Educational Resources

How You Can Use your IRA or 401K to Invest in Multifamily Real Estate

401K to Invest in MultifaWant to invest in private equity real estate, but having difficulty securing the minimum investment? Don’t worry. While it may seem as though a substantial sum of cash is required to invest in multifamily real estate, many aspiring investors are not aware that they can use their individual retirement accounts or 401K plans (without penalties) to fund their investment. By converting your IRA or rolling over your 401k into a self-directed IRA, you may now have the capital required to invest in multifamily real estate.

Why you should use your retirement plans to invest in multifamily real estate

While it can be difficult to free up enough capital to meet the minimum investment that many firms require, investors tend to overlook the money that they have sitting in their retirement accounts. Or perhaps you are simply disappointed with how your retirement accounts are performing. Being able to use those funds for a resilient and lucrative investment like multifamily real estate with the tax benefits of retirement accounts could be the answer. In order to use your retirement funds for alternative investments, there are a few steps you need to take.

How to use your IRA or 401k to invest in multifamily real estate

Most IRAs are restricted by their brokerages to only allow investors to use traditional investments such as stocks and bonds. The same holds true for 401K plans. If you want to invest in an alternative investment like multifamily real estate, you will need to use a self-directed IRA.

First, you need to start by vetting an IRA custodian. A custodian will help you convert your IRA or rollover your 401K into a self-directed IRA while making sure you don't violate any rules that may compromise the IRA’s tax-assured status. This process is fairly simple, however, it is important to look for a custodian with experience in alternative investments in order to better streamline the investment process. When selecting a custodian, pay attention to their fee structure since it may vary from one custodian to another. Once you have found a satisfactory IRA custodian and your funds are self-directed, then you are free to invest in multifamily real estate. 

The monthly distributions you receive as well as your return on capital will then be returned to your self-directed IRA and can be withdrawn penalty free at the age of 59½.

Make sure to use the type of IRA account that best suits your investment needs. A self-directed Roth IRA uses after-tax dollars, meaning tax is paid on the money before it is invested, allowing withdrawals after the age of 59½ to be tax-free. This differs from a self-directed traditional IRA which uses pre-tax dollars, whereas a traditional IRA allows you to defer the tax to the time of withdrawal. Both forms of IRAs allow your capital to grow tax free.

Using your IRA or 401K to Invest with Freshwater

Freshwater has worked with a number of trusted IRA custodians who have helped investors diversify their portfolio into multifamily real estate. Since self-directed IRAs prohibit investments into certain types of real estate, it is important to know whether your investment fits the criteria. Luckily, at Freshwater all of our investments abide by the rules and regulations of a self-directed IRA. By self-directing their retirement accounts, many of our investors have found great success boosting their portfolios with capital they originally believed they had little control over.

Whether you're unhappy with the current performance of your retirement accounts or just need to free up some extra capital for an investment of your choice, a self-directed IRA is the best way to take control of your investment portfolio. Make sure you know the rules, find a trusted custodian, and start allocating your retirement funds on investments you believe in.