Self Employed 401k Tips: Passive Real Estate Investing
In my last Bigger Pockets’ post, Leverage Growth with “No Tenant” Approach for 401k Small Business Plan, I discussed alternative real estate investment options, including mortgage notes, tax liens, and REITs, highlighting the return profile of each of these investments. What makes passive real estate investing a feasible option is its relatively lower maintenance profile, allowing an average investor to run the investments on auto mode. Adding passive real estate to your Solo 401k retirement portfolio offers additional benefits of tax-deferred growth and compounding. However, if you are still uncertain about indirect real estate investing, here are some reasons to get started.
4 Qualities that Make Passive Real Investing Perfect for Your Solo 401k
- No tenant calls at 3 am: If you do not own a rental real estate property, be aware that it is a challenging process, and you are the one answering any tenant issues day in and day out. With passive real estate investments, you are free from the management hassles. You can add the benefits of real estate investing to your self directed 401k, but minus the responsibilities.
- Profit from the industry experts: “It takes a wise man to learn from his mistakes, but an even wiser man to learn from others.” ~ Zen Proverb. The real industry comprises of experts who have spent several decades understanding the market and are aware of the best methods for sustainable growth. It only makes sense to leverage their knowledge and receive long-term growth with passive investing.
- Easy to start investing and management: Unlike traditional real estate, you don’t need to manage the rehab or the tenants. All you need to do is to look for the deals and fund the transaction with your Solo 401k money. It will probably take less than 24 hours to start investing in REITs or real estate mutual funds, whereas tax liens or tax deeds require some extra efforts.
- Grow your retirement portfolio while you sleep: Traditional real estate requires you to work for the money, but passive real estate investing allows money to work for you, even when you are asleep.
Complement Passive Real Estate Investing with Solo 401k Plan
- Tax-deferred growth: Any investments in your Solo 401k plan grow tax-free, and the taxes are payable only at the time of distribution.
- Higher contribution limits to accommodate big investments: Solo 401k plans have large contribution limits, allowing you to invest aggressively in passive investment options. You can contribute up to $53,000 in 2015, along with catch-up contributions of $6,000 for individuals above 50 years old.
Comments (5)
It wasn't mentioned that like the self directed IRA, SD-IRA, the solo-401k can invest directly in owning rentals, do flips (with limits re being tagged being a "dealer"), not just buy REITs or turn-keys. We own around 12 rentals in our SD-IRAs and are moving them asap into a solo-401k (for many reasons).
Bottom line you can move your SD-IRA, IRA, 401k from a prior job into a solo-401k and buy rentals directly. You aren't limited to lending to flippers (hard money lending) or buying managed investments (turn key or other). You can directly own and manage rentals if you'd like. There's limitations in that you can not live in or have a relative live in the rental, or do any work on the rental yourself. Read up on "unpermitted transactions" for SD-IRA and solo-401k.
We are leaving our SD-IRA custodian for many reasons and creating an LLC S-corp to be a property management company for our taxable rentals. Under which we are creating a solo-401k plan with a sub account for my wife and one for me. We will move the SD-IRA rentals into the solo-401k sub accounts, each with their own check book account that we will have direct control over.
The issues with SD-IRA: one unpermissable transaction will blow up the entire account, poof its gone. The 401k statute limits the risk to your account to just the amount of the transaction. IE if you put a light switch plate on in a rental owned by your solo-401k you have violated the unpermissable transaction law by just the value of the work you did. In the SD-IRA should the IRS audit you you'll potentially loose the value of the entire account via having all gains exposed to being taxable, then the fines. You need to know the rules in owning rentals in either a SD-IRA and solo-401k.
We've about doubled the value of our SD-IRA account (same as if it was in a solo-401k) in 4 years by buying rentals cheap, light fixing, in top high school districts, because of good schools we get top rent and also top appreciation and growing tax free (untill we start taking destributions).
Curt Smith, about 9 years ago
I didnt see the "return profile" of the various alternate real estate investment options in your other post. Maybe I missed it or misunderstood what you meant? I was looking for estimated returns for each one.
Joseph M., about 9 years ago
The intent of the post was not to provide detailed explanation of each investment option and potential returns, but rather to provide an overview of the options that are available. But BiggerPockets is the platform where you can find more in dept explanation and studies for the investments that you are interested in. And since investments are not my area of expertise (while I am an investor, my specialty is self-directed retirement accounts with checkbook control, which allow all kinds of investments) you can find articles, posts, videos and podcasts from those who are much more experienced on the subject.
Dmitriy Fomichenko, about 9 years ago
I enjoyed reading the post. keep them coming.
Robert Hetsler, about 9 years ago
I'm glad you found the article helpful Robert. Merry Christmas and Happy New Year to you!
Dmitriy Fomichenko, about 9 years ago