Using Retirement Funds to Buy a Rental

“Should I invest my retirement funds into a rental property?” If you have a 401k or IRA, it’s a good question to consider. Real estate offers a high potential return on investment (ROI) but requires a significant initial commitment. It’s true that the cost of getting into the rental business can deter many investors. However, you could already have the funds to kick start your rental property waiting in your retirement account. But what are the benefits of using retirement funds to buy a rental, and are there any drawbacks?

The Benefits of Investing in a Rental

With good management, investing in a rental property can offer enormous benefits. Depending on whether you have a 401k or IRA, you will also experience several tax benefits that will ultimately save you far more than you’d otherwise need to spend on an investment property. The tax reduction and the ability to continue growing your retirement account with rental income make this an appealing way to increase your investment portfolio.

A rental property is not only a great way to passively increase your retirement account, it’s also a major investment in your future. With home values consistently rising nationwide, owning a rental property is a very safe and lucrative investment. Portland’s housing prices have increased dramatically, which makes investing in a rental in the area even more appealing.

Whether you’re looking to diversify your investment portfolio or take advantage of a stable asset that will steadily appreciate, using your IRA or 401k to invest in a rental is a great idea. However, your investment strategy will vary depending on your type of retirement fund.

Investing from an IRA

While an IRA specifically allows people to invest in mutual funds, stocks, and bonds, it is also possible to use an IRA to purchase an investment property. With a self-directed IRA, you can invest the funds within it in whatever way you want. However, additional restrictions come with buying a property with funds from an IRA. For one, a custodian other than yourself must hold the property’s title, and you cannot live in or actively manage any property you buy with an IRA. A third party, such as a property management company, must maintain and run your rental property for you. As your rental property generates income, that income must go directly to your IRA account to remain tax-deferred.

Despite the rules surrounding purchasing an investment property through an IRA, the benefits are clear. You can own a property that continues to appreciate while collecting tax-deferred income through rent and capital gains.

Turn Your 401k Into an Investment

Unlike an IRA, you cannot use a 401k to invest in real estate directly. However, your 401k can be a valuable tool in securing an investment property with tax benefits. One method is to take out a loan against your 401k. Most plans allow you to take out half the value of your account up to $50,000, secured by collateral (in this case, the property you are purchasing). This strategy will likely require you to repay the loan within five years with interest. Failure to repay the loan will result in it being treated and taxed as an early distribution, with a 10% added penalty.

If the risk of penalties from failing to pay back a loan sounds stressful, you can also investigate whether your plan allows you to roll your 401k funds into a self-directed IRA. At that point you can use those funds to invest in a rental property without worrying about borrowing.

Taking out a loan on your 401k requires some careful planning. However, the ability to avoid taxes and penalties makes it a big incentive. In addition, the IRS will not tax any other income your property generates, as it goes directly into your 401k. Investing in rental property with your retirement funds is a great way to continue planning for a comfortable financial future.

This Strategy Does Have Downsides

There are many benefits to investing in a rental property with your retirement funds, but there are some drawbacks. While this type of investment is a great way to channel more income into your retirement account, you won’t be able to access those funds until retirement. Unlike purchasing a rental property outright, using your retirement accounts limits your ability to be involved with its management. Generally you must remain a passive investor. This arrangement might be a drawback for anyone who likes to get hands-on with the running of a property.

An investment property’s success is primarily determined by how it’s managed. Poor management can reduce a property’s ROI, causing extended vacancies and lost revenue which can hurt your finances. If you need to pay back a 401(k) loan in five years, these financial setbacks can be especially stressful. The key is finding a quality property manager you can trust with your investment.

A Property Manager Keeps Your Investment Running Smoothly

If your investment property is located in the Portland metro area, Rent Portland Homes by Darla Andrew is ready to help you maximize your ROI. We work with Portland property owners every step of the way to turn any home into a flourishing rental property. We’re often able to rent out a property within hours of posting a listing on our website due to our marketing team’s tireless efforts.

With years of experience in the area, we know what Portland renters are looking for and how best to connect the best tenants with your rental property. Our quality communication means you’ll never be left in the dark if you have any questions about your investment. When it comes to tenants, we also pride ourselves on our top-notch service and point to our 48-hour maintenance call guarantee as a sign of how we believe in giving tenants the best experience in their rental. If you’d like to hear more about how we can help you invest your retirement funds in a rental property, call or text us at (503) 515-3170 or drop us a line through the contact page on our website.