Solo 401k for Self Employed: Direct or Indirect Real Estate Investment

Real estate often offers promising returns to investors. Instead of simply buying an investment property, it is best to inspect the available investment options in real estate itself. Real estate is much more than purchasing physical properties. It also offers indirect investments in the form of real estate investment trusts (REITs), real estate mutual funds, and institutionalized commercial real estate assets. A Solo 401k for self-employed retirement plan offers investment in all of these real estate products.

What are direct and indirect real estate investments?

A majority of the people choose direct real estate investments over indirect investment options, primarily because of the lack of knowledge about comparative returns. According to the National Association of Real Estate Investment Trusts®, the NAREIT Index reported net returns of 10.54% annually between the years 1992 and 2012. During the same period, housing industry offered annual returns of 2.87%, as per the Case-Shiller Home Price Index. Historical returns are favoring REITs against physical property investments.

Direct real estate investments

Direct real estate investments involve selective purchases of the property and its biggest advantage is the extent of control. Real estate investors can initiate development or create other strategies that affect the overall returns directly.

On the other hand, very few real estate investors have sufficient funds to purchase different types of properties and diversify their Solo 401k portfolio. They are often limited to the local market and its associated risks.

Indirect real estate investments

REIT is the most popular method of indirect investing in real estate. These are public or private equity stocks of companies investing in commercial or residential real estate, mortgages, and similar real estate investments. A board of directors is responsible for the investment decisions of the firm and these firms distribute their investment income among shareholders.

REITs offer an easy method of investing into real estate, which fits for a retirement plan like the Solo 401k plan. However, unlike physical properties, stock market movements influence these investments.

Real estate mutual fund is another investment tool that offers higher diversification and fits for a Solo 401k plan. These funds invest in REITs and real estate companies. Investing in real estate mutual funds offers liquidity and moving from one fund to another is relatively easier. At the same time, investors can start investing with a smaller amount, unlike traditional physical property investments.

Choosing a direct or indirect method of real estate investing depends upon individual choices and financial goals. The key is to target diversification and lower risk profile. Solo 401k for self employed allows real estate investments through direct as well as indirect options. Plan owners can achieve tax-deferred investment growth through a Solo 401k retirement plan.