#171 Leveraging Your Retirement Accounts for Real Estate

Hey, everyone, Hope you're having an amazing day. This is Peter, and today we're going to be exploring the world of real estate investing and how you can leverage your retirement accounts to make that happen. And yep, you've heard it right. You can actually use your retirement accounts to invest in real estate. We're going to talk all about that today, so stay tuned.

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Thanks for listening. Each and every week, I know so many of you tune in while you're in your cars, walking your dog on the treadmill. I just want to say thanks and I hope whatever you're looking at in front of you while you're listening to this is a beautiful sight and that you just soak in all of the great things that are happening in your life this week. In a previous episode, I talked about how to find money when you feel like you don't have any, when you want to invest. I don't know if you ever got to the store before, try to buy something. I've done it before. And you go to pull out your wallet and it's not there, or you open your wallet or especially back in the day, and. And there was nothing in there in terms of cash. I had a friend like that growing up. We'd go somewhere to the store together. We go put our soda, whatever it is, on the counter. He pull out his wallet, and he always would show nothing in there. I always felt bad I ended up paying for him, but I thought it was a funny thing that he kept doing over and over again. Eventually I caught up. But sometimes we all feel like that when we go to invest in any sort of opportunity. We were so excited. It sounds great, but we look at our bank accounts, we're like, we have nothing there. Because that money hopefully is being utilized in other investments. Not that you have a lack of cash flow, but you're utilizing it elsewhere. You just don't have excess capital. I don't know if that's ever been you, but what we talked about in that episode is that there are different places to find capital now that your retirement account might be one of those places. Now, many of you have probably been at your jobs for a while. Maybe you've had a retirement account that they either started for you or you created on your own. And you've been funding that for years on the advice of your cpa because that's a smart way to get some money socked away. But you probably also thought the only place you can invest that is in a stock account or in some equities or maybe some bonds like whatever you might have on one of these online platforms like Fidelity, Vanguard, whatever it might be, or whatever they've designated that you have to invest your money in. However, that's not always the case. Sometimes you can actually use your retirement accounts to invest in alternative assets like real estate or other things. There's a famous story about Peter Thiel. I don't know if you've ever heard his name, but he's one of the co founders of PayPal. If I have it straight, he was able to put some of the shares in some of these early businesses into one of his retirement accounts. I think it was like a Roth IRA type thing. So that when he would eventually cash out on those shares, even though they've appreciated so much, when he did pull that money out, it would be completely tax free. So even though your financial advisor might say there's only one way to invest using retirement accounts, that's not always the case. Just to remind you, this is not tax advice, but, but it's just showing you different options that you can use. Call it another tool in your tool belt. So why do we even like using retirement accounts? It's because you can benefit from the power of compounding without the impact of taxes on that money every single year. You've probably seen some of those graphs where if your money doubled or every so many years and it continued to do that without any sort of taxes, it ends up, you know, let's say like at 100 million or whatever it is. But if you took out your 30, 40% taxes, some people 50% of taxes each year, that 100 million is instead like 8 million. Again, these are just rough numbers, but it shows you the power of compounding that's tax free. Of course you can't access that money till later on unless you want to take it earlier with penalties. It allows your investments to grow really just a lot more efficiently. And the hope is that many of you don't actually need this income, especially with some of the passive income strategies that we've talked about. But when it does come time to cash it out, a good amount of wealth will have accumulated for you and it's waiting for you whether you use it in stocks, real estate, whatever it might be. So let's talk about the different retirement accounts that you can use for real estate investing. So there's something called a self directed IRA. There's also something called a solo 401. And in case people weren't aware about the difference between Those, usually these 401 s are employer sponsored. Sometimes there's matching contributions, sometimes the employees can invest a little more. IRAs, on the other hand, they're not employer sponsored and they usually have lower contribution limits, but they also offer some flexibility and some investment options. So this self directed ira, which usually has a lower contribution amount this year, the reason it's called self directed versus maybe like an IRA that you've normally seen, is that you're allowed to utilize those funds and invest in alternative assets because it's not associated with your employer. It offers you a lot more control and flexibility. Whereas that 401k, again it's employer sponsored. There are higher contribution limits, but again, oftentimes they're kind of locked into one way of investing. So there are ways just with each of these. Just so you know, there are sometimes third party companies that you can use to unlock what's possible with these IRAs and 401ks. They can become self directed IRAs, they can become solo 401ks, which allow you to open up the world of possibilities when it comes to investing in real estate. Oftentimes you have to have a third party to help you to put all of this together. And if you're able to convert those to a place where you can control what you invest in, you can invest in direct ownership of real estate, private lending, REITs, syndications, you can invest in mineral rights, you could invest in venture like angel investing. I will tell you that a lot of financial advisors don't love this because they can't manage these accounts. But again, I'm just letting you know that the possibility is out there.

