“The loftier the building, the deeper must the foundation be laid.” ~ Thomas A Kempis
One of the basic principles of construction is to lay a strong foundation for the building, ensuring its longevity over the next several decades. The same holds true for your financial life, you cannot amass riches without understanding the way it works. For small business owners and self-employed individuals, 401k self directed retirement plans offer a medium to invest in a tool of their choice and enjoy tax-deferred returns until distributions. Solo 401k leads the self-directed retirement plan category and more people are turning towards the plan because of its self-directed investment feature. You can invest in real estate, mortgage notes, tax liens, precious metals, private financing and businesses, and much more.
In this series, we are going to focus on real estate and understand some basic investment strategies and niches of this industry, along with the benefits of investing through 401k self directed plan.
401k Self Directed Plan: What You’ll Learn in Our Real Estate Investing Series?
- Investment niches
- Physical real estate
- Alternate real estate investments
- Investment strategies
Real Estate Investments with 401k Self Directed Plan: Investment Niches (Physical real estate)
Unlike the common belief, you can achieve a tremendous amount of success with a narrow focus on a particular real estate niche. The choice of niche depends upon your current financial resources, availability of time, and most importantly, your understanding of the real estate industry. Let us find out some prominent physical real estate choices for your retirement plan.
- Single Family Homes
According to the latest figures from the National Multifamily Housing Council (NMHC), 37% of the U.S. households were renting a house out of which, 15.19 million or 35% were living in a single family home. These figures alone indicate the vast investment opportunity in single-family homes, and a majority of real estate investors prefers them at the initial stage of their career. They are easy to rent, sell, buy, and because of their lower capital requirements, you can fund the transaction with your Solo 401k account balance. However, you need to do some math before investing in a single family home and make sure that you are able to generate positive cash flow at the end of the month.
- Small Multifamily Homes (Duplex and Triplex)
For investors who have contributed regularly to their 401k self directed plan and have a high account balance, small multifamily homes offer an excellent investment opportunity. These properties usually contain anywhere between two to four single-housing units and can offer good cash flow. Unlike a single family home, at least some of these units will always be rented, ensuring a regular cash flow. The key is to choose a neighborhood with lower vacancy rates, although you might need maintenance services for the building. The purchase process will be similar to that of a single family home and you will need to redirect the rent to the 401k self directed plan only.
- Commercial Property
If you already have an exposure in real estate along with a fair understanding of the industry, a commercial property could help you generate substantial cash flows. Commercial properties represent physical establishments that are rented to businesses and may vary in size or purpose. You need to understand that commercial properties must comply with some standard safety requirements set by the local government. Realtors with experience in real estate are the right candidates for this investment option, and they can use 401k self directed plan to purchase the property, while practicing non-recourse financing option.
- Mobile Units/Homes
According to the NHMC, 5% of the overall renters in the United States live in mobile homes, as reported in August 2015. Further, the latest trends indicate an increase in mobile home demand. As published on the Wall Street Journal, the average cost of a mobile home was $64,200 in November 2014 against the average median home price of $180,800 in the country. Warren Buffet, the Oracle of Omaha, owns the largest mobile home manufacturing company in the U.S., Clayton Homes, and two of the largest mobile-home financing companies, including 21st Mortgage Corporation and Vanderbit Mortgage and Finance Company. If one of the most-respected money managers in the country has an interest in mobile units, then there is definitely a potential in the industry. Mobile home is an excellent investment option for investors who have a lower Solo 401k account balance. However, there are some terms associated with mobile units, such as the cost of the land might not be included in the price, and you might have to pay a monthly charge to your landowner.
Understand Your Responsibilities with Physical Real Estate
Real estate is known for its ability to generate stable income and it makes perfect sense to add it in your Solo 401k portfolio, however, there are a few factors you must acknowledge before investing in it. With physical real estate, you will be responsible for the safety (fire and theft), insurance, and maintenance of the house. If you are self-employed, with real estate not being your primary business, finding time to manage these responsibilities could be difficult. You can always hire a service agency for maintenance of the property, but it will eat up your monthly returns. Investing in real estate has its perks but it does demand effort and experience. If you are ready to manage these responsibilities, real estate offers an excellent investment opportunity, but if you are not, we have some other ideas too.Next in Series: 401k Self Directed Plan: Real Estate Investing Guide (Part Two) Last in Series: 401k Self Directed Plan: Real Estate Investing Guide (Part Three)