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How To Invest In Apartment Syndications Using Your 401k/IRA


In last week's article we discussed the distinct advantages investing in real estate offers as opposed to investing in traditional retirement accounts. Of all the advantages that are offering by REI one component that is missing is the ability to either defer taxes (traditional retirement account) or pay them up front and allow money to grow and be dispersed tax free later (Roth retirement account). The question which likely comes to mind then is how to take advantage of investing in real estate under the umbrella of a tax favored retirement plan. Today, we will provide an overview of how this can be done. Please note that as tax laws are always changing and each retirement account custodian has different requirements you should consult your CPA before making any decisions.


Self Directed IRA (SDIRA)

The self directed IRA is possibly the easiest and most common way to invest in real estate using a tax advantaged account. With both traditional and Roth accounts available there is likely an option that suits everyone's needs. Self directed is a label given to IRA accounts whose custodian allows their customers to invest in a variety of investments (including real estate) instead of restricting them to a select group of stock market investments as one would normally see in an IRA account. Two important things to understand when opening one of these accounts is how much freedom the custodian gives you to invest where you want and also if the UBIT tax will be applicable to your real estate investments. Even though the account is labeled as self directed, the custodian might have cumbersome requirements that you must meet when selecting an investment so you want to make sure you have a clear understanding of how easy it will be for you to invest in the types of investments you are considering. For example, you could ask the custodian what requirements must a multifamily syndication meet to qualify for investment with this account? The custodian would then be able to describe any paperwork, requirements and fees associated with this type of investment. The UBIT (unrelated business income tax) is a tax that is typically imposed on IRA accounts when the money is placed on an investment with leverage (debt from a lender). In short, the IRS recognizes that you are receiving additional gains from the leverage and therefore chooses to place a tax on it. Once again, a conversation with a CPA can provide clarity as to the impact of this tax on your investment.


Solo 401k

The second common type of retirement account that can be used for investing in real estate is the solo 401k (sometimes called qualified retirement plan). This type of plan is basically set up like a 401k plan under an employer with the difference being that you are the only employee who is under a plan provided by your own business. The drawback to this type of plan is that you need some type of personal business or income to truly qualify for one of these plans. However, if it is an option for you it is likely worth considering as the contribution limits are higher for this plan, the rules much more flexible and the UBIT tax is not applied to funds invested using these accounts. Although typically more expensive to setup, these accounts have the ability to make up the difference due to no UBIT and fewer ongoing fees.


In Summary

We are often asked by investors how they can invest in our real estate projects with a tax advantaged account such as a self directed IRA or solo 401k. The power of real estate investing combined with tax advantaged accounts is certainly not something to ignore and it is worth the time to see if it can be of use to your financial planning. Many people ask if they can move funds from their employer's 401k account to one of these real estate investing friendly accounts. The short answer is it depends on the rules of your employer's 401k custodian. Often times, individuals are not allowed to remove money from these accounts until their employment has terminated with the particular company. However, this is not always the case and it's certainly worth exploring considering the benefit should it be allowed. Additionally, many custodians also allow for loans of up to 50k to be taken out at a low interest rate which could also be used for real estate investing purposes. While everyone's situation and opportunities are different, hopefully this article has provided some thought provoking questions whose answers can help you to take another step in your real estate investing journey.


There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.




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