Self Employed Solo 401k Investing: Rentals Still Remains Popular

A recent analysis from RealtyTrac® has shown that buy-to-rent strategy is still a successful bet in at least 41% of the analyzed U.S. counties, despite a 0.13% drop in the annual rental gross yield of 8.94% during the first five months of 2015 against the prior year period. Out of the 285 analyzed counties, 111 witnessed an increase in buy-to-rent returns, with Philadelphia, Pennsylvania topping the list with 17.67% returns. Darren Blomquist, VP of RealtyTrac, said, “Buying rentals continues to be a brilliant strategy that allows investors to hedge their bets in a real estate market shifting away from homeownership and toward a sharing economy.”

Does that sound like a profitable proposition? Well, it is, especially considering the lower risk profile of the rental real estate industry. If you are a small business owner without any employees, a self employed Solo 401k plan can help you add real estate in your investment portfolio. Solo 401k is an IRS approved retirement plan for self-employed professionals and small business owners, which allows real estate investing.

What makes Solo 401k perfect for buy-to-rent real estate investment?

• Access to non-recourse funding: A Solo 401k retirement plan provides access to non-recourse funding, which means you can add real estate to your portfolio without increasing your credit-risk profile. Under non-recourse funding, the property under consideration acts as the collateral, prohibiting the lender from coming after you in case of a default.
• Tax-deferred growth: Self employed 401k plans enjoy the benefits of tax-free growth, and the taxes are applicable only at the time of distribution. Further, if you invest through a Roth Solo 401k plan, your returns on the property will be tax-free even at the time of distribution.

4 Short tips for buy-to-rent real estate investors

• Develop an understanding of the market: Real estate industry is among of the most malleable sectors to be in, and if you want to achieve long-term success, educate yourself and spend time understanding the market.
• Start small and choose gradual growth: As a general rule of thumb in every aspect of life and business, starting small and gradually rising to the larger ranks later is a well-proven strategy. The same principle applies to real estate investing, and the biggest mistake you can make is to buy a prize property at the start of your real estate investing career.
• Devise a management strategy: If real estate isn’t your primary business, you will need a management plan, involving maintenance of the property along with repairs and regulatory responsibilities. Keep in mind that the entire cost of maintenance should go out of the Solo 401k account only, and the rent should come back to the account only.
• Tenant screening is crucial: First-time rental property investors ignore tenant screening, making their first biggest mistake of investing. Follow a procedure and find out the credit history of the tenant, run a background check, check references, and prepare a tenancy contract with utmost attention.