Buying Real Estate with Retirement Funds


Do you have a retirement plan like an IRA or 401(k) and are looking for some different investment ideas for your hard earned nest egg?  Are you tired of only being able to only invest in mutual funds, ETFs, stocks, bonds, annuities, or other paper assets that, at the end of the day, provide you with very little control due to outside market forces?  Does stock market volatility simply drive you nuts?  Are you tired of paying hidden fees as well as transparent fees for these assets that may not be delivering what you want?

I have some great news I’m going to share with you another alternative to consider, and help you take control of your retirement nest egg by investing in hard assets versus the alternatives I outlined above and refer to as “paper assets” in this article.

What qualifies me to discuss this as an alternative?

Prior to becoming a real estate professional, I spent the better part of 14 years of my career in the financial services industry.  During that time I saw some good things, and I definitely saw some bad things.  Now don’t get me wrong, there are some good financial professionals out there so I’m not writing this to blast them.  I just think there are some hidden agendas that might not always be made clear to the average investor and I know from experience that this topic is typically not discussed as alternative, and you’ll understand why here in a moment.

As I am no longer in the financial services industry, this article isn’t being written to provide you with financial advice as I cannot legally do so.  I am merely doing this to inform you of the alternatives that exist beyond what in commonly sold to people inside of most retirement plans.  Having a good mix of investments that you feel comfortable with should always be the end goal.  Just beware, because there are lots of investment traps out there and having an experienced professional in your corner that you trust is the best recipe to help you avoid many of these pitfalls.

I think it’s important to point out that the real estate industry also has some good and some bad to it as well, so in the end you’ll need to align yourself with a competent individual that you trust and that will give you honest feedback to help you make informed decisions.  Honesty and integrity are hard to find these days, so choose well!

With that said, let’s jump into this exciting topic because I think this will be a powerful benefit to a lot of people out there.

The Power of Utilizing an IRA Rollover

In this day and age, most of us invest in things like mutual funds, ETF’s, stocks, bonds, and annuities inside of our retirement plans.  Many of us likely have a retirement plan in some form or another.  There are literally dozens of them, so I’m not going to list them all out here for you here in this article.  The most common types of plans are usually 401(k)s through our employer and IRAs.

When we invest inside of a 401(k) or other employer provided retirement plan at work, your employer will typically give you a set of investment options you are limited to investing in that are most commonly mutual funds.  However, when we leave an employer we have the option of utilizing the power of an IRA and some employers will even allow you to make in-service rollovers to an IRA while you are still working.

The beauty of an IRA is you have a multitude of investment options to pick from, you can move the money from one plan to another without penalties as long as they are between qualified retirement plans, all while keeping your plan in a tax-deferred environment until you start taking distributions at some future date for retirement.  IRA rollovers are HUGE, and you really need to think of an IRA as an avenue that will allow you to invest in just about anything you want.  Owning physical real estate is one of those options and one I feel could a powerful asset to have in your investment portfolio.

Why Haven’t I Heard About This Option Before?

Unfortunately most financial advisors, brokerage firms, and mutual fund companies probably don’t want you to know about using an IRA to invest in hard assets like real estate because they won’t make any money off you!  That’s right…they have a built-in interest in keeping you locked into paper assets because that’s how they make money, and make ongoing residual income off of you too!  That’s why what I am discussing may very well be the best hidden secret out there, and why it may be time to consider this as an option if you feel it fits your situation.

To put it simply, these companies make money off of you by charging a management fee built into the fund being used (which you typically won’t see), charging you a transparent fee for managing these funds (some fund companies and financial advisors will do this), a commission for selling you the investment, or a combination of all the above!  You could be paying anywhere from .25% all the way up to 3% or even higher depending on who you are working with and how they have you portfolio set up.

Index funds that follow an index like the S&P 500 will typically cost you the least.  As you get into more actively traded funds and even hiring a financial advisor to assist you with this process, you may be knocking on the 2%-3% range or even higher which could end up being very costly.  I will run through some investment hypotheticals in my next article to help give you an idea of what this might ultimately cost you and to compare against using real estate as an option.

The Potential Fee Trap with Mutual Funds, ETFs, Annuities, and Financial Advisors

On a $500,000 retirement portfolio, you could be paying anywhere from $1,250 all the way up to $15,000 or higher a year in fees alone to invest in most types of paper assets depending on your mix and who you are using to manage this portfolio.

Now to be fair, I’m outlining this in general terms for comparison purposes, but spending almost 14 years of my professional career in the financial services industry, I would like to think I have some very valuable insight into how this process works.  The best thing to always do is ask!  If the person you have hired or working for the company managing your money begins to fumble along in their explanation of how they get paid and what you are ultimately paying, this might be a red flag.

