k’s. If given the choice, we would use a Solo 401k every time instead of a SDIRA. If you have any kind of self-employment income, you may be eligible for a Solo 401k.

Working with a knowledgeable retirement company is the easiest way to get more knowledge for your specific situation. They will also guide you through investments to help ensure you’re compliant.

We’d be happy to share our experiences investing with retirement accounts. We have no affiliation to any retirement companies and can share which companies we use.

Thanks for reading this month’s newsletter. Next month, we’ll highlight some of the tax benefits of investing in real estate.

Is this strategy for me?

You won't know until you learn more.

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