How To Invest 401k In Real Estate

With the economic climate around the world a bit like a roller coaster ride, a growing number of American workers are interested in learning how to invest 401k in real estate. Choosing to invest your 401k in real estate can be an extremely risky proposition, but many argue it is a profitable one. Here's what you need to do before choosing to invest your 401k in real estate.

1. Learn about the rules of your 401k. All 401k's are not created equal. Some 401k's do have rules prohibiting you from borrowing against it or moving funds to your IRA , and these rules will make it fairly impossible to invest your 401k in real estate. Other accounts don't prohibit you from doing this, but will have a number of conditions or additional fees that you'll want to know about before making your decision to invest your 401k.
2. Know the value of your 401k. If you are permitted to borrow against your 401k, essentially you'll be taking out a loan against yourself to accomplish this. You will not be able to take out a loan for an amount greater than what's in your retirement account at the time of your inquiry. A 401k is a source of guaranteed funds, so you will only be permitted to borrow against what you're guaranteed to be able to repay.
3. Learn about the best investment options available. Learning how to invest your 401k in real estate is not a simple financial transaction, and you should do all your research before committing to an investment option. For most, the safest option is the REIT, or real estate investment trust. In essence, choosing to invest 401k funds in the REIT is allowing a group of companies that routinely buy and sell real estate to make the investment choices for you. Because the REIT is composed of companies rather than individuals and because the REIT deals solely with real estate transaction, the risk is minimized and you're putting your investment decisions in the hands of professionals.
4. Consider relocating funds to your retirement account. In some cases, relocating funds from your 401k to your IRA will allow you to finance your real estate investment if you're having difficulty getting approval to invest your 401k in real estate. This is not an option for every borrower, and in some cases, the financial penalty that accompanies the relocation of the funds makes this choice less than worthwhile. It is, however, an available option worth exploring.
5. Choose a lender. Since you are essentially seeking a loan when you take steps to invest your 401k in real estate, you're going to need a lender. Even though your loan is guaranteed because you are borrowing against yourself, there are some lenders who prefer not to deal with these types of transactions. Others will only help you get the required loans to invest 401k funds if you're investing in an REIT. Be sure to shop around and choose a lender that best represents your goals and interests in choosing to invest 401k funds.
6. Find an investment.  For most investors, this part is the most challenging aspect of figuring out how to invest 401k in real estate. The investment you choose will largely determine your success, and putting your funds in an ill-advised investment is essentially gambling with your financial security. This is why many choose the REIT option when it comes time to invest 401k funds. If you're investing on your own, be sure to do all the appropriate research before committing to an investment, and consult a trusted financial professional before you determine how best to invest 401k funds.

It's important to be aware that many financial professionals and lenders will strongly advice against investing a 401k in real estate. These advisors are well aware of the risk such an investment entails, and have unfortunate experience with past clients that may have lost their entire nest egg to an ill-advised decision to invest 401k in real estate.  Keep in mind that these financial advisors simply have your best interests at heart.

Source: "How To Invest In Real Estate And Pay Little Or No Taxes", Hubert Bromma. McGraw Hill, 2004, 250 pp.