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Reallocate to Real Estate to Kick-start Your Retirement Savings

This post is for you, the high-income business owner, entrepreneur, healthcare or corporate professional who has an IRA and 401k retirement account in traditional custodial brokerages and holding stocks and bonds.  There is nothing wrong with stocks and bonds for building retirement wealth, but if that's all you're doing, you're losing a massive opportunity to put real estate to work for a more comfortable retirement.

If you resist the remainder of this article, there is still a way to invest in real estate and to do so in the traditional account.  Look at a private real estate syndication or a REITs, Real Estate Investment Trusts.  There are two general types: one investing directly in ownership of commercial property, and the other investing in the mortgages that finance those properties.

If you like REITs and you value the strategy of diversification, take the next step and invest in ETFs that buy REITs. The ETF, Exchange Traded Fund, can diversify you across many REITs, so you can invest in different property types from industrial and manufacturing to retail and medical properties. 

If you’re looking to dial it in a bit more and have ownership of an asset but still participate passively, consider investing in a syndication, depending on the team and assets that are being purchased.

Active Real Estate Investment in Retirement Accounts

Not all retirement accounts are eligible for real estate investment, and many of the largest retirement account custodians do not offer active direct investment in real estate.  Moving some or all your assets to a self-directed IRA or 401k with a custodian experienced in serving real estate investors will allow you to actively invest in real estate.

Rental property investing, notably rental single-family homes, can then be done inside your retirement account.  It offers the excellent advantage of leverage through buying with a mortgage with your cash invested limited to the down payment and closing costs.

The rules are strict; all monies, expenses, and income go through the retirement account.  They cannot in any way be handled by the investor.  For this reason, the fees to manage these accounts are higher.  However, the advantages can far outweigh the costs.  This doesn't mean that you can't do the normal management tasks, such as taking repair calls and sending repair people.  It is the money and accounting that must all go through the account.

The beauty here is that all of the rental income profit and positive monthly cash flow stay in the retirement account and grow tax-free until you retire.  This can be accomplished with the proper account setup and receipt of rents into the account directly.  The vendors are paid with checks from the retirement account as well.

An example of how reallocation to real estate can change your retirement considerably would be moving into rental property ownership early and growing your portfolio.  Taking $30,000 of your current account balance plus closing costs can purchase a $150,000 rental home.  In the right markets and shopping carefully, the investor could clear around $300/month in cash flow.

Start early and buy the first home, then as your account grows, you can invest in more homes.  In this example, if you own six homes, ten years later they will generate around $2,400/month considering rent inflation.  To generate that income from dividends or savings at 5%, you need more than a half-million dollars in the account.  While you may own six homes that have an appreciated value of up to a million or more dollars, your actual cash invested is only 20% to 30% of that amount.

If you are still sitting on retirement accounts invested only in stocks and bonds, take a hard look at improving your retirement nest egg considerably by reallocating some of your assets to real estate.

If you’re a high-income earner and looking for advanced strategies, let’s jump on a quick call. Schedule some time with me here!