Passive investing in a real estate syndication with your solo 401(k) or self-directed IRA opens a whole new world of opportunities for you as an investor. Unfortunately, a lot of people believe that their only way to invest is in exchange-traded funds, index funds, bonds, stocks, and mutual funds.
However, with the solo 401(k) or the self-directed IRA, you have a much broader array of investment options. Fortunately for you, the allowable assets for investment include participation in real estate syndication opportunities.
To explain this, let’s start by exploring the basics to help you understand why we believe passive investments in real estate syndication is something you want to include in your financial portfolio.
WHAT IS PASSIVE INVESTING?
Passive investing refers to an investment strategy designed to maximize returns with minimal buying and selling. That is one of the top benefits you get when you invest in a real estate syndication with your retirement funds.
WHAT IS A SOLO 401(K) PLAN?
First, the 401(k) plan gets its name from its section number and paragraph in the Internal Revenue Code which is “section 401, paragraph (k)”. This is the plan many employers choose as a retirement plan for their employees. Within this plan, the employee can save for retirement while at the same time, their investment and earnings receive a tax deferment until the time of withdrawal from the account.
Next, because most 401(k) plans allow the investors to choose several types of investments, it becomes the custodian’s responsibility to supply a variety of investments within the plan for the investors.
A self-directed 401(k) is a retirement plan option also approved by the IRS and it follows the same rules and requirements as any 401(k) plan. However, a self-directed plan has far more allowable options for investments which makes it a more flexible choice for your retirement.
WHO CAN OPEN AN INDIVIDUAL 401(K)?
Due to the tax law by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) which was effective in January of 2002, a new and exciting retirement plan provides excellent advantages to the small business whose employees are the owner or the owner and their spouse. Since then, self-employed business owners can start an Individual 401k plan and take advantage of the benefits of this retirement choice.
One distinct benefit for the solo investor is that you make greater contributions which maximize retirement contributions and tax deductions. Annually, the solo 401(k) has two parts: 1. a salary deferral contribution, and 2. a profit sharing contribution. The total allowable contribution is these two parts added together to meet the maximum limit.
Another nice advantage is the flexibility you have with your investment. For instance, you may change your salary deferral and the profit sharing contributions at any time in conjunction with business profitability.
Moreover, for a husband and wife, even though there is one solo 401k for their business, the contribution limits can be doubled which makes this a highly attractive option for small business owners.
• DEFERRALS AND CONTRIBUTIONS
If you are the small business owner, you have two roles in a 401(k) plan. One is that of the employee and one is that of the employer. The good news is that you can make contributions to the plan in both roles. Specifically, as the owner, you can contribute the following:
- Employee elective deferrals up to the annual contribution limits. For current information about limits, refer to Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits.
- Employer non-elective contributions up to 25% of annual income
WHAT IS A SELF-DIRECTED IRA?
IRA is an acronym for Individual Retirement Accounts. First, anyone with an income can set up an IRA account. Specifically, a self-directed IRA is a plan that gives you a greater variety of investments for retirement savings.
You might think that self-directed IRAs are a new thing. However, they have been available since 1974 when the IRA was established. Investments in stocks, bonds, and mutual funds have always been an allowable alternative but, most custodians only offered the usual stocks and bonds. However, now that you know differently, you can take advantage of self-directed alternative investments such as a real estate syndication by seeking out a custodian that offers the alternative investments you desire.
ADVANTAGES OF A SELF-DIRECTED RETIREMENT ACCOUNT
As you understand by now, with both the solo 401(k) and the self-directed IRA you make pre-tax contributions which are tax-deductible in addition to tax-free gains until you begin to withdraw your earnings. But, the primary advantage of a self-directed retirement account is the ability to have a greater choice of passive investments. Under the employer retirement accounts, your choices are usually exchange-traded funds, index funds, bonds, stocks, and mutual funds. While it may be an uncomplicated way to diversify, it does not give you the flexibility to access other asset classes.
Conversely, when you invest in a self-directed 401(k) or IRA, you have a greater variety of investments from which to select. The types of investments include the following assets.
- Real estate
- Precious metals
- Equipment leasing funds
- Energy resources
- Private company stock
- Secured and unsecured notes
- Tax liens and deeds
- Judgments and structured settlements
- Accounts receivable factoring
- Commercial papers
Please note, however, that there are still limitations set by the IRS about what type of investments you can make. For instance, collectibles such as antiques, insurance, or S corporation stock are not allowable investments in a self-directed retirement plan. To further your knowledge about allowable investments, please refer to the IRA Rules.
Overall, you gain financially from self-directed retirement investments in real estate syndication simply because you don’t pay tax on the gains. Instead, you get the ability to increase your retirement savings by investing with incredible tax-deferred options.
PASSIVE INVESTMENTS IN A REAL ESTATE SYNDICATION
When you invest in a real estate syndication, you join a group of other investors. Together, the participants can invest in higher-yielding properties than is otherwise possible. For instance, if you passively invest in a large multifamily apartment complex, you might pay out $50,000. Furthermore, each member of the group pays the same amount. Then, each member owns a smaller equal percentage rather than one hundred percent of the property.
• THE SPONSOR DOES MOST OF THE WORK
Another advantage of this type of investment is there is a sponsor who organizes the real estate syndication. This is the person who does all the heavy lifting for you. They perform research of hundreds of properties to formulate the best deals. Additionally, they do the underwriting, finance applications, and supervision of property managers. The sponsor of the syndication does all these tasks for you. So, essentially, all you must do is sit back and watch the checks roll in. That adds up to a nice boost to your retirement income from this truly passive investment tactic.
Moreover, when you invest in a real estate syndication, there is not only the tax-deferred status and a sponsor who manages the project for you, but there are even more compelling reasons to take part in this type of investment.
• DIVERSIFIED PASSIVE INVESTMENTS FOR RISK REDUCTION
Diversity is the name of the game in real estate. We’ve all heard the phrase, “don’t put all your eggs in one basket”. Nothing is truer when it comes to passive investing. Because you can invest in larger-yielding properties at a lower rate, you get a better balance of risks. Moreover, you may expect more consistent returns than stocks or bonds. Additionally, you may also expect a more consistent long-term performance.
• RENTAL INCOME INCREASES EQUITY AND PAYS DOWN DEBT
Another benefit you may expect from this type of investment is the principal pay-down. First, with multi-family apartments, the rental income increases your equity. Secondly, it consistently pays down the debt. This is in addition to the fact that there is inherent protection against inflation when you purchase multi-family rentals. This happens because the rent rises as the demand rises which offsets the loss of revenue due to inflation. This refers to natural appreciation.
• FORCED APPRECIATION IS ALWAYS AN OPTION
Forced appreciation, on the other hand, is yet another tactic that will increase the income from your passive investment. The most commonly known way to force appreciation is to add improvements to the property or increase your occupancy. However, this tactic also happens in a few other ways. One way to raise the price of rent or to lower the operating expenses. Or, they can be a winning combination when used together.
Whether you have a solo 401(k) or a self-directed IRA retirement account presently set up, it is to your advantage to check into a real estate syndication today. Contact us today to ask how you can take part in this unique opportunity.