Many people want to invest their retirement savings in real estate for diversification and potential higher returns. One option is investing your 401k in real estate through providers like Fidelity. Investing 401k in real estate can provide portfolio diversification, inflation hedge, and passive income. However, there are also risks like illiquidity and concentrated exposure. This article will explore the pros and cons of investing 401k in real estate fidelity, and provide additional tips.
The advantages of investing 401k in real estate
Investing a portion of your 401k retirement savings in real estate can have multiple benefits compared to traditional stock and bond investments. Here are some of the key advantages:
Diversification – Real estate tends to have low correlation with stocks and bonds, so adding it to your 401k can improve diversification and reduce overall portfolio risk.
Inflation hedge – Real estate values and rents tend to rise with inflation over time. This provides a hedge against inflation eroding the purchasing power of fixed income investments.
Passive income – Investing in rental real estate can provide ongoing passive income through collected rents. This gives your 401k portfolio an income-generating component.
Tax advantages – 401k investments grow tax-deferred. Capital gains, interest, dividends, and rents within the 401k aren’t taxed until withdrawn.
High return potential – Historically real estate returns have been on par or better than equity returns over long periods with moderate volatility.
How fidelity enables 401k real estate investing
Fidelity is one of the largest 401k providers that offers real estate investments within 401k plans. Here are some of the ways fidelity enables you to invest your 401k in real estate:
REIT Funds – Fidelity offers access to Real Estate Investment Trusts (REITs) mutual funds and ETFs that provide broad exposure to commercial real estate sectors like apartments, hospitals, malls, offices, etc. Top options include FSRNX and FNARX.
eREITs – Fidelity offers fractional electronic Real Estate Investment Trusts (eREITs) that let you invest directly in specific real estate assets like apartment communities, self storage facilities, and more. This provides more targeted real estate exposure.
1031 exchanges – You can do tax-deferred 1031 exchanges of appreciated real estate held outside a 401k into your Fidelity 401k account to gain tax advantages.
Real estate stocks – You can invest your 401k in stocks of publicly traded real estate companies through a self-directed brokerage option (if available in your employer’s plan).
Risks and considerations when investing 401k in real estate
While investing retirement funds in real estate has benefits, there are also important risks and considerations:
Illiquidity – Unlike stocks and bonds, direct real estate investing often requires minimum holding periods and has limited liquidity. You can’t quickly sell shares if you need the money.
Concentrated risk – Individual property investments concentrate your real estate exposure versus a diversified fund. There is risk the specific property declines in value.
High fees – Some non-traded REITs have high upfront fees of 10% or more. This erodes net returns over time.
Manager skill – Returns for actively managed real estate funds rely heavily on the skill of the manager for selecting properties and markets.
Limited options in 401k – Many 401k providers have limited or no real estate investment options available within their plans.
Complexity – Evaluating individual property deals requires significant real estate expertise most investors don’t have.
Additional tips for investing 401k in real estate
Here are some additional tips to consider if you want to invest your 401k in real estate:
– Use broader diversified REIT ETFs or mutual funds rather than individual properties if available to reduce risk.
– Limit real estate exposure to a reasonable portion of your total 401k, generally 10-20% of assets.
– Consider using an IRA for direct real estate investing instead since it provides more flexibility.
– Partner with an experienced real estate investor or fund manager if investing in individual properties.
– Ensure you have sufficient liquid 401k assets for near-term needs before illiquid real estate investing.
– Evaluate all fees associated with any real estate investment option to minimize expenses.
– Consult a financial advisor to see if real estate fits your overall investment objectives and risk tolerance.
Investing a portion of your 401k retirement savings in real estate like REITs or rental properties can provide portfolio diversification benefits as well as inflation hedging. Fidelity offers some options to invest 401k in real estate. However, illiquidity and concentration risks should be considered. Diversified real estate funds or ETFs can help mitigate risks compared to individual property investments.