Why Real Estate as an Option?

Ever look at your statement from the company you have your retirement funds with and wonder, just what exactly am I invested in?  What is this ABC fund (generic term) invested in, or why am I in this individual stock?  To give you a quick rundown, mutual funds and ETF’s will typically invest in a portfolio of stocks, bonds, or a combination of all kinds of stuff for you to spread out your risk.  Some of these funds and/or ETF’s could have literally several hundreds of different assets mixed into the funds at one time.  However, it is widely publicized that most fund managers, financial advisors, etc.  hardly ever outperform the market as a whole.

So…why might real estate be an option worth considering?  Let me ask you one simple question: Even in economic hard times, what is one asset we are all going to need?  I can think of a few right off the top of my head like food, water, clothing, and a roof over our heads.  We are always going to need a roof over our heads so whether you like it or not, real estate is here to stay.  People are always going to need a place to live, and why not utilize that as part of our retirement nest egg?

You get the potential for capital appreciation on the asset, monthly income for life via rents, and you have a hard asset in the mix that you can actually feel and touch.  I can tell you that in the stock market, you’ll have a difficult time finding stocks, bonds, mutual funds, or ETFs that will provide you with a 5%-8% cash flow in addition to capital appreciation without taking on lots of risk to get it.  Real estate prices can fluctuate too, but over time I’m willing to bet these will be reliable assets to have in the mix and subject to the violent swings we may see in the stock market.

What if I don’t want to be a landlord?

Let’s face it, this could be considered a negative especially if you want to go out play during retirement and don’t want to take care of a property or multiple properties.  The good news is there are literally several dozen management companies out there that will take this burden off your hands if this is something you don’t want to deal with.  It will come at a cost though, as you’ll likely be looking at 10% of your monthly rent(s) going to a management company.  If you are charging $2,000 per month rent, that would roughly equate to $200 per month.  I know there are some newer companies out there charging a flat rate of $85 per month, but I haven’t had the chance to investigate them yet.

Think about it though, even if you go with a management company you have a built in cash flow for life that will provide you with cost of living adjustments via rising rents, the potential for capital appreciation in the property, remove the worry of running your account to zero via a paper asset portfolio, and a cash flow that is back by a hard asset.  Definitely worth considering if you ask me.

What if I don’t have enough in my IRA to pay the full purchase price of the home?

Not a problem.  However, you can’t just use any lender you wish, since this is retirement money you will be using.  You will need to line up with what’s called a “non-course” lender and the custodian will typically have lenders they recommend.  However, most of these lenders will be looking for at least 50% down on the property, so if you were looking at a property worth $300,000, you would need to look at using at least $150,000 in IRA money to make the purchase.

Can I use this for my primary residence and not as an investment?

Unfortunately, you cannot use these funds to purchase a primary residence.  These funds need to be used for retirement purposes, so you would need to look at doing this on income type properties.

How are taxes, insurance, maintenance fees, and other ancillary costs handled?

Since this would be considered a cost of utilizing the investment, payments for all of this would be paid out of the IRA.  The good news is these payments to contractors for maintenance work, taxes, insurance and on down the line would be treated as a taxable event like it would when you withdraw the money for your personal use.

It’s important to note that when buying an income property inside of an IRA, you will need to keep your personal stuff out of the equation.

What’s happens to my rent payments?

Your rent payments would be made payable to the IRA custodian where your funds are being held for your benefit.  They can sit in a savings account, money market, or you can even consider reinvesting those proceeds back into stocks, bonds, mutual funds, or ETFs.  The choice is entirely yours!

What’s my next step?

If you like what you are hearing, then the next logical step is where do we go from here?  As I have a fairly extensive background with all of this, I would be a great resource in helping you coordinate your rollover with a qualified custodian and upon completion; help you find the right property that fits your situation.  I most commonly make money from the seller of the property, so if you are buying a property you likely would have very little (if any) fees paid directly to me.  The best thing to do is contact me if this of interest to you and we go over the details in person.

If you are wondering what some of the numbers look like in making a decision if that would be a value to you, I would encourage to read my follow up article to this one Using Retirement Funds to Buy Real Estate – Part 2 (Hypotheticals)

Thanks for your time, and I hope you found this article of interest to you!

Disclosure:  The author was a previously licensed Registered Investment Advisor and a securities licensed broker, but is no longer in the financial services industry.  This article is not intended to provide financial advice, but is intended to be used for informational purposes only.  The author is currently a licensed real estate broker and Realtor in the State of Colorado.  You should always consult your tax and/or financial professional before making any investment decisions.


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