How Did You Get Started With Real Estate Investing?

Question

I am currently trying to learn the basics of real estate investing. For a start, I'm about to read Brandon Turner's "How to Invest in Real Estate: The Ultimate Beginner's Guide to Getting Started".

Up next in my reading list will be "The Book On Rental Property Investing: How to Create Wealth and Passive Income Through Smart Buy & Hold Real Estate Investing".

Another book in my queue is "The Book on Investing in Real Estate With No (and low) Money Down: Creative Strategies for Investing in Real Estate Using Other People's Money"

I am a homeowner. And I am looking at earning passive income. I do have 401K & IRA, and REI is something I have been wanting to do.

I know the fundamentals of buying a property (having bought and refinanced my house).

I want to know how did you get started. I know having some cash would greatly help, and I'm interested in stories of those who started with limited capital or resources.

Thank you in advance!

Marlon

George Blower · Answer

@Marlon Ribunal

In short, you can use your retirement funds to invest in real estate but must do so passively not as "business".

Please see the following regarding Considerations re Investing in Real Estate & Considerations re Choosing a Self-directed 401k/Self-directed IRA provider:

General Considerations Re Investing Retirement Funds in Real Estate:

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company that allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

2. If you are self-employed with no employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and if you will use debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, you can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. In either case, you must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. In either case, you should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

Considerations in Setting up a Solo 401k to invest in real estate:

1. First, you must be eligible to set up a Solo 401k. In order to be eligible, you must be self-employed (e.g. providing goods and/or services through your personal effort), reporting self-employment activity on your taxes (e.g. Schedule C if you a sole proprietor) & you do not have any w-2 employees working for your self-employed business or otherwise.

2. If you are self-employed with no employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. All of the income and expenses will need to flow in and out of the retirement account.

4. If you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira...

5. You can't live on the property or otherwise use it for personal use.

6. You can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. You must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. You should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

Considerations in Choosing a Solo 401k Provider:

1. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).

2. You may wish to confirm that the new 401k provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).

3. You may wish to confirm that the new 401k provider will handle the ongoing compliance support such as any required 5500 filing (e.g. 5500-EZ for a one-participant plan with assets in excess of $250,000), any required tax reporting (e.g. 1099-r in the event of a distribution or in-plan Roth conversion), mandatory plan updates and amendments, etc.

4. If you might take a 401k loan, you may wish to confirm that the new 401k provider will prepare the required 401k participant loan documents.

Here are some issues to consider in choosing a Self-directed IRA provider:

1. In order to have checkbook control, the IRA account will need to be at a trust company that will allow the IRA to invest in an LLC (where you will be the manager and your IRA will be a member - an as manager you will have checkbook access to the LLC bank account). Therefore, you will want to confirm that the trust company allows for investing in an LLC and the associated fees and minimum balance that applies to the IRA account.

2. Confirm that the IRA LLC provider will prepare all of the documents needed to not only form the LLC (articles of organization, SS-4 to obtain an EIN) but also the documents needed by the trust company to process the investment of IRA funds in the LLC.

3. Confirm that the provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).

4. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).

5. In addition, if you are self-employed with no full-time employees you may wish to consider opening a Solo 401k instead of a self-directed IRA as it has several advantages over an IRA LLC such as much higher contribution limits, direct checkbook control (i.e. no need to have the account at a specialty trust company), ability to take a 401k loan, exclusion from unrelated debt finance income tax with respect to investment in real estate acquired with non-recourse financing, etc.

In addition, please note if you purchase debt-financed real estate with your IRA, unrelated debt finance income tax should apply to the income attributable to debt-financed real estate held by your IRA. Of course, you will want to review your specific situation with your tax advisor.

Brian Geiger · Answer

In Short,

I saw my parents struggle during the great recession and they had nothing to fall back on when they lost their jobs. We lived poor during that time and I can tell you that it was ver devastating. What this experience taught me is not trust your employer to come through during difficult times. Its always when you need them the most that they would do layoffs.

It wasn't until I was in a Small Business workshop representing the nonprofit I used to work for that I was approached by this person who kept talking about how much money he made in RE. So he recommended that i read rich dad poor dad and from that day on, I was interested in RE. I got a mentor and since been doing lease options and apartment investing. It was the greatest decision of my life thus far.

Colin Reid · Answer

I was an accidental landlord. I bought my first home in 2009 in a popular neighborhood (0% down VA loan), got orders a few years later, and a friend in my squadron offered to manage it for me as a rental. He and his wife were investors, managers, and realtors, outside of his military career.

I bought another home at my new base. In 2013-14, the DOD was making huge cuts and I was certain I would get kicked out of the Air Force, so I started learning about personal finance and real estate more intently. I ended up not getting cut, but I was on the path and the fire was lit. Now I am out of the Air Force, have 5 doors, I'm trying to learn about apartments, and I'm networking hard, finding a surprising number of people who say they want to invest with me.

As for books, I would say broaden your horizons. There's nothing wrong with BP books, and I've read several of them myself. But they're not the only real estate books out there. I always recommend "Millionaire Real Estate Investor," by Gary Keller, as a good starting point for new investors. It gives pretty good overviews of the main types of investing, so you can understand each one and decide which one you want to persue.

Isacc Lightbourn · Answer

@Marlon Ribunal

Read “BRRRR” by david greene! It gives so much organized information.

Best,

Marlon Ribunal · Answer

@Isacc Lightbourn Thanks for the book recommendation. I'll definitely grab that book! I'm trying to immerse myself in as much knowledge as possible.

Marlon Ribunal · Answer

@Brian Geiger That is true. If you are employed by somebody else, there is no such thing as job security.

I have just re-read Rich Dad Poor Dad and that inspired me to delve into RE.

Thank you for sharing your story.

Marlon

George Blower · Answer

This is why it is important to select a provider with experience in helping others invest their retirement funds in real estate.

Marlon Ribunal · Answer

@George Blower Thank you for the info. I'm glad to know that the IRA can be an option if I choose that route. But it seems it could be complicated for people like me who have zero background in real estate investing.

Marlon Ribunal · Answer

@Colin Reid thanks for sharing! And thank you as well for the book recommendation!

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