How to Invest in Real Estate Syndications Through a Solo 401K

A commercial apartment complex ranges from $4M to $60M, depending on the market, size, and condition of the building. The national average for a 50-unit apartment building is $11M. Well beyond the financial means of most investors.

For many, real estate syndications open the door to these larger opportunities.

You pool money with like-minded investors to purchase a property you could not buy independently. Under syndication, the sponsor or manager does all the leg work, vetting the property, securing the financing, and managing the asset during the period of ownership.

Even these deals require an investment of 50 to 100 thousand dollars, which you may not have readily available. Solo 401ks may provide the capital you need to start investing in commercial real estate syndications. Here’s how it works:

How to Buy Real Estate With A Solo 401k

What is a Solo 401k

A Solo 401k is available to business owners with no employees. You qualify if you run a business, even if it is a part-time commitment, and even if you have access to a company-sponsored plan. You can invest up to 100% of your income up to $20,500 annually. The IRS also allows employer contributions up to 25% of profits for an aggregate of up to $61,000 each year. Those over 50 can add another $6,500 to the total contribution allowed.

You can also fund the account by transferring money from a company plan or IRA.

Establish a self-directed 401k through a qualified brokerage firm: The benefit of a Solo 401k is that you can choose the self-directed option, which allows you to invest in alternatives like real estate syndications.

Determine how much you need for the investment of choice: Most real estate syndications have a minimum investment threshold. You can contribute any amount above the minimum. Your level of ownership is determined by the amount you invest.

Fund a Solo 401k with you as the trustee: In most cases, you will either roll over funds from another qualified retirement account or make a contribution. Solo 401ks allow you to invest in either a Roth or Traditional 401k based on the tax benefits you want.

A Roth allows you to capitalize on higher than average gains with no tax liability as long as you leave the funds in place until you reach 59 ½ and have the account for at least five years (typically the minimum hold time for commercial real estate projects). It, however, does not offer a tax deduction upfront.

Traditional 401ks give you a tax write-off upfront and grow tax-deferred instead of tax-free.

Buy into the investment: Commercial Real estate syndications include active and passive investors. The active party is the general manager, who takes care of all the purchase details and manages the project.

As a passive investor, you write the check, so to speak, and the sponsor takes care of everything else. In many cases, you will begin receiving monthly or quarterly payments within a year and a return of capital plus additional profits at the exit.

Final Thoughts

Investing in commercial real estate syndications requires choosing a sponsor and vetting the particular deal. Once you are confident in the project, you commit to the investment and participate in the profits. It is truly a passive investment that can build wealth through real estate.

To learn more about how to get involved, watch our introductory video here.

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