Investing in Real Estate with a 401k

With the regular up-and-down fluctuations of the stock market, many investors look for more stable investment options for their 401k. However, most 401k account holders don’t know there are other options outside of the portfolio offered by their employer’s custodian of choice.

Can You Invest a 401k in Real Estate?

Did you know that you can choose where to invest your 401k plan? Investing in real estate with a 401k is fully permitted by the Employee Retirement Income Security Act (ERISA). There are a few restrictions to consider though:

Restrictions of 401k Real Estate Investments

• The transaction cannot benefit you personally, your direct family, or your business. In other words, you cannot occupy or use the property. It must be for investment purposes only.
• If you choose to purchase a rental property with your 401k, it is recommended that you hire a property management company. You can manage the property by collecting rents and paying expenses. However, you cannot do the “sweat equity” work, like making repairs.
• All expenses and cash flow must be directly connected with the 401k account. If you use your account to pay expenses or collect income, you will be subject to taxes and penalties.
• You cannot use your 401k to purchase real estate you already own.

While it is permitted by the IRS to use an account with a 401k tax designation to invest in real estate, your current 401k custodian may not permit it. But there are other options! By opening a Solo 401k, you gain complete control of the investments in your account.

Investing in Real Estate with a Solo 401k

If you work with an experienced financial adviser, they can assist you in creating a Solo 401k for real estate investments.

What is a Solo 401k? A Solo 401k allows investors to use his or her retirement funds to make virtually any type of investment on their own, without consent of a custodian.

First Steps to Creating a Solo 401k

1. Work with an adviser who has experience with Solo 401ks. The rules and regulations regarding 401ks are strict, and any mismanagement can trigger fees and penalties.
   1. Determine how to fund your Solo 401k. Some options include:
   2. Transfer or rollover funds from an existing 401k account.
2. Contribute money from your personal accounts.

Once your account is open and funded, you are ready to begin the search for the perfect real estate investment property.

Where to Invest?

When buying a property with your 401k, your goal should be to find a safe and passive investment. Just like a standard 401k that is invested and managed behind the scenes in the stock market, your investment property should also be a passive behind-the-scenes investment. Avoid any 401k real estate investments that require lots of work and won’t make you money over a long period of time.

Consider Turnkey Properties

Turnkey real estate investing is an excellent option for investors looking to diversify their 401k. In particular, Class A turnkey properties offer low vacancy rates, low maintenance costs, and provide positive monthly cash flow with long-term appreciation in property values.

Savvy investors choose Class A real estate investment properties because they are a safe long-term investment. If you invest in the right market, like Dallas, your investment will generate positive cash flow and appreciate in value over time. Investors looking for 401k real estate investments should consider diversifying their portfolio with properties throughout the U.S.

How Do You Get Started?

To get started, contact a financial adviser who has experience with Solo 401ks or self-directed IRAs. They can assist you in the process of creating a Solo 401k. They should also be able to refer you to a real estate investment company who can help you choose an investment property. While 401k real estate investing is an excellent option for many, there are other ways to purchase and finance investment properties. If you are looking for alternative financial options for investing in real estate, download our free list of the top 5 ways to find money to invest in real estate.

This article is for informational purposes only. For information specific to your investment situation, consult with a qualified tax adviser, CPA, financial planner or investment manager.