With the rising housing prices in recent years, many people start looking into investing their 401k retirement accounts into real estate. Compared to traditional stocks and bonds, real estate offers attractive cash flow and appreciation potential. However, not everyone understands the methods and risks associated with investing 401k into real estate. This article will explain the basics, pros and cons, and things to consider when utilizing 401k for real estate investment.
Self-directed 401k allows investing in real estate
The easiest way to invest 401k into real estate is through a self-directed 401k account. Unlike regular 401k that limits investment options to stocks, bonds and funds, self-directed 401k allows account holders to invest in alternative assets like real estate, private companies, loans and precious metals. To open a self-directed 401k, you can contact providers like Guidant Financial, Pensco Trust Company, IRA Services Trust Company, etc. They act as custodians to hold the assets while you make investment decisions.
Consider the risks of illiquidity and volatility
While real estate investment can generate higher returns through cash flow and appreciation, there are also higher risks to consider. Illiquidity means it may take months to sell a property, so you lose the ability to liquidate quickly. Real estate values also tend to fluctuate more than securities. Conduct thorough due diligence before committing a large portion of your retirement savings into any individual real estate asset.
Abide by prohibited transaction rules
When investing 401k into real estate, you must avoid prohibited transactions such as using the properties yourself or renting to your business. Violating these rules would make the investment taxable and penalized. Work with experienced custodians who are familiar with ERISA laws governing retirement accounts.
Consider real estate funds as an easier alternative
If you don’t want to take on the time and effort to research and manage individual properties, real estate funds can provide easy diversification for your 401k. Many fund companies like Fidelity offer real estate mutual funds and REIT ETFs that invest in a basket of real estate assets. While returns may be lower than owning directly, funds provide convenience and liquidity.
Investing 401k into real estate can boost returns but also comes with more responsibilities. Work with experienced custodians, be mindful of risks and legal issues, and consider easy alternatives like real estate funds.