Self Directed 401k: Investing in Real Estate for Retirement

There were 1.1 Million foreclosure filings in the United States in 2014, 18 percent lower than the number in 2013, as per the records of RealtyTrac. The real estate tracking agency reported 37% lower median sale price for distressed properties in September 2014, which makes investment through self directed 401k an interesting proposition.

The number of foreclosures has declined in the past few years but there are still a lot of distressed properties up for sale. On a national level, distressed properties were sold at an average price of $130,000 against a sale price for $205,000 for non-distressed properties. A 37% lower median price indicates a significant opportunity for profit both for flipping and long-term investment purposes. One could create a profit margin of 10 to 12% compared to the existing market value even after the complete rehab process.

In addition to the active house flipping investors, foreclosures offer an appealing investment opportunity for rental investors. The capital gains in terms of lower acquisition cost can help in keeping the maintenance costs under control. Rental property investments offer dual benefit of steady monthly income and capital appreciation over a long period. At the same time, rental properties offer high credit leverage and one can build equity over time.

A rental property owner is entitled to several other tax benefits including tax deductions. Property owners are eligible for insurance, maintenance, and utility tax deductions, which allows larger tax savings.

A self directed 401k plan allows real estate investments and any capital gains realized on the property goes into the plan. In case of rental properties, the rental income is deposited in the retirement account for tax-deferred growth and it is taxable only at the time of withdrawal. For investors with Roth self directed 401k plans, there are no tax liabilities even at the time of withdrawal. If there are insufficient funds for the transaction, one can avail non-recourse financing option and fund the purchase.

In addition to real estate investments, self directed 401k plans allow participant loan of up to 50% of the overall fund value to a maximum of $50,000. The use of these funds is up to the discretion of the account owner. Self directed retirement plans offer investments in real estate, private businesses, money lending, precious metals, tax liens, and tax deeds.

For real estate professionals, the important thing to understand is that there is still time to invest in real estate and achieve retirement saving goals.