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Back to the show. Another question I get asked all the time is what type of deals or investments should I actually make using these retirement accounts? I mean real estate is known to be really tax efficient to begin with, even outside of retirement accounts. So should you be investing in real estate anyways using these retirement accounts? That's a good question. Task now there's types of investments called debt investments. This is like private lending mortgage notes where you're lending out money like the bank to maybe fix and flips or whatever it might be. You act as the lender and receive regular interest payments. The income from this is usually taxed at ordinary tax rates. So it can be significant. For most of us listening to this, we're probably in a higher tax bracket. So for this type of investment, normally a debt investment, we get taxed according to our ordinary tax rates and that can be significant. So if you actually invest in these debt deals in retirement accounts, you don't have to worry about that tax hit. You'll be getting that steady predictable income stream and it'll go into your retirement account. But at least you know it's growing in their tax rate and can compound over time. Now equity investments, those are like syndications where you actually have a share or ownership of a building, either yourself or through investing with somebody else. Example of these are rental properties you might own. Maybe it's real estate development projects with somebody else. Also REITs or real estate investment trusts. Again, these provide hopefully steady income for you, cash flow and then at the end when these properties sell or exit, you have some, you participate in the upside. You could take advantage of a lot of these tax benefits from these type of deals when it's outside a retirement account. However, inside a retirement account you won't have access to things like depreciation or those losses you won't be able to offset any gains from from some of the losses from this real estate. However, the amount that you have in that retirement account, it can still compound very quickly. Often these deals will last anywhere from three to seven years and will give you 50 to 100% return on your monies. Of course that's assuming you pick a good deal. So you're going to grow your portfolio through long term capital appreciation here. So what I like to do with my retirement accounts, I'll tell you, I like to put debt in there for sure. It's great Knowing that I'm getting steady payment, steady growth into my retirement accounts that is not being taxed. I also have put some equity investments in there as well. When I didn't have a lot of cash on hand and I had some access to retirement accounts that had grown that, you know, over time with the bull run in terms of the stock market, those appreciated assets, I took that cash and I put it in some syndications. So now I have a retirement portfolio of not only stocks, of bonds, of debt deals and equity deals like syndications. So I feel like even with my retirement account, I really tried to diversify it, create that mix of debt and equity to manage risk, to optimize returns. I've tried to create a portfolio of cash flowing assets outside of retirement accounts so that I actually don't need those retirement accounts in the future. But it is a hedge, the government encourages it in a way, and so you're able to put that money away, let it grow and take advantage of those compounding returns. So I will tell you, investing in my retirement account is not the first thing I think of when I have cash or I've saved up money for investments. In terms of real estate, I'll do it outside of retirement accounts. However, I do look inside my accounts just to see what's in there. I feel like if the portfolio is in balance, I make sure I do that, make sure it's well diversified and I still try to contribute to it every single year. When that new capital comes in, I have to decide how I'm going to invest that. So sometimes it's in retirement account, sometimes it's in real estate, sometimes it's not. So I hope that's been helpful. Hopefully it's given you some insights into how you can leverage your retirement accounts for real estate investing. Especially if you're looking for different sources of capital to get into some of those deals. This can be a great opportunity to generate that passive income that we've talked about and build wealth for the future. Again, you're not going to have access to it now, but when it does come time, that money will be there and it will have grown tax free. Of course, all this requires careful planning. You want to look at what your portfolio looks like today, both with retirement accounts and without. Do your proper due diligence when looking at these deals. Obviously consult your cpa. If you're a financial advisor, make sure you build that team around you which will help you make great decisions. Looking at your whole portfolio holistically, make sure you set yourself up for success. By the way, if you're interested in this stuff, we're going to talk about all of these things at our conference that's coming up. You can't make it in person September 21st through 23rd, 2023 in LA. That's okay. We have a virtual option for you too, so make sure to check it out@pimdcon.com we'd love to have you as part of it. We're going to also interact with the people that are there virtually. It'll be a lot of fun. If you enjoy our podcast, just make sure to subscribe. Leave us a Review I read all this feedback, the good and the constructive ones. It means the world to us and helps us reach more folks like you. Helps us know how we can provide more value for you at the end of the day. You're amazing. Have an awesome day. Take care. Let's talk again next week. Thanks.

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