3 Creative Ways to Fund Your RE Investments w/Qualified Money

I often work with investors who like what we offer with respect to certain opportunities in syndication deals. This may be large multifamily apartments, self-storage properties and mobile home parks for instance. Minimum investments in these types of syndication deals are $50K. Our deal flow is usually very strong so I’m sending our investor base opportunities frequently.

The challenge many run into is funding. Having liquid capital to diversify and take advantage of several niche opportunities can be hard. Folks may be able to invest in one deal and then wait another year or so to be able to fund another deal and we are working with accredited investors who are either making a very nice salary or have a min $1m net worth (excluding their primary residence). What’s the challenge then with these more well-heeled investors? Well, our current system is heavily skewed to investing in stocks and bonds. Yet, there is a whole world of investing out there that Wall Street doesn’t want main street to really know about. This is the world of alternative assets investing that I work in.

Alternative assets get very little attention. There are reasons for that. Simply, the big money (Wall Street) has a far easier task (think no need to worry about finding only accredited investors) to market their products. The masses are their audience. The financial magazines are sponsored by mutual fund companies who have the products to sell (stock and bond mutual funds) so you only read about these types of investments. Hence, even accredited folks end up heavily skewed in their investments to primarily stocks and bonds. These assets are tied up in qualified long-term accounts like traditional 401K plans and IRAs. These funds are not liquid and I see investors essentially hamstrung because their investments are limited (narrowly focused) and they feel like they have no choices.

What’s even far more interesting to note is a concept of beta. Beta measures volatility. The higher the beta the higher the volatility and as a component of risk, theoretically the riskier the investment. The stock market has a beta of 1.0. The Russian stock market may have a beta of 2.0. This will blow you away. The beta for mobile home parks is .3, for self-storage is .5 and multi-family apartments about .8. Couple in the returns history on these asset classes and their risk adjusted returns are far superior to stocks. But you probably never knew that because you are not exposed to it in the media, from your local financial planner, etc. Much easier to sell the masses on simple stock and bond portfolios and charge an asset management fee each year to simply ensure your allocations are in range. The SEC does not allow syndicators in the types of deals we do to talk to non-accredited investors. So there you go.

Ok, sorry for the transgression. Let’s get back on topic. So you are an accredited investor but are not liquid and want more money allocated to alternative asset classes. You probably have a significant percentage of your investments in stocks and bonds since IRAs and 401Ks of the traditional sense are only able to purchase mutual funds of stock and bond companies. What are some choices you have in moving some of this money around and put it into some alternative asset classes such as apartments, mobile home parks, self-storage, student housing and assisted living facilities which have bright futures based on demographics, supply and demand issues and trends?

1) Establish a Self - Directed IRA (SD-IRA). Ideally, you have a traditional IRA already established. If that IRA and your 401K is all in stocks, perhaps you look at the IRA and see if you can allocate some money from that account and transfer to a new SD-IRA that you have established. SD-IRAs are typically established at companies that are focused on only providing these types of specialized accounts. SD-IRAs allow you to invest in much broader array of asset classes such as real estate, business entities, etc.

2) Establish a solo 401k. If you have a business on the side or have your own small business where maybe only you or you and your spouse work at, consider establishing a solo 401K. A solo 401K has similar approaches to allowing you to invest in a much wider set of asset classes. You can contribute much higher amounts than a SD-IRA but also as of this writing solo 401Ks have an advantage in the tax area of leveraged real estate. The IRS wants to tax you (UBIT – Unrealized Business Income Tax) on the gains from the leveraged portion of your real estate. This applies to SD-IRAs but not to solo 401Ks. This is a huge current benefit.

3) Transfer Money from your existing 401k at your work. Now, there are several angles here so let me cover a few of them. Please review your companies 401K plan and ideally talk to one of the plan administrators about these options.  The last option requires a discussion with a competent legal advisor that specialize in this area.

a) You can borrow your own money and pay it back over some set time w/usually a small interest charge that is essentially you are paying yourself back with interest. Rules are very company specific. Some companies let you borrow $50K which would allow you to fund any of our syndication deals if the company allows you to borrow for “any” situation. However, others have restrictions such as you can borrow only under hardship scenarios or to purchase a primary home.

b) If you are planning to quit or leave your job, this is an ideal time to look at transferring some money to a SD-IRA.

c) If you are still working and living in a community property state and married, you may have the opportunity through a legal maneuver (seek experienced legal counsel on this) to transfer money to your spouse’s SD-IRA. I have talked with a local Austin attorney who has done these many times. It’s a seriously interesting angle because if you have worked at your company a long time and have a ton of money tied up in your 401K you may feel like there is no way to gain access to it if you want to continue working. See link below.

https://www.thompsoninvesting.com/single-post/2017/01/04/Unlock-Your-Employer-Based-401k