Real Estate Syndication Investing For Self-Employed (IE self-directed 401k, IRA)


Real estate investing is generally considered an excellent method of building personal wealth. Yet many investors today refrain from adding property investments to their retirement plans and portfolios. A major reason for this is that most financial institutions and their investment advisors recommend selecting only those investments that are available on the financial markets.


Many investors also gravitate toward putting their capital into these traditional market-based investments. They make this choice mainly due to a common limited understanding of the significant benefits of property investing through syndication. These investors may not be aware of the impressive return on investment (ROI) that they can receive by pooling their funds with other passive investors for investing in large multifamily property projects.


Build Your Self-Directed IRA or Solo 401(k) with Real Estate Investments


Recommended syndication property investments for building your self-directed IRA or Solo 401(k) include the following:


Multifamily Real Estate Investing Through Syndication


Today, multifamily properties offered by real estate syndicates are preferred investments among both U.S. and international investors. In fact, U.S., Chinese and Mexican investors currently lead the way in this type of property investing. Especially since these large multi-unit properties offer low-risk and the benefits from long-term leases and high asset appreciation, they continue to grow in popularity as investment choices.


If you have or gain adequate knowledge that can benefit other investors, you can win approval as a “sophisticated investor” with respected real estate syndicates. Gaining this status can enable you to start with an investment of just $50,000, pooling it with the combined funds of other investors for the transaction of a multifamily property investment.


You and the other investors (passive investors) have done your part in making this property deal possible with your funding. At this point, the sponsor of the syndicate takes over, managing all other aspects of the property deal. This includes the future sale of the property.


As a passive investor (limited partner) in this syndication property investment, you can then sit back and wait to receive payouts and dividends. The sponsor (general partner) then continues managing the investment project through to its completion.


Adding Syndicated Property Investments to Your Retirement Portfolio


If you are self-employed or the operator of an owner-only business, you may already have a self-directed IRA or Solo 401(k) plan. If you want a Solo 401(k) plan and you do not yet have one of these retirement accounts, you should be eligible to get one.


When you have located a syndication property investment for your retirement portfolio, you can invest in this asset with funds from your retirement account. Your IRA or 401(k) owns the investment and holds its title. Any and all of the income that you receive from this investment then must go back into your IRA or 401(k). In addition, all expenses that are related to this investment must be paid from funds in your IRA or 401(k).


Funding Real Estate Investments with Your IRA


Financial assets like stocks and bonds, mutual funds and exchange-traded funds (ETFs) are common investments held in IRAs. Under specific conditions, property investments can also be held in your IRA. Multifamily syndication property investments are popular assets for your IRA portfolio, and they can be quite lucrative.


However, investing in these properties is more complex than purchasing bonds or shares of stock. In order to be successful at investing in multifamily real estate through syndication, you need to know and understand the rules, steps, risks and benefits.


Key Points to Remember About Holding Real Estate in Your IRA


  • If you want to hold real estate investments in your Individual Retirement Account, you need to have a self-directed IRA. Any properties that you buy and hold in this account must remain there as investment properties. You cannot use them for any purpose.


  • Buying real estate within an IRA normally means paying with cash. The IRA must also cover all payments for ownership expenses.


  • When holding investment properties in your IRA, you may encounter tax issues and other complications. However, these valuable investments can bring you an impressive ROI while diversifying your portfolio.


The Ideal IRA for Purchasing Property Investments


As mentioned, you need a self-directed IRA to purchase real estate investments. “Self-directed” IRAs allow alternative investments like property as well as the standard market assets of stocks and bonds, mutual funds and ETFs. These investments may be offered by the entity that holds responsibility for keeping the records and the IRS reporting requirements of your IRA.


This entity may be the IRA custodian, a financial institution or an individual company. Your self-directed IRA is not connected to any bank, brokerage or investment company that would make investment choices or decisions for you. The majority of brokerage accounts today disallow real estate holdings as investments.


