According to the latest data from the U.S. Census Bureau, rental vacancy rate in the country was 7.3% during the third quarter of 2015, the lowest figure in the subsequent quarters of the past 10 years, making it a perfect time to invest in real estate. If you are a self-employed individual or small business owner with no employees except your spouse, you can invest in real estate through a self directed Solo 401k plan. Solo 401k is an IRS-approved retirement plan for self-employed professionals and small business owners. The primary reason behind its popularity is its ability to invest in a wide variety of assets including tax liens, tax deeds, real estate, precious metals and private lending along with similar investing options.
Why investing in real estate with Solo 401k plan makes sense?
Unlike traditional retirement plans, Solo 401k has an annual contribution limit of up to $53,000 for 2015 along with a catch up contribution of $6,000 for professionals above 50 years of age, allowing you to create a large retirement nest. Considering the size of capital investments in real estate, Solo 401k provides access to necessary funds, and higher contributions help you amass resources quickly. Solo 401k retirement plans enjoy tax-deferred growth, which means you will be able to maximize your real estate investment income with the benefits of tax-free compounding. Tax payments are applicable only at the time of distributions. If you have a Roth Solo 401k account, your distributions too will be tax-free.
Another unique feature available in Solo 401k plans is the access to non-recourse loans, which means you can fund your real estate purchase with the loan itself. Real estate investors could leverage from non-recourse funding option, allowing them to invest in multiple properties. Further, the property serves as collateral, protecting the plan owner from any creditor indebtedness in future. The real estate crisis of 2008 did highlight the uncertain nature of real estate, making non-recourse funding a low-risk option under unfavorable market conditions.
The key is to make sure that all the real estate maintenance costs are paid through the Solo 401k plan only, and the rental income or any capital gains flow back to the retirement plan. The current IRS regulations prohibit the use of the property as the principal residence of the plan owner, or for any other purposes benefitting the owner directly. While choosing a Solo 401k plan provider, keep in mind that investment options vary from one provider to another, so pay attention towards the terms and conditions of the plan. Always work with a company that understands your financial goals, and is willing to provide guidance to self direct your account.