5 Awesome reasons to use your 401K to buy real estate and how to do it

Most people realize that real estate is a great investment, but never actually utilize the incredible benefits of building wealth through passive income from buying additional real estate.

Once they buy the home they live in, they assume they will never be able to afford the down payment to buy a second house, multiple houses, or ever buying apartments. These were my thoughts before I knew better. I really thought only rich people own lots of houses and apartments and that I could never afford that kind of portfolio unless I hit the lottery.

Well, after I bought my first home, I was lucky enough to come across a book called “Rich Dad, Poor Dad.” After reading it, I had a huge ahhaaa! moment.

The book basically said that owning your home is not an asset while owning additional houses and having other people pay your mortgage IS a true asset. This is because it appreciates and makes you money in multiple ways.

1. 
   
1. Someone else is paying your mortgage.
2. You are making a monthly profit above and beyond your mortgage payment that is adding up in your bank account.
3. Your house is appreciating.
4. Your loan balance is dropping and your equity is skyrocketing!
5. You are creating passive income and building wealth.

Ok. I thought, “Wow! That’s great, but how do I come up with the money to buy more?”

Well after some deep research, I found I could buy houses, or even better, invest in apartment complexes by utilizing my current company 401K. Eureka!! I thought I had struck gold! But there were a few steps I had to take first.

First, I found that I could take money out (tax and penalty-free) and transfer it into a self-directed IRA or self-directed 401K. It took some research and a few phone calls, but I got it done relatively easily without a lot of costs.

Then, I had to go through a list of rules and requirements by the IRS.

1. You must verify that your current 401K will allow a rollover into another self-directed 401K or IRA. Not all are eligible. It depends on your company’s policies. Typically most IRAs’ do allow this type of rollover.
2. Once your self-directed IRA or 401K has been created, they will create a trust for you in whatever name or LLC you choose. You must then create a trust bank account to transfer the money into where the 401K or IRA funds will be held. The company that helps you establish your self-directed IRA or 401K can help you find a bank to do that. This process is not complicated.
3. Just like any normal IRA or 401K, the objective is for you to create and grow your money for your retirement. So any proceeds or profits from the investment you make must remain in the new 401K or IRA until you are 59 ½ before you can make any withdrawals without penalty or tax payments.
4. If you buy a house, the house must be put in the name of the trust.
5. The purchase can be done 2 ways.
   1. With a down payment from the trust and the rest financed through a finance company that specializes in non-recourse loans. (Loans for which you are not personally liable). Be aware that non-recourse loans typically carry a higher interest rate.
   2. Or, the entire house can be purchased with the trust assets. You cannot mix other personal assets with trust assets.

Obviously, purchasing and then renting those houses to tenants requires you to deal with things like fixing toilets, repairing leaky roofs, and yes, sometimes even evicting bad tenants. If you are handy and a good people person, this won’t be an issue and can be lucrative.

If that doesn’t sound like your cup of tea and you would prefer to just sit back and passively invest and watch money being deposited in your bank account on a quarterly basis, and still have all the benefits of owning real estate without all the hassles, then here is the part that will really interest you…

With that same self-directed 401K or IRA, you can also invest in apartments through an apartment syndication and be part owner of a large apartment complex. This will provide you with passive income without all the hassles of property management.

This concept is more clearly explained in my previous blog.

Typically there is a minimum of a 5-year hold on your investments,(sometimes less, sometimes more) but you can anticipate annualized returns between 13% and 25% and sometimes significantly higher which far outpaces the stock market.

I have used this strategy to make multiple investments and now own numerous houses. I’ve also invested in a 144-unit apartment complex through an apartment syndication. I receive monthly income from my homes and quarterly income from the apartments.

I am building passive wealth at a much faster pace than my 401K ever could.

The takeaway is this: You don’t have to be rich or win the lottery to invest like the rich. You can utilize the power of your 401k or IRA to create passive income and grow your wealth to achieve financial freedom.