Want to Use Retirement Money for Real Estate?

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Are you considering using your retirement money to invest in real estate? If so, you’re on to something. Investopedia describes real estate investing as “the purchase of a future income stream from property” that can offer several advantages over other types of investments.

Such advantages include stability, the potential for higher returns, and of course, diversification. One more advantage: Real estate is considered a “hedge against inflation.” Meaning, when you invest in real estate, it’s expected to maintain or increase in value over time. Since home values and rents typically increase during inflation, real estate investments are an excellent weapon to have in your arsenal or “investment portfolio.”

Using Your Retirement Money to Invest in Real Estate

We first started writing about the ability to use retirement money for real estate a few years back, but it is an increasingly popular topic that comes up often in my conversations with clients. And it’s not just with prospective clients (new entrepreneurs), it’s also with existing clients (seasoned entrepreneurs) who are looking to roll over additional retirement monies to give a real estate-related business a go.

As I always get a lot of questions about the process of using retirement money for real estate and about the meaning of the term “real estate-related business,” I decided to recount my answers to some of these common questions. You can also download our free guide: How to Use Retirement Money to Invest in Real Estate. But before I get to the nuts and bolts of it, let’s take a closer look at why it’s a good idea to invest in real estate.

Real Estate Investing & the Savvy Entrepreneur

In an Entrepreneur Magazine article, Brandon Turner, an active real estate investor wrote about how he had several conversations recently with entrepreneurs who had concluded they needed to start diversifying their business profits into more than a savings account.

“Being a real estate investor isn’t always glamorous but it is one of the best ways to build wealth over the long-haul, especially for the entrepreneurial-minded,” Turner wrote. And, I have to agree with Turner, who listed the following benefits to real estate investing:

  1. Appreciation
  2. A hedge against inflation as described above
  3. Cash flow, also known as “passive income”
  4. Tax benefits, including lower tax rates for long-term profits, etc.
  5. Control over your asset instead of it being controlled by Wall Street

“I don’t like my destiny tied to a board room on Wall Street or a nervous CEO in Silicon Valley. This is why I choose to invest most of my income in real estate, knowing that I am the one who is responsible for my success or failure.” ~Brandon Turner

Using a 401K to Invest in Real Estate

Most people don’t have tens, if not hundreds of thousands of dollars, laying around in their master bedroom safe or personal bank accounts. But a lot of people are interested in investing their hard-earned money in real estate, whether they want to buy rental properties or do “fix and flips” and be “weekend warriors.”

In light of the above, it’s understandable why someone who has funds sitting in their 401k, would be curious if there was a way to use it to invest in real estate without paying taxes and penalties. Can it be done? Yes, and it’s called a SELF-DIRECTED 401k, aka “ROBS” or rollovers as business startups.

1. Can I use my 401k to do fix and flips or rehab projects?

Investing in real estate can be very broad – apartment complexes, commercial buildings, land opportunities, etc. CatchFire Funding has two audiences in the real estate context: one is looking to build a portfolio of assets with cash flow associated with them, and the other is looking for a recurring transactional arrangement. I have conversations with both audiences and they end up merging.

As far as to fix and flips and rehabs, people can do them as long as they adopt the mindset of the business owner. In other words, you acquire the assets, service or rehab them, and remarket them as services. In a long-term context, you can resell them.

2. Can I use my 401k for just one fix and flip or rehab project?

Yes, you can use ROBS for just one fix and flip or rehab project. Someone can use our SELF-DIRECTED 401k once, sell it and unwind all the structuring. Essentially, you don’t want to create the retirement plan and put it on the shelf – you have to dissolve it. We have clients use their 401ks for a single real estate transaction; they’ll go through the process and unwind all the structuring, which is no different than if they bought a business and sold it after three months.

3. Is the ROBS process different if it involves real estate?

It’s the exact same process as if somebody were to purchase a franchise or acquire a manufacturing business. Here’s how it works in a nutshell:

  • CatchFire Funding creates a C-Corporation;
  • We create a new 401k plan;
  • Your 401k dollars roll over to your new plan; and
  • Your new 401k plan invests in your corporation stock. At that point, your corporation can either buy a franchise, a business, a distressed rental property, or a single-family residence!

