How to Use your Self-Directed IRA or Solo 401k to Invest in Real Estate Passively

How to Use your Self-Directed IRA or Solo 401k to Invest in Real Estate Passively

How to Use your Self-Directed IRA or Solo 401k to Invest in Real Estate Passively

Have you ever wondered what the total amount of funds invested into retirement accounts was in the United States? 

You might be surprised to hear that the number exceeds a staggering $33 trillion

That’s quite a lot of money; more than the annual GDP of the United States.

Unfortunately, I feel that the majority of those funds are being underutilized in the stock market, providing inferior returns and increased volatility when compared to real estate.  

The good news is that most people are simply unaware that you can invest into real estate through your self-directed IRA. 

This is an attractive option to many people who are interested in real estate as an investment vehicle. 

Some want diversification in their retirement portfolio, whereas others are attracted to the higher returns that real estate investing provides over the stock market.

How to Use your Self-Directed IRA or Solo 401k to Invest in Real Estate Passively
Real estate is a more stable source of sustained growth with minimal down periods when compared to stocks and bonds.

This article will serve as a guide for those who want to accelerate the growth of their retirement account by investing in real estate syndications passively. 

Please remember that I am not an accountant or an attorney and you should consult with your own qualified professionals in addition to reading this article.  

It’s also important to point out here that we are discussing self directed IRAs.  These are different from conventional IRAs. 

Whereas conventional IRAs only allow you to invest in publicly traded investment vehicles such as bonds, stocks, and mutual funds, self-directed IRAs open you up to alternative investment options.

Self directed IRAs give you additional control over how the funds in your account are invested. 

This is becoming an increasingly popular option as it provides more avenues into alternative retirement investments like real estate. 

Self directed IRAs represent a small fraction of all IRA accounts and many retirement account brokers themselves are often unaware of the expanded investment options that self directed IRAs provide.  

These brokers and bankers that provide the IRA accounts would rather focus on conventional investments through the stock market, as their company is involved with that world and can take a cut for facilitating the investments. 

They won’t inform you about the ability to invest passively in real estate syndications, for example, because this is not a service their firm provides and they cannot profit from you choosing to invest your dollars into real estate.  

Advantages of Real Estate Investing

How to Use your Self-Directed IRA or Solo 401k to Invest in Real Estate Passively

The end result of this is most people do not have a self-directed IRA and even those who do might be unaware of how to accelerate its growth through alternative investments. 

In recent years, however, the average person is becoming increasingly aware (and perhaps concerned with) the volatility in the stock market and now many people have begun to question the prevailing narrative that this is the best and only place they should be investing their money. 

This concern for the stock market’s volatility is leading many people into the warm embrace of good old real estate. 

The future looks bright once you realize real estate provides superior returns as well.  Check out our
What type of Investment Should You Make to Secure your Financial Freedom? investor guide for an in-depth analysis of market data that proves real estate is superior to the stock market for long term growth of your capital.

A Roth Self-Directed IRA provides further layers of benefits.  Roth IRAs allow the account holder to grow their retirement capital tax-free. 

For those who are in a higher tax bracket, this is an extremely important consideration. 

We have clients who have invested with us exclusively through their self-directed IRA as part of a tax-planning strategy.  

Beyond the fact that real estate provides demonstrably superior returns, the simple lack of diversification in your typical retirement account can spell doom for the would-be retiree if there’s turbulence in the stock market when they finally go to cash in on their years of hard work and retire. 

Having a good chunk of your portfolio in passive real estate investments can shield you from these worst-case scenarios.  

What Can You Invest In With a Self-Directed IRA?

How to Use your Self-Directed IRA or Solo 401k to Invest in Real Estate Passively

The IRS provides a wide array of investment options for your self directed IRA. 

You could, for example, invest your retirement dollars into other alternative investments like foreign currency trading (forex).  

You can even get creative with it and fund entertainment business ventures like the creation of a video game or television show. 

Of course, given that these are supposed to be funds for retirement, most people are looking for stable and strong returns, not something even more volatile and risky than stocks!

That’s why one of the most popular ways to invest your self directed IRA capital is in real estate. 

This can come in a variety of forms, from actual physical investments into real estate assets, to more exotic options like using your self directed IRA funds to provide loans to other individuals for the purchase or rehabilitation of real estate assets.

Most people tend to be interested in direct investment into real estate.  There are two ways to do this.  The first and more traditional way is to directly purchase a real estate asset by yourself as an active investor

Some examples here would be purchasing a single family, duplex, or condo that you intend to rent out.

The other option is to directly invest into real estate passively through real estate syndications. 

These are crowdfunded real estate investments where full time real estate professionals source larger and more profitable deals that are purchased collectively with their investor base. 

The investors do not have any active work to perform in this model, other than judging new investment offerings as they come.

In our So, You’re Thinking of Buying a Duplex – Top 5 Things to Consider First article, we dove deep into the differences between active and passive real estate investors.  Please read there for a more in depth comparison to see which one suits you and your investing goals best.  For most people, passive real estate investing is a sensible and more appropriate option than taking on additional work as an active investor.

