In a recent WSJ article, numbers show that self storage businesses are bouncing back nicely following the COVID-19 pandemic. Many Americans moved, and downsized because of it. Others, who stayed where they were, needed space as remote learning and working from home became the norm. This has led to an increase in returns from this popular real estate investment. REIT, or real estate investment trusts, have seen a 36% return from self storage facilities. This is well ahead of the S&P 500 gains. In the following, we’ll talk about how you can use retirement funds to invest.
Real Estate Investing
If you’ve considered investing in real estate, why not a self storage business? When it comes to using retirement funds to invest in any type of business, there are basically two options. First, there is the hands-off approach. You give someone money for his or her business, and you take a cut of the profits. So long as your retirement plan provider allows for it, anyone can do this. Of course, that’s a big if. Typically, financial institutions will not let you invest in non-traditional, or alternative, investments. Further, if you only have a workplace plan to invest with, you’re probably out of luck there too. Because of fiduciary responsibilities, investment choices are limited with workplace plans. You may be able to invest in REITs, so check with your plan sponsor.
Self-Directing Your Retirement
There’s still hope, as you can “self-direct” your retirement plan. Usually, this will be with an IRA. However, if you are self-employed, then the Solo 401(k) plan is the better choice. Anyone can choose a Self-Directed IRA. You just need the right provider, such as IRA Financial. A truly Self-Directed IRA will allow you to make any investment that is not prohibited by the IRS. This, of course, includes real estate and private businesses, such as a self storage business. However, you must be aware of the prohibited transaction rules. Essentially, you cannot be personally involved with an investment made with your retirement funds. Further, you cannot interact with a disqualified person, such as a parent or child.
However, if you have a friend, co-worker or sibling who is starting a business, you can certainly invest in their business. You must be completely hands-off, but you can invest your retirement funds in their business, and, hopefully, generate good returns.
Another factor you must consider is the Unrelated Business Taxable Income (UBTI) tax. Because the investment is in a tax-favored retirement account, you may be subject to tax when you generate taxable income. The whole idea of an IRA, for example, is to save for retirement. This is unrelated to the business you invest in and therefore would trigger the UBTI tax. The tax could get quite hefty and may negate the tax advantages of the plan.
Rollover as Business Startups (ROBS)
The second option for investing in a self storage business is the “hands-on” approach. You want to buy a business and actively participate in it. Anyone, with enough capital, can start a business. But, what if you are short the cash needed? The IRS does allow you to use retirement funds to actually start a business for yourself. You can use just about any funds you want, so long as they’re not in an active workplace plan. For example, you have a 401(k) at your current job, you cannot use those funds. Former employer plan funds, IRAs, etc. can be used.
ROBS allows you to use those funds and start your own business. There’s no need to apply for a loan at a bank or borrow money from someone else. Al you need to do is start your own business, which must be a C Corporation, adopt a new 401(k) plan for the business and rollover previous retirement funds into the plan. Stocks of the business are then purchased using the 401(k) funds. Now, the business has capital that can be used to purchase whatever you want.
The Rollover Business Startup structure is the only legal way to use retirement funds to buy a self storage business that you wish to be personally involved in. (Note: a 401(k) loan is another option, but can only borrow up to $50,000.)
Invest in Your Own Self Storage Business
IRA Financial is the leader in self-directed retirement plans, and one of the best ROBS providers out there. If you want to get in to the self storage business, look no further than your retirement account funds. Of course, starting a business is risky, especially when using retirement funds. Therefore, it is imperative that you do your research before investing. The experts at IRA Financial can help you every step of the way, whether you wish to invest your IRA passively, or are considering ROBS to start your own business.
IRS rules can be complex, especially if you are involved in the business. It’s important to work with financial professionals before getting started. The last thing you want to do is break an IRS rule which could cost you the benefits of your tax-advantaged retirement plan!