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How to Invest in Real Estate with Your Retirement Funds – Part II
October 26, 2017

December 20, 2023 | read

How to Invest in Real Estate With Your Retirement Funds – Part I

Brandon Hall

This is a guest post from our friends over at Sense Financial. You can check them out here:

“Don’t wait to buy real estate. Buy real estate and wait.” ~ Will Rogers, Actor

As an asset class, real estate enjoys a history unlike any other modern investments, dating back centuries. In the good old times, a man’s worth was measured by the land he held. Unsurprisingly, that is still unchanged, for most of the part, and real estate is still valued as one of the best asset classes for an investment portfolio. With careful planning and a solid investing strategy, real estate can produce consistent income and offer capital appreciation over the long term. However, how many people do you know that own real estate in their retirement portfolios?

Probably very few, if any!

Some might even ask if that’s possible or even legal.

The IRS permits investing retirement funds in real estate, allowing you to diversify your retirement portfolio. Although some financial institutions or plan provider may restrict your investment choices, as the IRS doesn’t require them to necessarily offer real estate as an investment option.

Why use a self-directed retirement plan for real estate investing?

Prior to taking a look at the available self-directed retirement plans, let’s find out why it makes sense to invest with these plans.

Tax deferred or tax-free gains

When completing a real estate transaction, you probably split the gains into three different parts: invested capital, profits, and taxes. Taxes take a significant cut out of your returns.

How about pocketing the entire returns and paying the taxes later or not at all?

Self-directed retirement plans allow you to do that. When you invest in real estate with your self-directed retirement plan, you can defer paying taxes on a later date, when taking distributions.

At the same time, if you happen to have a Roth self-directed plan, any returns on your investments are tax-free. You pocket the entire returns, and there are no taxes when taking qualified distributions.

Complete investment discretion

When discussing investing retirement funds, we are often limited by the investment options offered by the plan provider.

Self-directed retirement plans offer complete control over your investment decisions, although you may require custodial consent, depending upon the plan provider. There are some exceptions like a truly self-directed 401(k) plan, which doesn’t require custodial consent, allowing you to invest at your will.

You can choose from a wide pool of alternate investments, starting with real estate, promissory notes, private lending, private equity, precious metals, and even the traditional stock or bond investments.

Checkbook control of funds

How many times have you found yourself in situations demanding a quick reaction? Usually, more than a couple of times, and any delay could close the investment opportunity.

Some self-directed retirement plans offer checkbook control to the plan owners, allowing them to invest directly by writing a check.

Some of the popular retirement plans with checkbook control include a checkbook IRA or IRA LLC and a self-directed Solo 401k retirement plan.

Lower administrative costs

“Be aware of little expenses. A small leak will sink a great ship.” ~ Benjamin Franklin

Do you know that an average 401k investor pays as much as 1.5% in annual fees? While you may not realize the impact of a percentage point on your returns, these charges could take away thousands of dollars off your retirement nest egg.

When using self-directed retirement plans, you essentially eliminate excessive administrative charges. The only fee you pay is when you make a transaction, pay LLC fee, or the annual maintenance charges.

In the next part of this post about investing retirement money, you will find out some of the most popular self-directed retirement plans for real estate investing. We’ll provide a step-by-step process for investing retirement funds in real estate.