“The question isn’t at what age I want to retire, it’s at what income.” — George Foreman
Have you wondered if you should use your retirement money to invest in real estate?
You might see some risk, and that is a perfectly normal reaction!
Other, more traditional investments can be very risky.
What happens if the stock market crashes?
Can you use all this retirement money to invest in physical real estate?
A lot of people, including investment advisors, would say you can’t do that.
The problem with that is they have an interest to keep you in Wall Street products.
I know because I’m a recovering investment advisor.
I’m gonna lay it all out and be honest with you.
I’ve spoken with over 1200 individual investors about real estate.
Many people are interested in using retirement money to invest.
It is absolutely possible.
There are a few things that you need to know to make sure you take advantage in the right way.
What is the right way?
Do things compliantly, watch out for some penalties, and do things correctly.
This is a money game.
Tony Robbins came out with this book called Money: Master the Game.
Building off what he said, my opinion is: If you want to be a winner at any game, just don’t suck.
Don’t play poorly.
Don’t do it the wrong way.
Do it in a way where you can win the game.
1. Get the Right Type of Account
How do you not suck at the money game?
When it comes to real estate or retirement investing, the first thing you need is to get the right type of account.
A 401k will only allow you to invest in Wall Street products.
That means stocks, bonds, other sorts of financial paper, assets, even REITs.
That’s not owning physical real estate.
It’s owning a Wall Street product that substitutes for the actual physical thing.
Another thing about REITs: If the market goes up, your value will go up.
If the market goes down, you’re gonna go down with that ship Dido-style.
When you look at your investing, it’s important to do things with a margin of safety and also a value-add component.
Warren Buffet talks about a margin of safety in multifamily investing.
One way we use this principle is a value-add approach.
We come in and we do particular renovations on a property.
We spend around $10,000 per unit.
We see a rent bump of maybe $150-$200 a month.
That gives us some margin of safety.
If multifamily property valuations start to go down, we’ve at least increased some value there.
This allows for higher returns.
Even if things don’t go perfectly, The investment would still have higher returns than if you were owning the market.
That’s something that’s really important to look at!
Remember when I said it’s important that you get the right type of account?
There are a couple of rules that we’ll get into.
The first is you can’t have something where you’re doing the work.
So let’s say you’ve got a retirement account.
You’re buying property and managing it yourself, or maybe you’re doing flips.
That is something you would be managing yourself.
You can’t actually do that.
You need to have somebody else who’s actually doing the work for you like a property manager.
When you do all the work, you’re not benefiting from your own efforts.
You don’t have a side business with your retirement account…
You have another job.
The other thing you have to look out for are UBIT.
UBIT stands for unrelated business income tax.
The government loves to be sneaky here.
So you have your retirement account, which is tax free.
When your money is in there, you only pay when there’s a sale or you pull money out.
You can have money inside of a retirement account.
Certain retirement accounts allow for physical real estate.
If you use debt to buy a property, the government can tax you when you sell that property based on the amount of debt you use.
For example, let’s say somebody invests $100,000 in a multifamily project with us.
That money doubles in five years, and we used 80% debt to get there.
The government can say, congratulations on selling the house, but we’re going to tax you.
Of that $100,000 you gained, 80% was financed.
We, the government, are gonna tax you at normal income rates on that $80,000.
That could be $25,000 worth of taxes!.
You’d have to pay inside a retirement account, even without taking a distribution.
That’s like a kid coming up in the sandbox and still your toys and running away laughing!
One way you can get around that is by having the right type of account.
There’s something called a QRP, or a qualified retirement plan.
You can check out our resources (and a free book!) on QRPs here.
The plan limits the government’s ability to enact those taxes.
It’s not eligible for UBIT, which means you can have debt finance to whatever you have in that particular deal.
Isn’t that kind of crazy?!
The government wants to take your gains, but they will not share in the losses.
The second thing is called a Solo 401k.
If you’re self-employed or you have a business, you can qualify for a Solo 401k Plan that is also exempt from UBIT.
Those are a couple of things to make sure you get the right type of account to invest in real estate.
Let’s move onto the next step!
2. Move Your Funds to Your New Account
The second thing you need to do after you create your new retirement account is moving your funds.
I know this sounds really simple.
Well, let me tell you, I’ve raised over $20 million from different investors…
I can’t tell you how many times I’ve had this call:
Somebody likes our deal and wants to invest.
I’ll ask how they want to invest and they’ll say through an investor retirement account.Az
The trouble starts when I start asking some follow-up questions.
Do they have it set up?
Is everything ready to go?
Do they have the money there?
Sometimes, they’ll say no!
They haven’t set it up!
At this time I’m thinking: Oh my gosh, this is gonna take two to three weeks for this person to set everything up.
Not only do you have to have it set up, but you have to have it funded and ready to go.
I’ve seen many investors miss out on a deal simply because they really weren’t ready.
The best time to set this up is before you have a live deal so you’ll be ready to go.
If you’re reading this post, you’re thinking about it already.
You should start taking action and set it up!
Don’t discount this step because it sounds simple.
Now, let’s move on to the third and final tip:
3. Find a Great Passive Deal
It’s important to find a great passive deal.
There are many options, but this is the key to investing.
So lean in, listen to this.
The key to investing is don’t do crappy deals.
I’m on a roll with the great quotes today!
First, don’t suck; second, don’t do crappy deals.
Why I mean by not doing crappy deals is that you want to find good deals.
These are conservatively underwritten deals with great operators.
You don’t need to have out of the park home runs.
Finding base hits can be just as rewarding.
If you really try to go for base hits with good operators, you’ll do great.
There are many different investments you can do.
We do multifamily apartment investing and have been for years.
Self-storage is also a great option, along with mobile home parks.
There are also other sorts of alternative investments, but those are a few options I think are really great to get you started.
How do you find out about these great deals?
It’s not as simple as finding something online.
One of the best ways to find out about deals is to network with other investors.
They’ll tell you who to trust and who not to trust as well as which approaches they like the best and who does business that way.
The more that you network, the more you’ll learn about what type of deals you want.
Another way to find out about deals is through podcasts.
You can also go to live events.
We have a meetup the first Wednesday of the month in Southern California, if you’re ever in the area!
There’s also national conferences.
I go to a lot of national conferences every year and find out about deals.
It’s really important that you are finding conservative yields.
Everybody expects things will go amazingly 100% of the time.
Of course that’s not true.
Be smart and do your research – it’ll really pay off.
Now I want to hear from you!
How do you think you will invest your retirement?
Or how are you investing your retirement to be able to do well?
How are you finding out about deals?
Let’s grow our community and have a conversation!
Before you leave, make sure to check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.