To learn more about using your retirement funds to buy a business, franchise, or in this case, real estate, tax, and penalty-free watch this explainer video.

Benefits of Using ROBS to Invest in Real Estate

There are several advantages of using ROBS to invest in real estate, such as access to pre-tax capital you wouldn’t otherwise have access to; using that money to acquire a fix and flip project; and, participating in the appreciated value from the corporation paying you a salary, so you can turn it into a business and a job.

The concept of using a 401k to invest in real estate is not part of the traditional investment options, but it’s becoming wider and wider in its implementation. To use your 401k to invest in real estate, you’ll have to adopt the same structuring. It’s no different from real estate; it’s the same as if you were buying any other business assets.

If you’re interested in rolling your retirement dollars to invest in real estate, don’t put your hat on as a speculative investor. Instead, feel free to call me to see if a SELF-DIRECTED 401k is right for you.

Your 401k And Real Estate: A Smart Investment?

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For nearly 20 years I’ve been advising clients on their business investments – in particular – those business investments made using money in a 401k or other eligible retirement account. While most of these investments are small businesses or franchises, there are other investment scenarios where the benefit of rolling over retirement money applies. Real estate is one such scenario, and it has gained in popularity in recent years.

In fact, today nearly 20 percent of CatchFire Funding’s clients use our self-directed 401k program to invest in real estate as a business. Our clients want to diversify their investments into more than just a retirement account, thus they’re drawn to real estate, which is enticing because of the cash flow it creates. Their goal is to create ongoing business income that allows them to leave their 9 to 5 employment, travel, or invest in bigger properties, or all the above.

But is it a smart investment?

For me, a smart investment is an informed investment. If you’re considering rolling over your retirement dollars to invest in real estate, you should understand the nuts and bolts of it. You can invest in real estate but not from a traditional fix and flip perspective. With a self-directed 401k, you have to think of yourself as being in business as a property management company. In this case, your self-directed 401k invests in your corporation which, in turn, makes the real estate investments. It’s not you, personally, making the investments, as is often portrayed on HGTV shows.

For example, I recently spoke with a couple who is looking to relocate to another state where they want to buy a couple of 8-plex units. The girlfriend has been working for a major corporation and the division she works in was recently sold off to another company; therefore, she is no longer an employee of the major corporation.

The girlfriend’s retirement money has been released and now they want to move out-of-state to be closer to her family. Their goal is to redirect money out of her plan, buy a couple of 8-plexes, and generate business revenue so they have cash flow. That’s a typical example of a couple wanting to use their retirement dollars to invest in real estate.

To reiterate: a passive real estate investment is one where an individual buys and sells real estate – a self-directed 401k may NOT be used in this scenario. By contrast, a corporation may be funded by a self-directed 401k and that corporation may buy and sell real estate assets. Under the Internal Revenue Code, that’s not passive, that’s an investment. So, what about the fix and flip scenario?

Can I Look for Challenged Units?

When people ask me about real estate, they’re often looking for a challenged unit that they can fix and resell. Yes, people can do that; however, they have to get out of the “weekend warrior” fix and flip mentality. They can achieve those transactions, but they have to put on their business hat. They have to change their mindset; it’s not the individual, it’s their C-Corp doing it. If you use a self-directed 401k to invest in fixer-uppers, you would be the president. You would be the one running a property management business. You would be the one looking for distressed properties.

There is a component of rehabilitating those assets. When they are serviceable, you can rent or lease them out. It comes back to you being the business owner, employee number one. You can draw a salary out of this and redirect some of the appreciated value to additional properties. In other words, you can do real estate as long as it looks and feels like a regular business. But remember, you’re selling something else – rental services.

Single-Family Residences & Vacation Properties

You can use a self-directed 401k to invest in a single-family residence as long as it’s just one and it’s operated on an active basis. However, for fix and flip, it can’t be just one property. The long-term viable business has to be apparent. What about commercial real estate, is that acceptable? It is, but you cannot rent to yourself. You can’t put your son in the house, or your parents. Family can’t be there.

