How to Start Real Estate Investing with Your Old 401(k)

When you change employers, you may leave something behind besides your work friends. Something equally as important, but in a monetary way…

Do you remember that old 401(k)?

Initially, you might have wanted to leave that retirement plan right where it was until you settled in at your new job. Then, as it does, maybe time got away from you, and you forgot about those funds. Perhaps your new employer doesn’t offer retirement benefits. So, you’re at somewhat of a crossroads in deciding what to do. But, lucky for you, there are options, and you don’t even have to roll those old funds over into another typical employer-sponsored plan. Instead, you can choose to roll them into a self-directed 401(k).

For those who are new to self-directed investing, know this:

A self-directed individual (or solo) 401(k) gives you abundant freedom and control over your investment funds and decisions.

You gain access to a wide variety of investment choices that may have a higher rate of return than traditional retirement account assets. A self-directed plan gives you diversity and the power to expand your portfolio beyond stocks, bonds, and mutual funds.

With a self-directed IRA or solo 401(k), you can invest in a variety of options, such as private placements, precious metals, oil, gas, and timber rights, hedge funds, etc. However, real estate is a popular choice for both beginner and sophisticated investors seeking secure financial futures.

Use a Self-Directed 401(k) to Invest in These Real Estate Assets

• Single and multi-family homes
• Mortgage notes
• Commercial property
• Rental property
• Apartments and condominiums
• Rehab-and-flips
• Real estate owned (REO) properties—foreclosures
• Improved and unimproved land
• Offshore property
• Building bonds and commercial paper
• Tax liens and deeds
• Tangible asset and trust deeds

Private Mortgages Offer an Additional and Interesting Investing Strategy

One area, in particular, has been growing in popularity: private mortgage lending. For example, a potential borrower may lack either the down payment for a property that is required by traditional lending institutions or they may need to finance the full purchase price of the property. This is your opportunity to use retirement funds to earn a higher rate of interest by putting it to work. Your retirement plan can extend loans just like a bank would, and earn income on interest and other terms of the note.

As the account owner, you must perform proper due diligence both on the potential borrowers and the rules involved in this type of investing. Using your self-directed IRA to provide private mortgage lending options, with both secured and unsecured notes, has both benefits and risks.

Secured Notes

• Typically, lower interest rate which is appealing to the borrower, but you still make a higher return than traditional retirement accounts
• Lower risk to the lender

Unsecured Notes

• Higher interest rate and higher return
• Higher risk as the loan is not secured by collateral

Either of the above loan structures can work for private mortgages and other promissory notes that have nothing to do with real estate. Your self-directed 401(k) can loan money to someone looking to finance a car, a business, or even to another individual who’s looking for capital to invest.

So, if you’re still on the fence about what to do with that old 401(k), hopefully, some of the above information has provided you with options to consider.

If you decide to self-direct your 401(k), consult with financial professionals who can advise you in making solid financial decisions, and learn the rules and regulations regarding self-directed investing. Make sure you choose a self-directed retirement plan administrator who allows and has experience with real estate and/or other investments you’re interested in.

Self-direction is a powerful strategy that gives you more control over building your future of long-term wealth with the tax protection that an IRA affords you. Choosing your own assets at a pace you’re comfortable with can help you achieve the retirement future you want and deserve.