How Do I Setup an Account and Invest in Real Estate through my Self Directed IRA?

This is actually the simplest part of the article to explain, luckily.  There are a number of retirement plan administration firms that offer self-directed IRA options. 

It is their whole business model to make the process of signing up for a new account or transferring funds into your account as seamless as possible.  

Signing up is typically as simple as filling out the initial application paperwork and submitting it to your plan administrator. 

Once you’ve identified a real estate syndication opportunity you would like your retirement funds invested in, you simply communicate this to your plan administrator. 

Since they control your funds, technically they are the ones actually investing the funds on your behalf.  

Your administrator will be able to speak directly with the sponsors for the syndication and communicate any information they need. 

There will also be some paperwork you will need to fill out as the account holder. 

The process itself is relatively straightforward and the plan administrator will in the vast majority of cases already have experience going through this process with their other clients.

I Have Retirement Accounts, but not a Self-Directed IRA. Can I Transfer the Money from my Existing Accounts into a Self-Directed IRA Instead?

Okay, so maybe you’re one of the many people who have built up a retirement nest egg, but it isn’t in a self directed IRA. 

Now that you’re aware of the option to invest in real estate through self-directed IRAs, you want in. 

How do you move funds from a conventional IRA or 401k into a self-directed IRA account?

Luckily, transferring funds from one retirement account to another is not a taxable transaction and there are no limits to the amount of transfers one can perform. 

This means that if you’re interested in using your retirement funds for real estate or other alternative investments, you have no barriers to entry in converting your conventional account into a self-directed one with the increased flexibility you desire.

The process of moving funds can take anywhere from a few days to a few weeks. You will need to fill out some simple paperwork to get the ball rolling. 

To do so, you’ll need to contact your plan administrator at the firm where your existing account is held, as well as at the firm you plan to transfer to.  You can then fill out a request form, which will set the process in motion. 

Transfers are surprisingly easy and simple, yet most people are unaware that this is an option.


One caveat to this discussion is that when you invest your self-directed IRA into real estate, you will be subject to the unrelated business income tax (UBIT).  This is triggered when your IRA earns unrelated debt-financed income, or UDFI.


Essentially, this is a tax on those cash flows that are created by the fact that you are investing in a levered asset with a loan.  The percentage of the asset value that is financed through debt will be the percentage of future profits that are considered UDFI.  


For example, let’s say you purchased a $1,000,000 property and a bank financed 75% of the purchase price.  Your net operating income for the property is $75,000 at the year’s end.  


$75,000 x .75 = $56,250 UDFI


In this example, your basis for your unrelated business income taxation is $56,250.  


Luckily, since the alternative asset we’re investing in is real estate, we don’t have to worry too much about our tax liability from UBIT.  Due to depreciation and other deductions such as interest and operating expenses, if you invest in a real estate syndication, you will likely have no or minimal tax liability!  

Check out our 5 Tax Advantages Every Passive Real Estate Investor Should Know article if you’d like to brush up on how that works.

What if I have a 401k Account?

When you have a 401k account with your active employer, your investment options are limited. 

One thing many people do not realize, however, is that if you have a 401k account from a previous employer, you are now able to access those funds for alternative investments, although a little bit more indirectly.  

The method is to lend yourself funds from your 401k account and then invest those in real estate. 

The limit for borrowed funds was previously $50,000, but has now been raised to $100,000.  

The same thing is true for solo 401k holders. 

Since you have a solo 401k, you have increased flexibility to loan yourself funds that can go towards real estate investments.  

NOTE:  Remember that you cannot open a solo 401k account for your company if you have any employees (other than form 1099 independent contractors).

One advantage  401k investments have over self-directed IRA investments is the lack of any UBIT taxation. 

While self-directed IRA funds invested into a real estate syndication will still have zero or minimal tax liability due to the tax benefits of real estate such a depreciation and operational deductions, solo 401k investments avoid UBIT taxes entirely, giving them a small edge in that department.


With such a large amount of capital invested into retirement accounts, you might expect that it would be a subject that attracts a little more focus.  Unfortunately, it feels like our retirement accounts are all too often an afterthought.  The idea of accelerating the growth of our retirement funds through real estate investments never even comes up as a possibility for most people.  

With this guide, you have the knowledge to separate yourself from the crowd.  You now have the knowledge necessary to look into the option of alternative investments through a self-directed IRA or a loan from your 401k.  

You worked hard for that money and you shouldn’t let it go to waste, mindlessly thrown into under-performing investment vehicles.  Take control of your retirement investments.

Invest with Winterspring

Invest with Winterspring

How to Use your Self-Directed IRA or Solo 401k to Invest in Real Estate Passively
How to Use your Self-Directed IRA or Solo 401k to Invest in Real Estate Passively
How to Use your Self-Directed IRA or Solo 401k to Invest in Real Estate Passively
How to Use your Self-Directed IRA or Solo 401k to Invest in Real Estate Passively