Retirement Investment

Using 401k to Invest in Real Estate: Is It Possible? How do You do It the Right, Legal Way?

Many people have a 401K account, wondering if one of the investments they can make is in the real estate market. Is it allowed? Using 401k to invest in real estate is not allowable directly through an employer-sponsored account. Still, the rollover option of an account from a former employer to an IRA that is self-directed is available.

You can use self-directed IRA accounts to purchase land, commercial properties, and even residential property to potentially generate income. You might not be able to use the residential property you invest in for personal use, however.

As the name suggests, a “self-directed IRA” account allows the account holder to direct how to invest their funds, as long as the investments are legal. Some more things you are allowed to buy with this kind of account includes tax lien certificates, crowdfunded real estate investments, private equity investments, cryptocurrencies, and so forth.

When using 401k to invest in real estate, you can roll it over to either a self-directed Roth or traditional account. What about a mortgage? Can you get approved for a mortgage to help you buy an investment commercial or residential property through IRA?

Using 401k to Invest in Real Estate With a Bank Loan

Typically, the bank would make a loan to you personally, which means your assets guarantee the loan. In a self-directed retirement account, the bank will have to loan money to the account, which the law considers a separate entity legally. This plan is known as a non-recourse mortgage because the bank wouldn’t be able to go after any other asset aside from the property itself. For this type of loan, you’ll need a company that specializes in it.

Since the bank cannot go after your other assets like usual, you might need to pay a higher down payment. The non-recourse lender will likely want something along the lines of 40% of the property’s purchase price as a down payment. A higher interest rate than usual is also something to be expected. For reasons such as these, you need to be very confident that the property will be a profitable investment that will deliver worthwhile returns.

How do you go about using 401k to invest in real estate? How do you roll it over to a self-directed account? The best way to get started is to go through a company such as Rocket Dollar. It offers all of the resources, information, tools, and assistance you need to establish and use a self-directed IRA account and make the right investments.

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