“Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised.” ~ Russell Sage
According to a recent survey conducted by the Association of Foreign Investors in Real Estate, focusing its members that hold real estate worth in excess of $2 trillion globally, U.S. remains as one of the top destinations for foreign real estate investments. The economic slowdown in China along with an equally challenging economic outlook of Brazil, and immigrant crisis in Europe are some of the reasons favoring the U.S real estate industry. In addition to a favorable growth environment, foreign real estate investments’ tax reform passed in December last year is likely to trigger higher participation from foreign pension funds, which are to be treated equivalent to their U.S. counterparts for real estate investments. It is important to note that the foreign demand is one of the primary reasons behind soaring commercial real estate prices in the country.
Amid all of these facts and figures, one thing holds still, and that is the ever-increasing trust on real estate investments. As a Solo 401k service provider, we have had the chance of working with hundreds of customers, understanding their financial goals and potential problems they face in real estate investing. Real estate has always allured customers from all walks of life; however, majority of the enthusiasts are crippled by the down payment hurdle. The same is quite evident from the fact that first-time buyers’ accounted for approximately 29% housing sales in 2014 against 40% in 1999. Considering a variety of experience with our customers, we decided to put together a list of the benefits of investing in real estate with Solo 401k retirement plan.
Real Estate Among Most Sought After 401k Investment Options
- Down payment assistance: One of the primary reasons of real estate being the most sought after 401k investment options is the down payment assistance it offers. With a Solo 401k plan, one can use retirement funds to make the down payment.
- Non-recourse financing: In addition to down payment assistance, plan owners can leverage non-recourse financing for funding the purchase. While non-recourse financing comes with strict lending guidelines, it saves plan owners from extended credit risk, and lowers their overall risk profile. In case the plan defaults on the borrowed loan, the lender cannot come after the plan owner, as the property under consideration is the only collateral in the transaction.
- Participant Loan: For Solo 401k plan owners looking to buy real estate outside the plan, the participant loan feature allows them to arrange down payment, and cover the transaction costs easily. Under the current loan facility, every plan participant can borrow up to $50,000 or 50% of the overall value of the plan. The loan comes with lower interest rates, prime rate plus one percent, and it can be easily repaid in five years, with a minimum of one quarterly payment. The participant loan can be used for any purpose whatsoever, depending upon the sole discretion of the plan participant.
- Tax-deferred growth: Another important benefit of investing in real estate with Solo 401k is the tax-deferred growth enjoyed by the plan. Any capital gain or rental income generated from the property flows directly into the Solo 401k plan, where it sits comfortably until distribution, growing tax free for decades. In case of a Roth Solo 401k plan, the investment is made with after-tax dollars, which means no tax deductions even during withdrawals.
- Easy administration with minimal filing requirements: Another reason out of which customers prefer real estate as 401k investment options is the easy administration of the plan. Filing requirements originate only when the Solo 401k reaches a threshold of $250,000 in assets, hence requiring them to file form 5500.
Considering these benefits, it is safe to say that Solo 401k supercharges real estate investing, or in body-building language, it is real estate investing on steroids.