Skip to Content

Get a FREE assessment of your rental property. Start here!

Get a FREE assessment of your rental property. Start here!

Fund Your First Merrifield Rental Property with a Self-Guided 401(k)

Model House and Cash in a Miniature Shopping CartInvesting in residential rental properties is safe and profitable but the biggest challenge is often obtaining the funds for a down payment. However, accessing the funds needed for you to invest in real estate might not be all that difficult. You may be able to fund a rental property purchase in Merrifield by using your 401(k) plan or an Individual Retirement Account (IRA) if you have them. What’s more, if you plan carefully, you can use a retirement account to fund an investment in real estate, and it could result in little or no tax implications. By putting the funds you have to use, you can invest in a much more profitable future now.

An IRA or 401(k) is a long-term saving account with some tax advantages for you if certain IRS regulations are followed. In some instances, these retirement savings accounts are self-directed. What that means is that you can choose how to invest the funds in the account. For example, you can make an investment in mutual funds, bonds, and much more by using a self-directed 401(k). Having said that, the law prohibits direct investment into real estate from a 401(k). So, to get your 401(k) funds, there are a few more things you’ll need to do.

To use a 401(k) to invest in real estate, you have two choices. The first choice is to take a loan against your retirement account, and the second choice is to transfer the funds in your 401(k) to an IRA account. The difficulty when it comes to taking a loan against a 401(k) is that it might result in those funds being taxed. Most investors would rather avoid paying unnecessary taxes. Because of this, the wiser strategy would be to transfer your 401(k) into a self-directed IRA. The transfer itself is typically tax-free. In addition, and unlike a 401(k), many IRA accounts can be used for a wide range of investments, including real estate.

To set up a self-directed IRA, you’ll need to deal with an IRA custodian such as Equity Trust, Community National Bank, IRA Services Trust Company, or others. The new IRA account can be funded by using an existing IRA or rolling over a 401(k). This is something your IRA custodian should know how to do. Then, when you are prepared to purchase your residential rental property, you’ll have to submit a direction of investment form and get it approved. Once the form is approved, you can request for the funds you need to go through with the purchase. To do this, the name of your IRA must appear on the title of the property. This allows your custodian to issue funds. You would then be an investment property owner through your IRA account holder.

Because of how the structure of ownership is set up when you use an IRA, all ongoing expenses and revenue from the rental property would need to be done through your IRA custodian account. This would include any proceeds from the eventual sale of your investment property. When you sell a rental home that was purchased with an IRA account, the proceeds from the sale must remain in the IRA account. The benefit of this approach is that there is no immediate tax liability for the funds. Instead, it’s the future use of the funds that get taxed.

There is another important thing you have to know when using a self-directed IRA for your real estate investment, and that is you cannot be the one to manage your rental property yourself. Instead, you would need to hire a professional property management company such as Real Property Management to take charge of the rental’s day-to-day operations. However, this shouldn’t be viewed as a limitation because this strategy to real estate investing is in line with current business models, where an investment property owner partners with quality professionals to grow their wealth.

There are few investment options that come with the stability and potential that residential real estate has to offer. When you do business with Real Property Management Deluxe, we will assist you in your investment activities, and you will rest assured that a comprehensive and professional team of property management experts are working for your best interests. We will do everything including the time-consuming tasks that come with rental homes. This will free up your time so you can focus on growing your investment portfolio and reaching financial freedom. Contact us or call us at 218-454-7962 for more information.

We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.