Council Post: Yes, You Can Invest In Real Estate With Your IRA Or 401(k) (2024)

Patrick Grimes is the founder of Invest on Main Street, a private equity firm managing passive multifamily investments in emerging markets.

Weekly, handfuls of investors come to me with the same set of issues. They’re frustrated that their retirement accounts aren’t performing well, and they’re fearful that they aren't protected from market volatility and rising inflation. They wish they could diversify into real estate, but all of their funds are trapped in their employer's 401(k) or their financial planner’s IRA until they are 59.5 years old. Additionally, they’re too busy to become landlords and, instead, prefer to spend their free time with family and friends and hobbies.

What is little-known by the middle class but highly exploited by the wealthy is that this is simply not the case. While you’re not able to spend the funds in retirement accounts before 59.9, at least not without significant penalties, you can roll those funds into self-directed IRAs or 401(k) plans and use them to invest in real estate and other alternative assets.

Additionally, while these plans allow the option to become a DIY landlord and spend the golden years dealing with tenants, toilets and trash, they also open up a wide range of completely passive real estate investment options through private equity firms that provide the same advantages as direct ownership without the headache.

Why Everyone Isn’t Using Self-Directed Retirement Accounts

Middle-class Americans aren’t aware of these options because their employers’ 401(k) representatives only provide retirement plans with a limited menu of traditional investments such as bonds, mutual funds, index funds, stocks, etc. Even if the investor has sought professional investment advice, they are typically only informed of similar types of investment products, mainly in the stock market, which allow the institutions or investment professionals to collect commissions and fees.

How To Invest In Real Estate With Your Retirement Funds

The first step is to identify a company that will help you set up your self-directed account. These are known as custodians, and they are typically very helpful in identifying what type of self-directed account is best for you and facilitating paperwork to do the rollover.

If the investor doesn’t have a custodian in mind and their current plan administrator doesn’t offer self-directed options, then I recommend seeking a referral, asking the fund managers they are intending to invest with, or Googling the keywords SDIRA, solo 401(k) and eQRP.

Types Of Self-Directed Retirement Investments

A self-directed IRA or 401(k) allows investment in a variety of alternative assets outside of the typical stocks, bonds and mutual funds.

Some of these include:

• Real estate

• Cryptocurrency

• Precious metals

• Promissory notes

However, some investments are considered forbidden transactions that you’re not allowed to invest in with a self-directed IRA or 401(k). It is important that you work with your custodian to make sure you don’t invest in forbidden transactions. Examples of these include:

• Collectibles like art, gems and more

• Life insurance

• Investments with disqualified persons (like investing in your family’s business)

• Self-dealing, in which you or your family personally benefit today from the investments, such as buying a personal vacation home.

Enhance Your Returns With Leverage

An advantage of buying real estate is that you can use it as leverage. You can take a portion of your retirement account funds and use it as a down payment, then borrow the rest via a mortgage, which increases buying power and accelerates growth.

For example, if an investor puts a $100,000 down payment on a $500,000 property, not only is the rental income likely to increase but, instead of owning a $100,000 asset outright, their wealth has the potential to grow at 5x the rate as the $500,000 property appreciates in value.

However, if the retirement account is small compared to the loan, lenders might be hesitant to approve the loan. Investors get around this by investing in a private equity fund or real estate syndication that buys large assets and can qualify for large loans. These investments are typically passive.

Passive Real Estate Investing With An IRA Or 401(k)

Self-directed retirement funds can be used to invest passively in commercial assets, such as multifamily apartment communities, retail, office, self-storage, etc. Since these acquisitions are typically out of reach for the size of most retirement accounts, investors may choose to invest with a sponsor, such as private equity firms that put together real estate syndications and pool together investors' capital to acquire larger assets. These types of investments allow the investor to remain completely passive, reaping the benefits of investing in larger real estate assets without having to be a landlord.

Risks Of Self-Directed Retirement Accounts

All investments come with risk, and self-directed investments are no exception. If you’re using a self-directed account to invest in real estate, take extra care to be a good steward of your retirement dollars.

In addition to avoiding self-dealing and forbidden transactions, keep in mind that a balanced portfolio is generally a safer portfolio. Traditional retirement accounts are usually heavily weighted in the stock market, which provides limited protection from inflation and market volatility. Choosing to roll over some of the funds from a traditional IRA or 401(k) and into a self-directed retirement account can open up opportunities to balance your portfolio.

Enjoy Greater Control Of Your Financial Future

People ask me all the time, “How can I save up the funds to invest in real estate?” I reply, “You already have them!” When you create a self-directed retirement account and use it to invest in real estate, you have more control over your own future financial picture and may be less vulnerable to market volatility. After all, it’s your retirement, and you deserve to have every option for growth available to you.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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