Do you think investing in real estate through your self directed Ira/401k makes sense? Here are some thoughts to ponder.
Transcript: Hi this is Jeff Brown the “BawldGuy”. Today we’re going to talk about investing in real estate inside your self-directed IRA or 401(k) retirement plan. First of all, let’s start out with, generally speaking – and I want say over 90 percent of the time – I recommend against it. Here’s why. First of all, you can buy the property outside the plan for half to 60 percent of the down payment. It’s going to take you a minimum of 40 percent down inside your self-directed plan to do it. You can generally buy single-family investment properties for 20 percent, and duplexes to four-plexes for 25 percent down. Secondly, the financing on 401 and IRA self-directed plans, when you borrow, by definition of law must be non-recourse loans. What that means to the lender is they can’t look to you for satisfaction if you default. And when I say “you,” I mean your plan, ’cause you can’t have anything to do with it; it’s your plan’s property. Now, what that really means to the lender is the property is the sole security; that’s why the higher down payment. That’s why they’re not going to give you a thirty-year fixed rate. At most, they’re going to give you twenty five years, maybe twenty. Today’s rates are around four and a half, thirty year fixed, for a citizen buying on their own account. Inside your plan, it’s going to be somewhere between 5 and 7 percent, depending on the terms of the note, and we don’t have to get into those specifics, but that’s the range you can expect, and instead of being thirty, it will be twenty or twenty five, and maybe due in three or five or seven or whatever – risks that you’re not sure you want that plan to incur. Now, once you do that, and now you pay it off over years and years, it’s free and clear. Big whoop – now you’ve got a free and clear piece of property. What are you gonna do with it? Well, the good news is you don’t even have to think about 1031 tax-deferred exchanges. It’s tax-deferred by definition. But what are you really going to do? Are you going to sell it and buy more – what are you going to do? Here’s why I tell you not to do it. You can take that down payment – let’s say you’ve got $130,000, $150 in your plan. If you take that $150,000, and you get out of that plan, you’re going to net $75 or $80,000, because they really pick your pocket when you get out of those things. Bottom line is you can buy the same exact piece of property with half the money. You’re going to get a better interest rate. You’re going to pay it off faster. You’re going to have more options on your menu. And you can do whatever you want with it when it’s free and clear, and your choices increase unbelievably. The bottom line is take control; you’ll do more with half the money in your pocket than with twice the money in your self-directed plan. I’ve seen it over and over and over. I’ve had my own family do this. Now, we’ll talk about this further down the road with some other approaches, but that’ll be it for today. Thanks for joining me. I’ll see you next time. This is Jeff Brown, the BawldGuy.