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What is a 401k? It’s supposed to give you cash flow and money to cover your monthly expenses and replace the income you used to receive when you were working fulltime.
But what is that money that you spent decades saving invested in? It’s primarily a mixture of mutual funds, stocks, bonds and other lower yield fixed income assets. Typically your 401k holdings are shifted to become more and more conservative (Meaning Less Risk and Less Return), the closer you get to retirement. What happens if you’re in the final ten years before your planned retirement age when another Recession hits and wipes out a lot of your hard earned savings and years of compounded interest earnings?
We all know that historically the market has always gone up, but will it go up ENOUGH in the period of time that you need it to in order for you to retire the way you had planned? Will your dreams of world travel turn into weekly trips to the local senior center instead?
Why Real Estate is Better: The one thing your 401k is NOT invested in is a tangible asset like Real Estate, that you can control, and which gives you both CASH FLOW, and EQUITY APPRECIATION. Compared to the Stock Market, your level of control over your investment is far superior when your investment is in a piece of Real Estate. So why not replace your current income with the Cash Flow from you Real Estate portfolio and then you can decide whether you’re going to retire early?
First is the ROLLOVER 401k, which usually exists if you had a 401k at a prior job and you left that job and Rolled Over your 401K. Now you may have a new job, with a current 401k, but it is unlikely that you will be able to
touch those funds. It’s not impossible, but it’s not as easy. However, the Rollover portion of your 401k CAN be accessed, but you will have to pay both the taxes, and (if you’re under 59.5 years of age), what’s called an Early Withdrawal Penalty, which is 10%.
Now, if you have a Solo 401k, otherwise known as a Self-Directed 401k, you have some REAL options. You can Borrow Money from Your Self-Directed 401k. There are some rules to borrowing Money from Your 401k. You can borrow up to $50,000 or half of your balance—whichever is LOWER. You have 5 years to pay back your loan. After that, the remaining balance is deemed to be a taxable distribution by the IRS – which means you pay the taxes and the Early Withdrawal Penalty on anything you’ve yet to payback.
You also have to make a payment of principal, and some interest, at least once every 90 days.
This is a Wonderful way to finance a Real Estate Purchase, or perhaps some renovations to a property (Think BRRRR Strategy.)
You can also buy a Real Estate Investment from your Self-Directed 401k, but all documents related to the deal MUST be in the name of your 401k, including the Contract of Sale, and all expenses, (like inspections, attorney fees, the Deposit, etc.) need to be paid by the 401k account. Contributions into the 401k account can be made through roll overs, from other qualified plans, or through pre-tax deposits into the account, but NOT by personal funds. If you use your personal funds, the IRS will consider it an early distribution, resulting in those penalties and taxes we keep mentioning.
The downside, is that your Purchase MUST be a CASH Purchase – meaning no mortgage or other debt financing to buy the Property. However, that DOES NOT mean you have to pay 100% of the Purchase Price. You can setup a Tenancy-In-Common structure which allows your 401k account to buy a percentage interest in the deal, and allows YOU to buy a percentage of the deal using personal funds. Plus, this option allows you to partner with other friends or family members who have similar retirement accounts that can each buy a percentage of the total investment until you’ve hit 100%
of the purchase costs.
LINK to our Video on “Real Estate Market Cycles”: https://youtu.be/cA3R6Y9qTOU
LINK to our Video on “Calculating Cash-on-Cash Returns”: https://youtu.be/Pqs53nmMp-g
LINK to our Video on “Identifying Where to Buy”: https://youtu.be/p3op9j8rCxY
LINK to our Video on “Confidently Calculating ‘Comps'”: https://youtu.be/GI6V2xNTZKU
LINK to our Video on “6 Ways to Increase Cash Flow”: https://youtu.be/vJDT3ALk0oI
Legal Disclaimer: No attorney-client relationship shall be formed by the watching of any video on this “Confident Real Estate” YouTube channel, or by any viewer subscribing to this YouTube channel. Please consult with an attorney in your jurisdiction before entering into, or negotiating any business or real estate transactions. The information provided herein this YouTube channel is not intended to constitute legal advice.