While many people are familiar with Real Estate Investment Trusts (REITS), there are many more options for investing in real estate with your IRA or 401(k). With a self-directed individual retirement account (SDIRA) or 401(k), you can choose to invest in specific investment properties, pool funds with other investors to purchase properties, or invest in income producing debt real estate funds. These strategies could help you to generate larger gains while securing tax benefits.
⌂ The Benefits of a Self-Directed Retirement Account
With a self-directed retirement IRA or 401(k), investors choose how to invest their retirement funds. They are not limited to a pre-set list of common securities such as mutual funds, stocks, or CDs. Self-directed investments could include real estate, private placements, commodities, precious metals, limited partnerships, tax lien certificates, and other alternatives.
Self-directed real estate investments could include rental properties, commercial properties, raw land, and debt funds.
These alternative investments can protect your savings against a volatile stock market and unpredictable economic changes. By diversifying your investments with a SDIRA, you can earn higher returns and accelerate your retirement wealth compared to traditional investments like stocks or bonds.
⌂ How to Transition from a Traditional IRA or 401(k) to a SDIRA
To transition from a traditional IRA or 401(k) to a SDIRA, you can transfer or roll over your retirement from one institution to another. Different rules apply based on account type.
If you have an IRA, you need to do an IRA transfer. Funds or assets are transferred from the custodian institution or trust company to a new one. This is a quick process with no fees, taxes, or penalties.
With a 401(k), you need to roll over your funds to an IRA. This enables you to move your employer-sponsored 401(k) plan to a rollover IRA. This is only an option when you leave your employer and are no longer contributing to the employer-sponsored retirement plan.
⌂ Why Real Estate is a Strong Investment In Today’s Economy
Real estate has historically appreciated over time, making it an ideal long term retirement investment. Rental properties can generate both short-term income as well as long-term appreciation. It is also a great way to provide diversification in a retirement portfolio across multiple types of assets.
As a tangible asset, real estate has proven to be a strong investment during inflation relative to many stocks and bonds. When inflation is high and prices rise, consumers may be forced to reduce spending. Rental prices will rise along with other prices, but demand for rental properties will always persist as people need a place to live. Real estate investments during high inflationary periods can lead to higher cash flow from rental income as well as higher appreciation of the asset itself.
With the inflation rate as of March 2023 exceeding 6%, investors need to look for returns that exceed the inflation rate just to maintain value. In today’s market, an investment with a 4-5% return may actually lose money once inflation is considered.
⌂ What is a Real Estate Debt Fund?
A real estate debt fund invests in real estate loans and mortgages. Investors in the fund effectively become lenders and earn stable, consistent cash flow through interest payments. Risk is minimized relative to traditional real estate equity funds because income is generated through interest payments secured by real estate collateral rather than owning and operating properties that are subject to market fluctuations.
Investing in a real estate debt fund through a self directed retirement account can also provide significant tax advantages. Unlike equity offerings, debt funds avoid Unrelated Business Taxable Income (UBTI) and Unrelated Debt-Financed Income (UDFI). Tax-exempt organizations, such as retirement plans, are liable for tax generated by investments unrelated to their primary purpose, such as investments in stocks. Since a Real Estate Debt Fund is offering loans rather than investments, all the in
come generated from the loans becomes tax free income for the investor.
Debt funds also provide greater flexibility for investment managers who can maintain control of the asset during construction without a third-party. Increased decision making for the fund managers often results in better outcomes for investors.
⌂ The Fort + Home Value Add Debt Fund
The Fort + Home Value Add Debt Fund (VDF) can provide investors with a consistent, stable 7% cash-on-cash return with reduced risk relative to traditional equity investments. By using a SDIRA to invest in the Fort + Home VDF you can expect to receive a monthly interest payment, secured by the mortgages on the underlying properties.
This means you have consistent cash flow with reduced risk in a shorter timeframe. Since the fund provides bridge financing to acquire properties, the investment period for the VDF is typically 6-24 months. The funding is used to complete the planning, development, and stabilization of a property. Once the construction is complete and the asset has generated for income 12 months, the property will be refinanced with a traditional lender for the remainder of the operating period. The timeframe for refinancing may be shorter if no construction is required.
Our fund managers believe there will be a growing opportunity over the next three years to quickly acquire properties from distressed sellers which is why liquidity from investors is needed. The VDF is a strong investment option for investors who want to build short-term retirement wealth with high-yield, reduced risk opportunities in the real estate market. Investing through the VDF is only available for accredited investors.
This investment is only available to “Accredited Investors” as defined by Rule 501 of “the Act”. The targets above are intended for illustrative purposes only to facilitate analysis and are not guaranteed by Sponsors as there are no assurances these targets will be met. These targets are based on past metrics, past performances, and past experiences of the Sponsors in the space. Sponsors make no representations or warranties that any investor will, or is likely to, attain the targets shown above since hypothetical or simulated performance is not an indicator or assurance of future results. Please review the Risk Factors in the PPM.
All offers and sales of any securities will be made only to Accredited Investors, which for natural persons, are investors who meet certain minimum annual income or net worth thresholds or hold certain SEC approved certifications. Any securities that are offered, are offered in reliance on certain exemptions from the registration requirements of the Securities Act of 1933 (primarily Rule 506C of Regulation D and/or Section 4(a)(2) of the Act) and are not required to comply with specific disclosure requirements that apply to registrations under the Act.
The SEC has not passed upon the merits of, or given its approval to any securities offered by Fort + Home Capital, the terms of the offering, or the accuracy of completeness of any offering materials. Any securities that are offered by Fort + Home Capital are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell any securities offered by Fort + Home Capital.
Investing in securities involves risk, and investors should be able to bear the loss of their investment. Any securities offered by Fort + Home Capital are not subject to the protections of the Investment Company Act.
Any performance data shared by Fort + Home Capital represents past performance and past performance does not guarantee future results. Neither Fort + Home Capital nor any of its funds are required by law to follow any standard methodology when calculating and representing performance data and the performance of any such funds may not be directly comparable to the performance of other private or registered funds.
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