Powerful benefits of real estate investing with your IRA or 401k

First, a story

Ah, retirement… Work hard and save for your retirement so you can enjoy life after many years of service. If you’re like most people, your retirement account is managed by major companies like Fidelity. You passively give them money to invest while choosing risks that you’re comfortable taking. Then, as time goes on, you check your account from time to time, watching it grow. Everything seems like it’s on track. But, here’s a foreshadow, your retirement is based on the market, and the market is unpredictable.

Next, you wake up to a perfect morning feeling great, ready to receive your daily news. The headline, “the market has crashed.” Why? Well, there could be many reasons. Like Europe’s economy, false news and reports, or a major institutional investor selling its holdings. You notice that all these things are entirely unrelated as to why the U.S. market has crashed!

Here’s the thing, it doesn’t have to be logical as to why the stock markets are down. People buy and sell stocks, and people are emotional and irrational. Even stock algorithms are biased and sometimes irrational because people made them. If they weren’t, they would miss irrational opportunities to capitalize.

Let’s also not forget the multitude of recessions that you and your retirement account will have to endure. As well as unexpected circumstances like COVID, all taking a chunk of your retirement. Because of all these random, unpredictable things. It means you can’t have an early retirement, and now you have to continue to work for many years to recoup the money you lost!

Sounds great, right? If not, keep reading.

Enter real estate

Real estate is one of the most stable, tax beneficial, income-producing, and foundational investments you can make. It’s a REAL asset that you can physically touch and is easy to comprehend. It’s an asset class that can build real generational wealth and long-term value. It doesn’t fluctuate with misinformation, feelings, or bias. These reasons alone should make you want to invest in real estate. Are there risks? Yes, every investment has risks, but some are a lot less than others.

Don’t just take my word for it. Do your own research about real estate as an investment, and I’m sure you’ll come to the same conclusion as most savvy investors. If anything, having options for diversification and not having your entire retirement portfolio rely 100% on the stock market is just good economics.

While I won’t dive into depth for each of the reasons to invest in real estate — we’ll save that for another article. So instead, I will give you a few overlapping key points in the “why you should invest in a real estate fund” section further below in this article.

Self-directed IRA

To be able to make investments of your choice, you’ll have to become a self-directed account. Don’t worry, as it’s a straightforward process. All you need to do is ask your current retirement account custodian that you want to become self-directed. If they don’t allow self-directed accounts, you’ll need to find a different custodian to hold your account.

Becoming a self-directed IRA investor offers tremendous tax advantages when you invest in real estate. For example, you will not have to pay taxes on contributions or earnings for a self-directed traditional IRA until you start taking distributions during retirement. Or, if you invest with a self-directed Roth IRA, your earnings will appreciate tax-free, allowing you to enjoy your profits without hassle from the IRS.

What you may not know is that you can easily switch to and invest with a self-directed IRA. You are not limited to traditional IRAs and can switch over with a Roth IRA, SEP or simplified employee pension (SEP) IRAs, or a simple IRA. You can also roll over a 401k from your current or previous employer. It is a fantastic opportunity to maximize the value of your 401k.

After becoming self-directed

Now that you’ve decided to become self-directed, you will have to choose how and where you want to make your investments. You’ve taken steps to gain more control over your retirement and future. Your most important choice will be whether or not you want to become an active or passive investor. While you can do both, active investing may not be for you if you still have a day job.

I’ll give you a brief overview of each.

Active investing is where you will manage hands-on the who, what, when, where, and why of: deal sourcing, negotiations, due diligence, legal, buying, and selling assets — along with many other issues that go with managing your portfolio. If this is more your style then all you have to do is go out and start doing it right now!

Passive investing is where you still get to choose your investments but without actively doing all the things mentioned before. Instead, you’ll rely on the expertise of the person(s) or company you decide to invest in to manage the day-to-day activities of the investment.

Passive investing, even for the active investor

If you’ve decided to be a passive investor or at least make some passive investments along with your active ones, then allow me to tell you about funds. On the other hand, if you’re not interested and already in the real estate game, let me make an argument on why you should also invest in a real estate fund.

Diversification. Spread your risk to risk-adjusted funds where investments are better protected and run by industry experts. For example, suppose your real estate investments fail — such as house flipping — where there is a greater risk on return. In that case, you’ll have fallback investments in well-established, cash-flowing assets that mitigate your loss.

Cash flow. For example, at Projected Capital, our fund focuses on multi-family properties. These are existing assets that are operating and generating cash flow and backed by many paying tenants. Another example is that if you’re invested in single-family homes and a tenant leaves, it’s 100% vacant. With apartments with many units, you can have ten vacate simultaneously and still generate positive cash flow.

Stability. Real estate has delivered higher returns than both equities and bonds. It’s also at the lower end of the risk spectrum than equities — which means less volatility. As a result, real estate makes risk-adjusted returns more favorable than these other asset classes.

Passive investing. Make income and build up your retirement without headaches, worrying about markets, or pitches from investment advisors. Passive investing also enables you to continue working while being a savvy investor.

Tax advantages. There are many tax benefits that both real estate and investing with a self-directed account offer. One of them is depreciation, a tax write-off that can deduct a certain amount of income taxes each year. In addition, for self-directed accounts, you will not have to pay taxes on contributions or earnings for a self-directed traditional IRA until you start taking distributions during retirement. Or, if you invest with a self-directed Roth IRA, your earnings will appreciate tax-free, allowing you to enjoy your profits without hassle from the IRS.

Wrapping up

I hope that this article has given you enough information to at least start taking action. Through my research and experience, I was surprised that many people didn’t know they could become self-directed and take more control over their retirement.

I encourage you to go out and find investments — or even do your own — just make sure you’re comfortable with the risks and don’t forget the due diligence part.

If you’ve found this helpful or think it could help others, please be sure to share, subscribe, & comment!

Disclaimer

This information, in any fashion, should not be viewed as legal, investment, or tax advice. Prospective investors should consult with a tax or legal adviser before making any investment decision.