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#AskBP 087: What Are The Pros and Cons of Using Retirement Funds to Invest in Real Estate?

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What Are The Pros and Cons of Using Retirement Funds to Invest in Real Estate?

On today’s episode of the #AskBP Podcast, Mindy Jensen discusses the different ways to use retirement funds to invest in real estate, and the pros and cons of each idea.

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Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has tau...
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    Tom Phelan
    Replied about 5 years ago
    I think Mindy should have titled the Podcast “What Are The Pros and Cons of Using 401(k) Retirement Funds to Invest in Real Estate?” She didn’t cover at all the IRA where there are six trillion dollars invested, almost twice the amount that are in Company 401(k)s.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied about 5 years ago
    Thanks for watching, Tom. You are correct, I didn’t get into the pros and cons of using your IRA to invest. There are so many rules that would need to be covered about IRA investing, that it wouldn’t fit into an #AskBP segment. Perhaps this could be covered in its own separate show.
    Timothy F.
    Replied about 5 years ago
    Would actually really like to see this. Any chance of you doing a full show covering IRA investing?
    Joe Foster Lender from Cary, NC
    Replied about 5 years ago
    Mindy, Thank you for taking the time to record and edit your thoughts on investing out of an IRA. Some additional areas of concern to a newb IRA REI are how to invest in real estate outside of REITs without pulling the money out of the IRA by using a self directed IRA. There are many companies that offer such services, the trick is to find the ones that has reasonable fees. Watch out for the companies that nickel and dime or $50 and $100 ya. Fifty bucks to process transaction incoming, $100 to send a wire, $100 to receive a wire, $75 for this paperwork and X% of your holdings every year as an administration fee. Turn around time is also important, how quickly can they handle the transaction? One of the major companies did not have the ability to bill these fees to a credit card before I “discussed” it with the corporate officers. If the fees come out of the account, this is less to be used for tax deferred/free gains and the fee is not tax deductible as a business expense. So, find a company that is either willing to bill you monthly/yearly or allow a credit card number on file. Investing in rentals in IRAs has other challenges for setting up and paying expenses and mixing taxed and tax free funds. I would recommend you discuss this with a knowledgable accountant before doing it. In my opinion, a great option for IRA REI is in private lending, there are few additional expenses, no tenants and toilets and if all goes well, that is no forclosure, much fewer hassles. I have yet to find a “great” self directed check book IRA provider. Everyone wants huge cuts and money for nothing, such as, even though it is a check book based and I control the assets in a separate account, most want a percentage or tiered amount of assets under “my” management on top of a kilo-buck or three to set it up. Perhaps a follow up that gets into additional details of some good ways to invest using IRA funds would be good after some additional research, experience and interviews with investors that have been around the block. Joe
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied about 5 years ago
    Thanks for watching and commenting, Joe. The rules for investing in real estate using an IRA can be daunting. I think you can make money doing it, but like you said, the fees can kill you.
    Susan Maneck Investor from Jackson, Mississippi
    Replied about 5 years ago
    An even better option for those who are able, is to establish a solo401K. It is cheaper to manage than a self-directed IRA. The draw-back is you have to have some self-employment income. I’m eligible because I do about 5K a year in consulting work, but any kind of contract work for which you get a 1099 will do. Now obviously earning 5K a year doesn’t leave me much to contribute to my solo401K but I was then able to rollover my IRAs into it. That gave me enough money to take out a loan to buy the house I live in, plus buy two other houses within my solo401K. Loans from a solo401K don’t have the same problems as regular 401K because it doesn’t carry the risk of losing your job and having to pay it back immediately. Since other than REITs Mindy didn’t mention buying property within a retirement fund (as oppose to taking money out for that purpose) she also didn’t mention one important disadvantage to buying property within a retirement fund, namely that you don’t get all the tax advantages that you would normally get from passive income outside of a retirement fund. When you withdraw the money you pay regular earned income tax, no discounts for depreciation, etc. which can make real estate income attractive. I initially bought property with money outside my retirement funds. Then I used money from loans from retirement funds that would not have to be paid back if lost my job. Only when these funds were exhausted did I buy property within my retirement funds. I should add that I’ve always had investments in an REIT within my retirement accounts. I have somewhat less invested in my REIT now that I own so much real estate outside of it.