Do you have a 401K, IRA, Roth IRA or even a health savings account?

I can help you own real estate in any of these vehicles.

What is a Self Directed IRA?

Real Estate Investment Using A 401K Plan.

Real Estate Investment Using An IRA.

Real Estate Investment Using a Health Savings Plan.

Can you Invest your 401(k) Plan Directly in Real Estate?

Investment newsletter Ken Holman.pdf

By Ken Holman

President, NAREIA



It’s likely your 401(k) plan  (or  403(b)  or 457   Plan   for   that matter) is managed by

one of the following companies: Ameri- prise Financial, Credit Suisse Securities, Deutsche Bank, Edward Jones, Gray- stone Consulting, J.P. Morgan, Merrill Lynch,  Morgan  Stanley,  Oppenheimer & Co., Raymond James, RBC Wealth Management,  UBS  Financial  Services, or Wells Fargo Advisors. These compa- nies and their financial advisors control most of the retirement wealth in the United States.

Can you invest directly in real estate with your current plan? Ask your finan- cial advisor. They will probably say you cannot, but they will offer to invest your funds in a number of Real Estate Invest- ment Trusts (REITs). The name is mis- leading. REITs are not an investment in real estate; they are an investment in a fund that obtains its cash flow from real estate. These differ from a direct invest- ment in real estate.

REITs do not typically leverage an investment, which is one of the most powerful forces for creating long-term wealth. Even with an investment in a REIT, your retirement portfolio is likely 70 percent or more invested in various mutual funds, all of which experience stock market volatility. That’s neither diversification nor smart asset alloca- tion investing. The Internal Revenue Service will let you invest directly in real estate, but your plan administrator will not. Why? Because they’re not set up to handle the administration nor do they earn a commission by recommending direct investment in real estate.

Let me give you an example: Say you have  only  one  asset,  $200,000  cash and  no  liabilities.  You  decide  to  in- vest  $100,000  in  mutual  funds  and $100,000 in direct real estate invest- ments, both of which are appreciating at 6 percent per year. The only differ- ence is that you can borrow additional money from a bank to buy more real estate. You obtain a 20-year amortiz- ing loan at 5 percent. To be conserva- tive, you borrow only $300,000, so you have a 75 percent loan-to-value ratio. After 20 years, your mutual fund in- vestment has increased to $320,714, while your real estate investment has increased to $1,282,854, an increase of $962,140 over the mutual fund invest- ment. That’s a 300 percent increase in value with the same $100,000. That’s the power of real estate.

What about the payment of the debt over the 20-year holding period? The mortgage has been paid off by your tenant who operates his business on your property. You get the tax benefits of depreciation and interest write offs, if you’ve invested personally. If you’ve invested your money through a Self- Directed 401(k) that money is grow- ing tax-deferred or tax-free, depending on whether you have a Traditional or Roth account.

You think this is unrealistic? The only unrealistic expectation is to think that your mutual fund accounts have ap- preciated at 6 percent. According to Dalbar,  Inc., the  average  mutual fund investment has gone up on average of 3.27 percent over a 20-year period. The National Association of Realtors, on the other hand, reported that real estate has appreciated in value an average of 6 percent over the past 30 years, even with the downturn in the economy that occurred in 2008.

If  most  financial  advisors  preclude you from investing directly in real es- tate, how do you invest in real estate with your 401(k) account? The answer is, you don’t with your company 401(k) account. The only money you should be investing in your company 401(k) account is enough to get the full match- ing funds. For instance, if you are mak- ing $100,000 a year and your company offers  a  4  percent  match,  you  invest $4,000 in your company 401(k) to get the 4 percent match. They do a 100 percent match up to 4 percent of your income. Then you create a Solo or Indi- vidual 401(k) account with an admin- istrator/custodian that handles Self-Di- rected Accounts and invest the rest of your retirement funds in that account up to the $51,000 contribution limit if you’re under 50 or $56,500 if you are 50 or older.

So, if you contributed $4,000 to your company 401(k) and your employer matched it with another $4,000, you can contribute $43,000 to a Self-Direct- ed Solo 401(k) account. If you’re 50 or older, it would be $48,500. That amount can be invested each year for you and your spouse, if you have it set up prop- erly. No income limits exist.

Eligibility for a Solo 401(k) account requires two things: (1) the presence of a self-employment activity; and (2) the absence of full-time employees. So you set up a consulting business either as an S-Corporation or limited liability company (LLC) and pay yourself a sal- ary, 100 percent of which can be con- tributed to your retirement fund. Then you invest in commercial, income-pro- ducing real estate investments.