INVESTING 101 EDUCATION

How to Maximize My 401(k) with Real Estate

Is your 401(k) retirement account working for you as it should? Most 401(k)s are managed by an employer (aka plan sponsor) through a financial services company such as Fidelity and Charles Schwab. You probably set up your 401(k) investment preferences in the first couple of weeks after you started at the company. Maybe that was years ago. Maybe it was decades ago. Your investment choices would have included individual stocks, mutual funds and maybe bonds. When’s the last time you reevaluated your 401(k) choices? Do you even remember the password to get into your 401(k) account online? Also, how much do you know about the investment vehicles and company stocks your money is in? Over the years, how much time have you spent each month reviewing the SEC filings of the companies your retirement account is linked to? Or are you leaving “all that stuff” up to the big corporations like Fidelity? It’s very likely that your 401(k) money is not giving you the best returns in today’s market. Commonly, stocks give around 5% returns today, and that’s assuming things are looking up. What happens when the stock market drops? Your 401(k) value drops with it.

The Trouble With Traditional 401(k) Investments

Investments like stocks, bonds, and mutual funds are very challenging to understand for the average person. Financial professionals study for years and work full-time analyzing the world market indexes. That’s why they get paid so well—out of your pocket—to make your investment decisions for you. Also, the value of publicly-traded companies is always changing. Their stock prices are linked to a whole complex system of factors like public opinion, sales, trade agreements, tariffs, and even the personal lives of the executives in charge. When a CEO is replaced, stocks react; it’s a fact of life.  If you’re energized by the inherent volatility of the stock market, that’s fine. However, when your financial future and retirement prospects are inextricably linked to that volatility, the ride isn’t so pleasant.

Why Real Estate Investments Are a Better Choice

On the other hand, real estate is something that everyone understands. We’re surrounded every day by real estate in its many forms. There’s commercial office space, strip malls, shopping malls, single-family homes, duplexes, apartment complexes, car washes, laundromats, hotels and much more. When you drive through a commercial area, and you see full parking lots and people carrying shopping bags you know, that’s a thriving area. If you drive through a neighborhood and see abandoned homes and lots of For Sale signs, you know there probably aren’t enough jobs to support people in that area. Real estate as an investment is easy to understand because you live with it every day. Much easier than abstract stocks and bonds. Real estate is a tangible asset. You can see it, touch it and get a sense of how one piece of property fits in context with surrounding properties.

Moreover, the best key feature of a real estate investment? You can improve it. You can personally improve a real estate investment. You can improve the quality, and you can improve the value. You can improve it physically by rehabbing it. You can improve its value to you by renting it out and collecting income. That’s something you can never do with stocks and bonds investments.

Maximize 401(k) Returns With Real Estate

This is all well and good, but are you wondering how to maximize my 401(k) with real estate? There’s a simple solution. The giant financial services companies aren’t equipped to offer real estate investment vehicles. However, if you take it out of their hands and self-direct your 401(k), you get the freedom to invest in real estate as you see fit. When you self-direct your 401(k), you make all the decisions regarding your investments. The funding comes from your 401(k), and the profits go back into your retirement account tax-free or tax-deferred. All you need to do is to hire a certified custodian to move regular 401(k) into a self-directed 401(k). That company then handles the transactions according to the government regulations. The big difference is that the company doesn’t make the investment decisions for you. All the decision-making and power is in your hands. There are at least two ways to invest in real estate with your self-directed 401(k).

Private Money Lending With Your 401(k)

You could opt to lend money from your 401(k) to qualified real estate developers. Developers need money to do projects ranging from commercial office space to housing developments to retail complexes. When you do private money lending with your 401(k), you act as the bank. You collect monthly interest on the loan amount. When you invest through a trusted company like American Real Estate Investments, your private money loan is secured by a first lien position. If the developer defaults on the loan for any reason, you have recourse to take the physical real estate asset, i.e., the buildings, land, etc. In other words, there’s practically zero risks. In exchange for your private money loan through AREI, you get monthly dividend checks in the double digits. Investors at AREI typically see between 10% and 12% returns on private money loans for a one-year term. That’s far more than most investors see today from stocks and bonds investments.

Turnkey Rental Investment Opportunities for Your 401(k)

Once you’ve converted your 401(k) into a self-directed 401(k), you also have the option to invest in turnkey rental investments through American Real Estate Investments or another trustworthy turnkey provider. This is a nice choice for people who want to invest in single-family home rentals but lack the motivation or time to hunt out investments, rehab properties, vet tenants, manage the tenancy, etc. Through a turnkey real estate investment, you can maximize your 401(k) returns with a hands-off approach, giving you a passive investment experience. Your profit go back into your 401(k), giving you tax-deferred or tax-free earnings. This is also a great option because you still get to choose the actual property to invest in; the city, neighborhood and price range. When you invest in turnkey rentals with AREI, you’ll know ahead of time exactly what your investment will yield regarding cash flow and the other ways that single-family homes can pay you.

There are many more opportunities available to you to maximize your 401(k) with real estate. Don’t let your investment choices be limited by unseen corporate giants who won’t be around to help you when your retirement fund value drops due to stock volatility. Consider the vast potential of real estate investing. To find out more about how to use your 401(k) to invest in real estate, contact AREI for a free consultation.