Can you use a self-directed 401k to purchase vacation property? You can have a vacation property as a business, but again, you can’t use it personally. This is a business asset, not a personal asset. It’s very important that you don’t mix personal use with business aspects. If someone were to vacation on their property, they would be bending the rules and that would be running a big risk.

In the IRS’s eyes, you’re not running a business if you do just one property. It needs to be in the context of a business – it must involve multiple transactions. To elaborate, you can’t just buy three properties and hold them; you need to be looking for the fourth one. There has to be velocity to the transactions to make it look and feel like a business. Businesses don’t have one transaction this year and another five years from now. I stress this because it’s a potential problem if you get audited.

Are you one of those people who doesn’t like their income to be capped by corporate employment? Do you not like your financial destiny to be determined by Wall Street? If these are a few of the reasons why you want to invest in real estate, contact me at CatchFire Funding to learn how a self-directed 401k can turn those dreams into a reality.

How Do I Use My 401k To Invest In Real Estate?

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Your 401k could be your ticket to financial freedom, well before you reach retirement. Over the years, I’ve helped a lot of people like you, people exploring alternatives to or diversification from the corporate world, to make their retirement savings work for them now vs. later. About 20% of our clients use our self-directed 401k program to invest in property, as a business. The first question they always ask me: How can I use my 401k to invest in real estate?

Let me start by saying that you need to have a good grasp of the nuts and bolts of the process, including what’s allowed and what is not. You can invest in real estate but not from a traditional fix and flip perspective. With a self-directed 401k, you have to think of yourself as being in business as a property management company. In this case, your self-directed 401k invests in your corporation which, in turn, makes the real estate investments. It’s not you, personally, making the investments, as is often portrayed on HGTV shows.

For example, I recently spoke with a couple who is looking to relocate to another state where they want to buy a couple of 8-plex units. The girlfriend has been working for a major corporation and the division she works in was recently sold off to another company; therefore, she is no longer an employee of the major corporation.

The girlfriend’s retirement money has been released and now they want to move out-of-state to be closer to her family. Their goal is to redirect money out of her plan, buy a couple of 8-plexes, and generate business revenue so they have cash flow. That’s a typical example of a couple wanting to use their retirement dollars to invest in real estate.

To reiterate: a passive real estate investment is one where an individual buys and sells real estate – a self-directed 401k may NOT be used in this scenario. By contrast, a corporation may be funded by a self-directed 401k and that corporation may buy and sell real estate assets. Under the Internal Revenue Code, that’s not passive, that’s an investment. So, what about the fix and flip scenario?

Can I Look for Challenged Units? 

When people ask me about real estate, they’re often looking for a challenged unit that they can fix and resell. Yes, people can do that; however, they have to get out of the “weekend warrior” fix and flip mentality. They can achieve those transactions, but they have to put on their business hat. They have to change their mindset; it’s not the individual, it’s their C-Corp doing it. If you use a self-directed 401k to invest in fixer uppers, you would be the president. You would be the one running a property management business. You would be the one looking for distressed properties.

There is a component of rehabilitating those assets. When they are serviceable, you can rent or lease them out. It comes back to you being the business owner, employee number one. You can draw a salary out of this and redirect some of the appreciated value to additional properties. In other words, you can do real estate as long as it looks and feels like a regular business. But remember, you’re selling something else – rental services.

Single-Family Residences & Vacation Properties 

You can use a self-directed 401k to invest in a single-family residence as long as it’s just one and it’s operated on an active basis. However, for fix and flip, it can’t be just one property. The long-term viable business has to be apparent. What about commercial real estate, is that acceptable? It is, but you cannot rent to yourself. You can’t put your son in the house, or your parents. Family can’t be there.

Can you use a self-directed 401k to purchase vacation property? You can have a vacation property as a business, but again, you can’t use it personally. This is a business asset, not a personal asset. It’s very important that you don’t mix personal use with business aspects. If someone were to vacation on their property, they would be bending the rules and that would be running a big risk.

