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Alternative Investments: Real Estate Investing

Alternative Investments: Real Estate Investing

The often-quoted Andrew Carnegie (1835 - 1919) said, “90% of all millionaires become so through owning real estate.” With all due respect to Mr. Carnegie, it is more like 99%. As an alternative investment, real estate is at the top of the list.

You would be hard-pressed to find any millionaires or billionaires who do not have significant investments in residential or commercial real estate as a considerable portion of their investment portfolios. Yet, a surprising number of non-self-managed retirement accounts do not have any real estate investments.

These retirement accounts with a plan administrator offer limited investment choices and may only hold stocks, bonds, mutual funds, or ETFs. With a self-directed IRA or a solo 401(k), you can also invest in alternative investments such as real estate.

Strategic Real Estate Investing

Over the long term, real estate investing may be beneficial. In a seller’s market, the year-over-year price appreciation may be substantial.

On the other hand, severe real estate market downturns do occur. These are buying opportunities for investors who are wise enough to hold aside some cash. These cash reserves allow them to grab bargains when the market makes a downside correction.

Ways to Invest in Real Estate

Here are some real estate investments to consider for your investment strategy if your goal is to build your net worth using a self-directed retirement account.

Owning Rental Properties

The goal with a rental property is to get it rented at a rate that makes it show a profit. You want the property to be cash-positive with some money left over after paying all the bills. Managing this strategy well allows a real estate investor to have the rent from tenants pay for the buildings that the investor owns.

In real estate investing, there is often a need for property management to handle all the problems with tenants, which are endless. Some investors take charge of the management issues. Others hire a management company to do this work for them.

If you outsource the management of your rental properties, expect to pay an average of 10% commission on the monthly collected rents. This commission has to be a factor included in your cash flow projections and calculations.

Building Custom Homes

This effort may be an effective strategy for creating real estate wealth for those who like the home construction industry. The process includes buying raw land, getting a permit to subdivide it, putting in the infrastructure, and then building custom homes to sell for a nice profit.

Flipping Houses

This strategy is to buy a fixer-upper, fix it up, and then sell it for market value at a profit. You may find bargain properties with renovation potential listed “as-is” for a distressed sale or bid on these properties at a foreclosure or another type of auction.

Some investors like to work as a team with other real estate investors as limited partners.

Crowdfunding

Crowdfunding might be useful to raise the capital needed for real estate investing or a development project. Investing in a crowdfunded project may also be a possible way for a smaller investor to participate with a modest investment in a much larger project.

Be sure to conduct thorough due diligence for any crowdfunding real estate investments you consider.

REITs

Owning shares or units in a real estate investment trust (REIT) is a way to have investment exposure in real estate without having any tenant headaches normally associated with property management.

A REIT must concentrate on real estate investments and distribute 90% of the annual net profits to their investors as a dividend. Publicly-traded REITs list on the stock exchanges.

Tax-Lien Sales

In some counties across America, past-due property tax liens are put up for bid at auction, including a high rate of return for the investors who pay the taxes in default.

After an investor pays the past-due tax bill, the property owner of record has some time to pay the taxes paid by the investor and the allowed premium. Some counties allow the compensation to be as high as 30%.

Suppose the property owner of record fails to pay the past-due taxes to the investor in the allowed time. In that case, the investor may foreclose on the property and then take ownership control of it free and clear through the county’s mandated legal process.

Virtual Real Estate

A hot trend is investing in virtual real estate that is part of a metaverse or an online gaming system. This investment mimics real estate in the real world but is completely a digital asset.

The values of some of these virtual properties may be astounding, rivaling the prices paid for real properties in the real world. If you want the virtual property next to a celebrity who owns a virtual property already, expect to pay a hefty sum to get the digital rights of ownership.

Free to Invest as You Like

For your self-directed retirement accounts, such as a solo 410(k), you may invest in various real estate projects and investment vehicles as long as you follow certain rules.

Real Estate Investing Using an IRA

Investing in real estate using the funds from an individual retirement account (IRA) requires the following:

  • The real estate must be for investment purposes.
  • You are not allowed to conduct a prohibited transaction. For example, you and your family members cannot live there or use the property for a vacation home or an office.
  • Property tax deductions are not used since the IRA is the property owner, and there is a deferral of all income taxes on IRA funds until your withdrawal after reaching retirement age.
  • Any rental income received flows back into the IRA.
  • Disbursement of the profits from real estate investments and rental income waits until you reach retirement age. From that age, you must take a minimum annual distribution.
  • Planning for rental property maintenance is necessary since you are limited in your annual contribution to an IRA and cannot overfund the IRA account to pay for maintenance costs that exceed the maximum allowed yearly contribution.

IRA Exception for a First-Time Homebuyer

If you qualify as a first-time homebuyer, you may use up to $10,000 of your traditional IRA funds as part of the down payment to buy or build a home. You pay income tax on these funds taken from an IRA. However, you do not pay the 10% penalty for taking an early withdrawal.

Watch this video to learn more about building a real estate empire using a Self-Directed IRA or Solo 401(k).

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