Funding Real Estate With Self Employed Retirement Plan
Real estate has once again claimed its spot in the average investment portfolio, as the markets are close to their pre-recession levels. According to the U.S. Census Bureau, the median sales prices of houses in the country were down 1.8% in the year for the data available until June 2015 to $281,800, indicating an excellent investing opportunity. If you are a small business owner or self-employed individual, this might just be the perfect time to add some real estate to your portfolio. Self employed retirement plan such as Solo 401k allows real estate investing along with other alternative investment options such as private lending, mortgage notes, tax liens, precious metals, and traditional investments.
How can you fund real estate with self employed retirement plan?
Real estate is a permissible investment for qualified retirement plans, as stated by the IRS. The two most prominent methods of investing in real estate through Solo 401k include:
- Direct Investment
- Private Lending
Direct Investment
It starts with choosing a self-directed retirement plan, which allows real estate investments and comes with the IRS approval. You can use the funds in your retirement account to purchase real estate, including commercial buildings, single or multi-family homes, rentals, and even vacation rental homes. However, there are a few regulations that have to be met, starting with paying all the expenses from your Solo 401k account. Once you have the property, make sure to pay for maintenance and repair through the retirement plan only. Similarly, any rental income or profits that come out of the property are submitted back to the plan only.
Private Lending
Buying or selling real estate requires some serious efforts and knowledge of the industry, which aren’t the strongest points of an average investor. Self employed retirement plan offers real estate investing through private lending, which means you can offer loan to other investors. Some of the most popular alternative real estate investments include mortgage notes, tax liens, trust deeds, and private placements. Under private lending, the plan acts as a private bank, lending funds to non-disqualified investors and collecting principal along with interest payments on the loan.
The best part of investing in real estate through self employed retirement plan is tax-free growth, allowing your money to grow at a heightened rate. Make sure that your plan provider offers real estate investing. You may want to open an account that offers checkbook control. With checkbook control, you can make quick investment decisions and benefit from volatile market conditions.