In 2014, the U.S. topped the list of global real estate investment destinations, with net investments of $324 billion, having 16% year-over-year growth, as mentioned in Cushman & Wakefield’s annual report. It is a clear indicator of a stabilizing U.S. real estate market, offering an excellent investment opportunity for savvy investors. However, buying and maintaining real estate isn’t a recommended investment option for individuals with limited knowledge or time in their hand. If you own an individual retirement plan, investing in alternative real estate investments makes perfect sense. The IRS allows investing in real estate through qualified retirement plans such as Solo 401k. Let us find out more about some promising and low-risk alternative real estate investment tools.
Invest in Alternative Real Estate with Individual Retirement Plan
- Tax Liens: A tax lien is the Government’s method to force pay back of taxes due on a property or business and the taxation authorities sell tax liens to investors in the form of tax certificates. Tax liens are maintained under public records, prohibiting the sale or refinancing of assets attached with the lien. The government collects taxes on the property and forwards it to the tax lien owners. In case the dues are not paid within a given time period, the tax lien holder owns the right to foreclose the property and pocket returns. The interest rates on tax liens may vary from one state to another in the range of 5% to 36%.
- Tax Deeds: A tax deed is an entirely different concept under which, the county owns the property and forecloses it to obtain due taxes along with other incurred expenses. With a Solo 401k, you can buy tax deeds and if the former owner is unable to make the payments in the redemption period, you can move forward to claim the title of the property. However, tax deeds can be slightly complicated and it is best to consult an expert before purchasing them.
- Trust Deeds: An individual retirement plan can invest in real estate with trust deeds, which are backed by real estate. A service company collects payments from the borrowers and pays it to the holders minus its service fee. On an average, you can expect annual returns of 10 to 15% after the fees. You can either buy a single note or invest in fractionalized notes, with more than two to 10 investors holding equal portion of a note. In fractionalized notes, the payments are distributed on a pro rata basis, ensuring regular income stream from your investments.
Apart from these alternative investment options, you can invest in real estate syndicated projects, tenancy in common agreements, discounted papers, and real estate investment trusts (REITs). The key is to make sure that any returns achieved from your investments find their way back to the individual retirement plan.