Invest in Real Estate While Staying Within Solo 401k Rules

Real estate investments allure investors from all walks of life, let it be a real estate investor, a technology professional, an investment banker, or a small business owner, and rightly so. The real estate prices are close to 2008 levels, indicating a significant improvement in the housing environment. 

If you are a small business owner or self-employed individual, buying real estate might seem like a promising venture, provided that you have the time and resources. As far as finances are concerned, a Solo 401k plan can help you fund a real estate purchase or even allow non-recourse financing within Solo 401k rules. However, the time factor could pose some challenges as real estate buying or selling requires a certain degree of skills or the need to work with a team. If you want to invest in real estate minus all the hard work, investing in alternative real estate investments through the market is the right option for you.

Investing with Solo 401k Rules

Solo 401k Rules: How you can invest in real estate through stock market?

• Real estate stocks: The easiest way is to trade the stocks of real estate companies or homebuilders like Reyland Group Inc (NYSE:RYL), which is up 8.27% year-to-date in 2015. The shares of these companies trade on real estate market conditions and you can switch or withdraw investments during unfavorable environment. However, investing in real estate stocks is likely to expose you to risk, especially during market fluctuations, and you may not want that with your retirement savings.
• Exchange Traded Funds (ETFs): Exchange traded funds (ETFs) offer a better alternative in comparison to individual stocks, as they hold stocks of multiple companies in any given asset class. ETFs are not likely to rise as much as individual stocks, but they hedge your investments against large market declines. SPDR S&P Homebuilders (ETF) (XHB) is one such ETF, with its shares improving 6.85% year-to-date.
• Stocks associated with real estate market: If you want to limit dependence on the real estate market, but remain in the same industry, stick to real estate retail stocks such as Home Depot Inc (HD). The shares of Home Depot Inc have grown 280.46% in the last five years, and 16.36% in 2015 only. These stocks run on the real estate market’s sentiment, but they offer handsome returns even when properties are not selling, as customers keep renovating their houses for better returns or just for maintenance purposes.
• Real Estate Investment Trusts (REITs): REITs offer another alternative real estate investment tool for passive investors. If you plan to add real estate in your portfolio, while staying within Solo 401k rules, invest in REITs. These are groups owning commercial or residential properties for gainful purposes, and at least 90% of their income is distributed among the shareholders. Their average prices may not appreciate as much as individual stocks, but higher dividend payouts make up for the moderate growth.

Under the IRS rules, you can invest in any of these alternative real estate investments while adhering to the Solo 401k rules. Keep in mind that the returns should go back to the Solo 401k plan only. Real estate can balance your portfolio and offer an income-generating investment vehicle for passive investors.