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Posted over 7 years ago

Small Business 401k Plans: Buying a single-family home

A majority of qualified retirement plan holders consider adding real estate to their retirement portfolio, starting with single-family homes. Single family homes are easy to maintain, sell or buy, and rent easily against commercial or larger residential units. In addition to offering healthy returns, single family homes can help you generate a stable income. 

If you are a small business owner holding small business 401k plans such as Solo 401k, adding single-family homes to your portfolio is a lucrative option. The IRS allows plan owners to invest in real estate along with some favorable financing options available for purchases, including non-recourse financing. For those who are just starting out with their Solo 401k plans, here are a few factors to weigh in before building an investment strategy.

Small Business 401k Plans: Why Invest In A Single Family Home?

Real estate has remained a lucrative investment for the past several decades, and on an average, it has outgrown inflation 1.5 times, making it an excellent asset. Unlike large real estate properties such as commercial complexes, apartment buildings, or even luxury real estate, single family homes are the most liquid assets in this class. If you want to sell your single-family home, there is a huge target market, which is not the case in comparatively larger establishments. Moreover, if you plan to add real estate in your Solo 401k account, it is best to follow a buy-and-hold strategy, ensuring positive gross returns, even in a down market.

How much should you invest in real estate?

According to a large pool of financial experts, diversification is the best strategy for an average investor, and the same holds true for Solo 401k plan holders. If you plan to add real estate to small business 401k plans, it is best to limit your investments to 25% of the overall portfolio. For early investors, 10% to 15% is the right allocation, and you might even start with alternative real estate investments, including REITs, real estate ETFs, mortgage notes, tax liens etc. The IRS allows investing into a wide range of investment products for qualified retirement plans.

Is it this the right time to invest in real estate?

The mortgage interest rates are near their all-time low levels, which makes it an excellent opportunity to invest in real estate. However, you need to consider many factors starting with current market supply, seller sentiment, and your personal investment plan. You can opt for non-recourse financing to finance the transaction, and it is likely that you might find favorable interest rates in the current market. The bottom line is to ensure that the transaction is properly structured and all your returns go back to the retirement plan only.



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