The Purpose of Your IRA Custodian


You need a custodian for the purchase and ownership of property in your IRA. The custodian is a specialist in self-directed accounts and will assume management of the property investment transaction. Your custodian will also complete the necessary paperwork and financial reports.


Every step and aspect of your property investment is managed by the custodian to protect you from rules violations pertaining to your REI. The custodian charges a service fee for handling all of your “office work” to ensure a smooth and violation-free transaction for each of your IRA property investments.


You must always remember that you and your IRA are two separate legal entities. In this instance, your IRA owns your real estate investment. You are not the owner. In fact, the title to this investment property will read “XXX Trust Company Custodian [for benefit of] (FBO) [Your Name] IRA.”


Pitfalls to Avoid for Property Investments Through Your IRA


You need to be aware of certain mistakes that can disqualify your IRA when you buy investment properties through this account. If your IRA is disqualified, all of the funds that it contains will become taxable. Important points to remember include the following:


  • You Cannot Use This Investment Property. The real estate that you bought as investment property through your IRA is purely an investment. It must not be used as a vacation home or a business office.


  • You Cannot Purchase Property from a Disqualified Person. You are not permitted to buy any investment property through your IRA from a disqualified person. These people include your spouse or your parents, grandparents and great-grandparents.


Other disqualified people are you children or their spouses, your grandchildren or your great-grandchildren. Additional disqualified people are your IRA service providers or anyone who owns over 50 percent of the investment property.


Buying Real Estate Investments Through your Solo (Self-Directed) 401(k)


After establishing a Solo (self-directed) 401(k) or a Roth Solo 401(k) for real estate, you can then invest in property through these accounts. These are not the same as traditional employee-sponsored 401(k) accounts. However, if you are the owner of a small business with no employees or if you are self-employed, you can use your Solo 401(k) retirement plan for REI purposes.


Solo (self-directed) 401(k) plans were designed by the IRS to aid individuals in these categories:


  • Self-employed individuals;
  • Individuals who actively make part of their annual income via self-employed pursuits;
  • Small business owners without employees (exceptions: business owner or spouse).


Syndicated Real Estate Investing Through Your 401(k)


Since your Solo 401(k) plan can take title of an investment property that you buy through this account, you do not need an LLC for making this investment. Your 401(k) can take title and own the property. For this reason, you are not required to establish an LLC with your Solo 401(k) plan funds in order to invest in real estate. Your plan will put up the capital as your share of the passive investors’ pool of capital to fund the syndication property investment.


One major advantage of making a real estate investment using retirement funds is that the sum of your financial gains are tax-deferred until a distribution is issued. For Roth accounts, they are tax-free (after-tax).


Helpful Tips and Requirements for Property Investing Through Your 401(k)


The following helpful tips and requirements can guide you when making real estate investments using your 401(k) retirement plan:


  • The purchase funds for a syndication property investment must be paid with your retirement account funds rather than from funds obtained from a disqualified person.


  • If you partner with a disqualified person when using your retirement account to fund a syndication real estate investment, this could result in penalties from the IRS prohibited transactions regulations.


  • If you need supplemental funding for investing in a syndication property deal as a passive investor using your 401(k) account, use only non-recourse financing. Non-recourse loans are not personally guaranteed by you as the holder of the retirement account or by any disqualified person. The sole recourse of the lender is against a property.


Concluding Thoughts


As you can see, there is a learning curve to successful real estate investing in syndicated multifamily properties using your self-directed IRA or your Solo 401(k) plan. There are also rules and regulations to abide by in order to avoid the disqualification of your retirement account, which can lead to tax assessments of your fund or other penalties.


However, after performing some due diligence and gaining good knowledge about investing through your retirement accounts, you can profit by investing in this way. You can build an impressive real estate portfolio with lucrative ROI as a successful syndication property investor using your self-directed IRA or Solo 401(k) plan.