In the IRS’s eyes, you’re not running a business if you do just one property. It needs to be in the context of a business – it must involve multiple transactions. To elaborate, you can’t just buy three properties and hold them; you need to be looking for the fourth one. There has to be velocity to the transactions to make it look and feel like a business. Businesses don’t have one transaction this year and another five years from now. I stress this because it’s a potential problem if you get audited.

Are you one of those people who don’t like their income to be capped by corporate employment? Do you not like your financial destiny to be determined by Wall Street? If these are a few of the reasons why you want to invest in real estate, contact me at CatchFire Funding to learn how a self-directed 401k can turn those dreams into a reality.

#1 Hurdle With Using Your 401k to Invest in Real Estate

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In October, I published a blog entitled, “Can I Use My 401k to Invest in Real Estate?” and this post in particular got a response from readers. I actually received a couple of calls from people who said the blog addressed some of the exact questions they had, so it “struck a nerve” and I’m glad I was able to help answer their questions.

This month, I wanted to expand upon my October real estate post and address another common question: “What if I want to buy a business that includes real estate with an existing house on the property for the owner?” I decided to dedicate a blog to this question because it comes up regularly. So, if you use your 401k to invest in real estate, the question is, can you live there too? Unfortunately, the answer is “no” because living there would be considered a “personal benefit,” which I explain with a couple real-life examples below.

Government: You Can’t Have a Personal Benefit

I have this client who wants to buy an RV park on the Kenai Peninsula in Alaska, a place with beautiful scenery. As you drive down the highway, you’re driving along the river and you come across a lodge and a couple miles later, there’s a little RV park and a convenience store – the RV park is supporting the tourism industry in the area like most of the local businesses. My client’s goals are to: 1) generate cash, 2) be on site and available, and 3) enjoy the beauty of nature and the location at the same time.

He said to me, “Well, there’s a little house on the property and that’s where the current owner lives.” He wants to buy it, move in and take over. The challenge is that living in the house is a personal benefit; when you invest your retirement dollars in your business, the government is a stickler about not getting a personal benefit out of the deal. You’re living at your business – that’s a no-no in the government’s eyes.

Something similar happened to my cousin in New Mexico, who was interested in a 198-acre pecan farm on a river, which came with a farm house. He wanted to buy it, but he couldn’t live in the house because that’s a personal benefit. So, the way my client in Alaska and my cousin decided to solve the issue is, prior to purchase, they have the parcel resurveyed.

In the first example, the RV parcel becomes two parcels and what’s left, is most of the acreage. The house is placed into a separate parcel. Same thing with the farm. Of the 198 acres, my cousin surveys 3 acres for the 3-acre residence. He buys the residence himself and gets a separate mortgage. He buys the business separately.

What About Vacation Property?

“What if I invest in a vacation property? Can I stay there if I want?” Once again, you don’t get the benefit to spend the weekend there; that would be a disqualified benefit if the owner used the property for vacation purposes. It’s a conflict of interest – the owner can’t even pay to stay on their own property.

One more slight variation…if somebody purchased an office building, not a farm or RV park, but an office building, they’d still have the same issue. While you’re not likely to sleep in the building; you can’t run a separate business in the building either. For example, let’s say a dentist calls me up. He says, “I’ve been in this building for 15 years and it’s up for sale. I’m worried my rent is going to go up or they’ll kick me out. I want to buy the building with my 401k.” If he buys the building with his 401k, he cannot personally operate his business in the building. It would be a personal benefit. Same context, same conversation.

Employees Can Live on the Property 

If you buy a property with your 401k, you cannot live on the land, nor can you stay overnight if it’s a vacation property. This is because it would be considered a personal benefit, but your employees sure can. Why? Because, the owner is not getting the benefit. Here are some examples of the types of properties that employees can use:

  • RV park
  • Cabin rental
  • Bed and breakfast
  • Farm with farm house
  • Multi-unit rental property
  • Campground with small house
  • Property with multiple cabins for rent
  • Storage units with living quarters on the property

I hope this post clears up some of your questions about buying real estate with your 401k. If you’re interested in generating income by investing in real estate with your 401k, I’d be glad to provide you with in-depth insight on how this process works. All you have to do to get the conversation started is give me a call directly at CatchFire Funding! I’m always just a phone call away.

