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High End Rentals in Your Self-Directed Retirement Plan

high end rentals
4 Minute Read

According to a recent Wall Street Journal article, about 19% of households with at least $100,000 annual income are renting homes.  This is substantially up from 2006, where about 12% of the same families rented.  This is good news for self-directed retirement investors.  In the following, we show you why investing in real estate with a Self-Directed IRA or Solo 401(k) is still the king of alternative assets.  As always, we’re not telling you to run out and invest your entire nest egg in a high end rental property.  As with all of our articles, this is for educational purposes and any investor should do his or her own research before investing!

Why High End Rentals?

More and more high earners are renting properties instead of becoming homeowners.  There are a myriad of reasons for this.  Obviously, the number one reason is money.  Real estate prices have steadily grown since the housing market crash.  Homes are selling for a lot more and therefore, higher down payments are needed.  Many people are finding it hard to come up with a 20% down payment.  Another reason is time.  Many people looking at high end rentals don’t have the time to maintain a house.  They put in long hours at work and/or travel often for their job.  They can’t be bothered with mowing lawns and shoveling snow.  When you rent, whether it a single family home or in a large apartment building, these services are generally done by the landlord.

Further, if you want to live in or near a big city, or one with great schools and amenities, you’re being priced out.  Historically, these areas come with bigger price tags.  Instead of paying $500,000 to buy, many people would rather spend $2,500 in monthly rent.

According to the article, high end rentals offers the investor security.  If a financial emergency arises, high earners are generally prepared.  Further, a rent increase won’t price them out of the space.  The same cannot be guaranteed for low and middle income renters.  The six figure renter tends to stay longer at the property, too.  Therefore, there’s always income coming from the property. There’s also less maintenance needed the longer a tenant stays.  The costs add up if you need to fix up the place for new renters every year or two.

Using Retirement Funds for Real Estate

Real estate investing has always been allowed in your retirement plan.  This is assuming you have a custodian or administrator that allows it.  Most large financial institutions do not.  Smaller providers, such as IRA Financial, do allow for alternative asset investments.  In fact, real estate has been (and probably always will be) the number one alternative investment.

The best option for those who are self-employed is the Solo 401(k).  Basically, it’s just like a regular workplace 401(k) plan that is designed for anyone who has self-employed income.  It has much higher contribution limits than an IRA and real estate investments are not subject to the UBTI tax.  Since you are the trustee of the Solo 401(k) plan, you can make any type of investment you want (with the help of a financial advisor).  Checkbook Control gives you the freedom to invest when and how much you want.  You don’t need to ask for permission.

If you are not self-employed, the best option for you is a Self-Directed IRA.  Again, this is no different than an IRA you can open at your local bank.  However, the major difference is your investment options.  Banks and other large financial institutions don’t offer alternative assets as an investment choice.  They want you to invest in their offerings and want your funds to stay in the account indefinitely.  Therefore, you will need a passive custodian to invest in high end rentals.  Just like a Solo 401(k), an IRA Financial Self-Directed IRA will give you checkbook control.  When you find the perfect investment, you can act on it as soon as you wish.  There are no needless delays that could cause you to miss out on an opportunity.  You must be aware of the UBTI rules concerning real estate investments, specifically rental properties.

Are High End Rentals for You?

As with any investment choice, this is dependent on the individual.  Obviously, the more upscale the property, the more it’s going to cost.  That being said, the returns are often greater.  It’s up to you to decide if the increased cost of the property is worth the possible returns that are generated.  The alternative is looking at a crowd-funding type investment.  Did you know you can invest smaller amounts into big projects?  It’s basically a “kickstarter” or “gofundme” for real estate.  You can make a small investment in multiple properties and in different cities.  This will help diversify your retirement portfolio even more.

The potential is there to profit from high earners who would rather rent than buy.  The steady stream of income it creates is easy to rely on, unlike stock market returns.  Low turnover and maintenance costs are very favorable to high end rentals.  Doing your due diligence and working with a qualified advisor is paramount.  When first researching alternatives, it’s best to formulate a plan that stays within your risk tolerance and aligns with your financial goals.

Get in Touch

Looking for more info on real estate investing, especially concerning high end rentals?  Browse around our site and use the search function for all the details you need.  If you have questions, you can reach out to us @ 800.472.0646 anytime Monday-Friday!  Investing in alternative assets, like real estate, is easier than ever with the all new version 2.2 of our app!

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