5 Warnings To Consider Before Using Your 401k To Invest In Real Estate

Self directed retirement account investing is one of the most powerful tax saving and wealth building vehicles available to us. Everyone should be seeking to use these tools. Every day I get to see individuals and families enhancing their futures with them. However, others may not be positioning themselves in the best possible way. Here are five things to be considered before you make an investment through a self directed 401k or IRA.

1. You Need a Sound Self Directed 401k/IRA Provider

Billions and billions of dollars are primed to be invested through tax saving accounts. Many people want a piece of that pie. There are some great, ethical, and proven providers in this space. Like any industry, there are also those that may not be so great. One of the biggest red flags is those who are trying to act as both the IRA custodian and investment advisor or seller. That may not pass the smell test for the IRS. The last thing you want is a bigger than expected tax bill. So choose wisely.

2. Get a Second Opinion from Your Tax Guy

Taxes are tricky. To make it more complicated each person’s situation is unique. There is no question that self directed accounts can be hugely beneficial for real estate investors. However, it is important that you know what to expect in tax savings versus what you may have in a tax bill or rebate next year. Get some input from a tax professional who knows your situation and can help you be prepared.

3. Failing to Maximize Your Contributions

Most individuals fail to maximize their retirement account contributions. In turn, that means paying too much tax and forgoing the compounding benefits of those gains earning for them each year. There are several ways to bump up your contributions and to supersize how much you can invest through your tax-protected retirement accounts. This is especially true for the self-employed and business owners. Check with an IRA expert and you may be surprised at how fast you can ramp up and change the dynamics of your finances.

4. Investment Strategy Makes All the Difference

Some investors get confused with the ‘self directed’ part of these vehicles. You do gain incredible freedom. Yet, remember that this portion of your finances is for retirement. Be thoughtful of what different investment options will mean for your time, and the return on your time. This portion of your money isn’t for spending. You may not want to be spending a lot of time managing it. And there are certainly some restrictions on that as well. Think long term and passive investments.

5. Be Prudent with Leverage

The ability to leverage retirement funds by pooling money in investments or using non-recourse loans is often heralded as a big perk and advantage of self directed accounts. It can be. But this must also be done wisely. Choose who you invest with carefully. Do they have the experience to truly manage your money and assets well in both good and bad times? How long are non-recourse loan terms compared to your timeline? A 10 year balloon, which puts you needing a refinance when lending is tighter or rates are much higher could put your assets in jeopardy unless you have built in flexibility in other ways. In some cases it may be better to invest in cheaper properties or to increase diversification. Just make sure you find the right fit for your personal retirement plan.

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