“The most important thing in terms of your circle of competence is not how large the area of it is, but how well you’ve defined the perimeter.” ~ Warrant Buffet
Are you a real estate investor? Yes or perhaps you plan to get into it.
If that’s the case, real estate is likely to be your preferred investment option and why not, you already understand the asset class, your target market trends, and you enjoy more control over your investments.
As Real estate investors, you have ample choices when choosing an asset class for your portfolio, starting with residential properties, commercial properties and even passive investments such as notes. However, when you plan for retirement, your investment options are cut down to the traditional stock, bond, and mutual fund investments.
Don’t you miss the investment discretion you enjoy in your real estate portfolio? I bet you do.
Good news is that there are retirement plans that allow alternative investments such as real estate, mortgage notes, tax deeds, tax liens, precious metals, and much more.
- SD IRA
- Solo 401k
Self-directed Individual Retirement Account (SD IRA) is known for its investment freedom, as it allows plan owners to take their investment decisions. You will require a custodian to manage your plan and help you stay in the legal circles while investing in alternative assets.
Self-directed Solo 401k is a retirement plan targeted towards owner-only businesses and self-employed professionals. The only requisites for the plan are an absence of full-time employees and presence of self-employment activity.
Let’s find out the exact step-step process of real estate investing with your retirement funds.
- Choose a retirement plan: Start with a qualified retirement plan that suits your investment strategy. Make sure that your plan provider allows alternative investments. You can consult financial experts before choosing a plan.
- Fund it with qualified rollovers: Fund your retirement plan through regular contributions and qualified rollovers. Your plan provider should be able to guide through the process.
- Choose alternative investments: Choose among residential, commercial or paper real estate (notes, tax liens, tax deeds). It is best to create an investment strategy up front and choose assets that help in achieving your retirement goals.
- Purchase it with your plan: The next step is to purchase your property through your qualified retirement plan. In case of a self-directed Solo 401k, your plan will hold the title of the property and you will sign on its behalf. When using an SD IRA, your custodian will hold the title of the property. Depending upon your retirement plan, you can choose non-recourse financing, only in Solo 401k plans, to fund the purchase.
- Treatment of income: Any income that comes out the property will go directly to the plan itself. Similarly, any maintenance or repair costs incurred in the upkeep process will go from the plan only. All income and gains generated by the property will enjoy tax-deferred growth until distribution.
Isn’t that simple?
If you are a real estate investor planning to boost the ROI (return on investment) of your retirement funds, get started with a self-directed retirement plan.