How To Invest In Multi-Family with Your 401(k) | SDITalk.com #305

You’ve found a great multi-family deal, but it’s going to take some cash. You have some cash in your 401(k). How do you put them together for a glorious result? I’ll tell you right now. I’m Bryan Ellis. This is episode #305 of America’s Largest, Fastest-growing podcast for self-directed investors…

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Hello, Self-Directed Investors coast to coast and all across the fruited plane! Welcome to Self-Directed Investor Talk, the show of record for savvy self-directed investors like YOU, where each weekday, I help you to FIND, UNDERSTAND and PROFIT from exceptional alternative investment opportunities and strategies.

Happy Q&A day, my friends! I always enjoy Q&A day here on SDI Talk – which happens every 5th episode. If you’d like to submit a question for Q&A day, the best way to do that is to email me directly at [email protected] with your question… I look forward to hearing from you!

Today’s question comes from Riley Lange from Colorado Spring, Colorado. He asks: “What’s the process for rolling your corporate 401(k) over into a multifamily property as a passive investor?” Riley, that’s a great question, and in answering it, I’ve got to encourage you to visit today’s show page at SDITalk.com/305 to refer to the additional resources I’ll reference.

So Riley, if you’re using an existing 401(k) to fund this investment, the process you’re going to want to take will look something like this:

First, select the right type of self-directed account. Even if you already have a self-directed IRA or other account, take the time to reconfirm this, because in many cases – and the type of investment you’re proposing is DEFINITELY one of them – the distinction among the different types of accounts can have HUGE… I mean truly HUGE ramifications on the complexity and profitability of the investment. Yes… the ACCOUNT TYPE you select – like Traditional IRA vs Roth IRA vs SEP IRA vs Solo 401(k), etc. – can mean you actually make substantially MORE or LESS money, so take this seriously. Fortunately for you, SDI Society offers a very powerful and very concise training on this topic, which, while it is not a free training, I have taken the liberty of providing a way for you SDI Talk listeners to access it for free for a VERY limited time if you go over to SDITalk.com/bestaccount.

So after you pick the right account type, the second step is to pick a great custodian or account provider. This too is a big topic. Speak with friends and colleagues about who they use. Get some first-hand referrals if possible. That’s always the best way. If you need a great starting point, over on today’s show page at SDITalk.com/305, I’ve provided the official SDI Society list of self-directed IRA custodians and other account providers… that’s a GREAT place to start.

Third, transfer your money directly from your existing 401(k) to your new account. The IRA company or account provider can guide you on how to do this.

Fourth, assuming you have done proper due diligence on this investment – which is a huge, massive topic unto itself – then you’re ready to direct your custodian to make the investment. Now most of the time, larger multifamily projects will actually not technically be a real estate purchase. Instead, larger properties are usually held within a partnership or other business entity, and you – or your self-directed account, in this case – will instead be purchasing a portion of the partnership which owns the real estate. The broader point here is to make sure that you fully understand how the transaction is structured before you jump in, because there’s a wide array of options here and some are more advantageous to you than others.

So however the transaction is structured, you’ll see to it that the necessary money is transferred from your account to either the investment operator or – more ideally – to a third-party escrow service, and that you receive the proper documents to serve as your account’s indicia of ownership.

At that point, your self-directed retirement account actually owns the investment. Any income that’s generated will be paid to and necessarily owned by your retirement account. And when the time comes for you to sell that investment, all of the proceeds of sale will go back into your retirement account… and that’s REALLY when you get to experience the utter beauty of tax-free investing.

But I do have a word of warning for you: Remember that with pass-through entities, like partnerships and most LLC’s – which is the likely way that your investment will be structured by the investment provider – with entities like that where the tax liability passes directly through to the owners rather than being paid at the entity level, that means that to the extent that the entity generates EARNED income or uses debt financing, your self-directed IRA or solo 401(k) may be liable for payment of current-year income taxes! Yes, I know that those are tax-free entities… but that doesn’t mean that every type of transaction is tax-free. For example, if the investment fund uses leverage – also known as debt – to finance a portion of the transaction, then there’s very likely to be a current-year tax liability for self-directed IRA’s. Similarly, if any of the income generated is “active” income rather than “passive” income – more technically, if any of it is considered to be “unrelated business taxable income” – then your account will owe a current-year tax liability on any income generated from that as well.

Again, Riley, and all of SDI Nation, the one thing that could affect that issue the most is the TYPE of account you select on the front end. It’s really that critical. Be sure to check out SDITalk.com/bestaccount for more about that so you don’t find yourself with a tax bill you weren’t expecting.

And that, my friends, is how one rolls over their corporate 401(k) to invest into a multi-family property.

If you have any further questions or comments, be sure to drop me a line to [email protected] – I’ll be happy to help you out.

In parting, my friends, I have a favor to ask of you: If you’re learning from SDITalk, I ask you to become a subscriber to the show now. Just stop by SDITalk.com to enter your name & email… and that’s all it takes!

My friends… invest wisely today and live well forever!

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