Build Real Estate Wealth in Self-Directed IRA or 401k Retirement Accounts

There are many thousands of real estate investors who are building wealth for retirement through rental property investment. A significant number of these small investors are enthusiastic about their success in buying and holding one or a couple of cash flow properties that are meeting or exceeding their expectations.

The challenge for these investors becomes replicating their success. They see more opportunities in their market areas, but funding more rental home purchases isn’t possible until they can gather the funds for down payments on mortgages. Perhaps some of them have enough equity in their personal homes or in rental properties they have purchased in the past, but they hesitate to leverage that equity for more purchases. That’s a very prudent approach to leverage.

The good news is that there are substantial funds available to many of these investors who want to grow their real estate portfolios. These funds are in IRA and 401k retirement accounts they may have been growing for many years. The IRS allows for what is called a self-directed retirement account.

The vast majority of current accounts are held in custodial accounts that only allow a few standardized investment asset classes. You can have stocks, bonds and a few other assets, but you’re limited to those and the commissions and fees for their purchase. However, with a self-directed account, the investor makes more decisions on their own, and they can hold other assets such as precious metals and real estate.

To do so will probably require transfer of some or all assets to another custodial account that specializes in these types of investments. Some investors are considering it a diversification option, only transferring a portion of their cash and traditional assets to a self-directed account with a different custodian firm.

Rules are very strict, and the real estate investor should carefully investigate firms offering self-directed accounts. The goal is to choose a firm with experience and a reputation for strict adherence to IRS regulations in order to avoid severe penalties to the account owner. With real estate, while the investor makes the choices related to property selection, all income and expense transactions, no matter how small, must go through the retirement account.

As with anything tax related, rules can be complicated and accidental breaking of them can be very painful. Using the right custodial firm helps, but consulting with them before even the most innocent activity is important. One example cited on a brokerage site is stopping by the property and cutting the grass. Perhaps it’s vacant and you want it looking good for a tenant showing. “Sweat equity” is not allowed, and cutting the grass falls under that definition.

However, certain “desk related” activities, such as keeping of the books and office management are allowed. The point is to work with the right people and follow the rules. The rewards can be well worth the trouble.

As an example, one investor moved half of a $400,000 retirement account’s assets as cash into a self-directed IRA. That $200,000 funded the down payments and other acquisition costs for three rental homes. Those homes are generating a total monthly positive cash flow of $1,100/month. That’s a return of 6.6% as cash flow, and the properties are in areas that should experience excellent appreciation over time.

Self-directed retirement accounts aren’t for everyone, but one could be right for you.

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