Can I Use My 401k to Invest in Real Estate?

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Nowadays, nearly 20 percent of CatchFire Funding’s clients use our self-directed 401k program to invest in real estate as a business. Our clients want to diversify their investments into more than just a retirement account, thus they’re drawn to real estate, which is enticing because of the cash flow it creates. Their goal is to create ongoing business income that allows them to leave their 9 to 5 employment, travel, or invest in bigger properties, or all the above.

If you’re considering rolling over your retirement dollars to invest in real estate, you should understand the nuts and bolts of it. You can invest in real estate but not from a traditional fix and flip perspective. With a self-directed 401k, you have to think of yourself as being in business as a property management company. In this case, your self-directed 401k invests in your corporation which, in turn, makes the real estate investments. It’s not you, personally, making the investments, as is often portrayed on HGTV shows.

For example, I recently spoke with a couple who is looking to relocate to another state where they want to buy a couple of 8-plex units. The girlfriend has been working for a major corporation and the division she works in was recently sold off to another company; therefore, she is no longer an employee of the major corporation.

The girlfriend’s retirement money has been released and now they want to move out-of-state to be closer to her family. Their goal is to redirect money out of her plan, buy a couple of 8-plexes, and generate business revenue so they have cash flow. That’s a typical example of a couple wanting to use their retirement dollars to invest in real estate.

To reiterate: a passive real estate investment is one where an individual buys and sells real estate – a self-directed 401k may NOT be used in this scenario. By contrast, a corporation may be funded by a self-directed 401k and that corporation may buy and sell real estate assets. Under the Internal Revenue Code, that’s not passive, that’s an investment. So, what about the fix and flip scenario?

Can I Look for Challenged Units? 

When people ask me about real estate, they’re often looking for a challenged unit that they can fix and resell. Yes, people can do that; however, they have to get out of the “weekend warrior” fix and flip mentality. They can achieve those transactions, but they have to put on their business hat. They have to change their mindset; it’s not the individual, it’s their C-Corp doing it. If you use a self-directed 401k to invest in fixer uppers, you would be the president. You would be the one running a property management business. You would be the one looking for distressed properties.

There is a component of rehabilitating those assets. When they are serviceable, you can rent or lease them out. It comes back to you being the business owner, employee number one. You can draw a salary out of this and redirect some of the appreciated value to additional properties. In other words, you can do real estate as long as it looks and feels like a regular business. But remember, you’re selling something else – rental services.

Single-Family Residences & Vacation Properties 

You can use a self-directed 401k to invest in a single-family residence as long as it’s just one and it’s operated on an active basis. But you can’t put your son in the house, or your parents. Family can’t be there. However, for fix and flip, it can’t be just one property. The long-term viable business has to be apparent. What about commercial real estate, is that acceptable? It is, but you cannot rent to yourself.

Can you use a self-directed 401k to purchase vacation property? You can have a vacation property as a business, but again, you can’t use it personally. This is a business asset, not a personal asset. It’s very important that you don’t mix personal use with business aspects. If someone were to vacation on their property, they would be bending the rules and that would be running a big risk.

In the IRS’s eyes, you’re not running a business if you do just one property. It needs to be in the context of a business – it must involve multiple transactions. To elaborate, you can’t just buy three properties and hold them; you need to be looking for the fourth one. There has to be velocity to the transactions to make it look and feel like a business. Businesses don’t have one transaction this year and another five years from now. I stress this because it’s a potential problem if you get audited.

Are you one of those people who don’t like their income to be capped by corporate employment? Do you not like your financial destiny to be determined by Wall Street? If these are a few of the reasons why you want to invest in real estate, contact me at CatchFire Funding to learn how a self-directed 401k can turn those dreams into a reality.