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Fund Your First Columbia Rental Property with a Self-Guided 401(k)

Model House and Cash in a Miniature Shopping CartInvesting in residential rental properties is safe and profitable but the biggest challenge is often obtaining the funds for a down payment. However, accessing the funds needed for you to invest in real estate might not be all that difficult. If you have a 401(k) plan or an Individual Retirement Account (IRA), then you may be able to use them to fund a rental property purchase in Columbia. Additionally, if you do it right, using a retirement account to fund an investment in real estate could result in little or no tax implications. By using funds that you already have with you, you really can invest in a much more profitable future now.

An IRA or 401(k) is a long-term savings account that can provide some tax advantages, assuming that certain IRS regulations are followed. In some instances, these retirement savings accounts are self-directed. What that means is that you can choose how to invest the funds in the account. For instance, you can use a self-directed 401(k) to invest in mutual funds, bonds, and much more. Having said that, the law prohibits direct investment into real estate from a 401(k). So, to be able to access your 401(k) funds, you would need to do a couple more things.

To use a 401(k) to invest in real estate, you essentially have two choices. You can either take a loan against your retirement account or transfer the funds in your 401(k) to an IRA account. The concern that arises when you take a loan against a 401(k) is the tax. This is because doing this may end with the funds being taxed, and that is surely something that investors would rather avoid. This is why the better course of action would be to transfer your 401(k) into a self-directed IRA. The transfer itself is typically tax-free. In addition, and unlike a 401(k), many IRA accounts can be used for a wide range of investments, including real estate.

To set up a self-directed IRA, you’ll need to work with an IRA custodian such as Equity Trust, Community National Bank, IRA Services Trust Company, or others. The new IRA account can be funded by using an existing IRA or rolling over a 401(k). This is a process that your IRA custodian should be familiar with. Then, when you’ve found your residential rental property and are ready to make the purchase, you’ll need to submit a direction of investment form and get it approved. After it’s approved, you can request the funds needed to complete the purchase process. To do so, the name of your IRA must appear on the title of the property. This gives your custodian permission to issue funds. You would then be an owner of an investment property through your IRA account holder.

The way the ownership is structured when using an IRA means that all ongoing expenses and revenue from the rental property would have to be made through your IRA custodian account. This also includes any proceeds from the eventual sale of your investment property. When you sell a rental home that was purchased with an IRA account, the proceeds from the sale must remain in the IRA account. The benefit of going through this particular process is that these funds aren’t taxed immediately. Instead, the tax liability is deferred to the later use of the funds.

There is another important thing you have to know when using a self-directed IRA for your real estate investment, and that is you cannot be the one to manage your rental property yourself. Instead, you would need to hire a professional property management company such as Real Property Management to take charge of the rental’s day-to-day operations. However, this isn’t really a limitation because this setup to real estate investing is in line with current business models, where an investment property owner partners with quality professionals to grow their wealth.

There are few investment options that also have the stability and potential that residential real estate has to offer. When you do business with Real Property Management Metro, we will assist you in your investment activities, and you will rest assured that a comprehensive and professional team of property management experts are working for your best interests. We will take care of everything including the day-to-day tasks that eat up a lot of your time. This will free you up to work on the investment portfolio that will lead you to financial freedom. Contact us or call us at 443-718-9832 for more information.

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