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Fund Your First Waterford 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 securing the funds for a downpayment can sometimes seem like a giant hurdle. However, the answer might be easier than you first thought. Accessing the funds you need so you can invest in real estate may not be that difficult. You can use your 401(k) plan or an Individual Retirement Account (IRA), if you have them, to fund a rental property purchase in Waterford. On top of that, if you plan it well, you can use a retirement account to fund an investment in real estate and have it result in little or no tax implications. By taking advantage of the funds that you already have, you can invest in a much more profitable future now.

An IRA or 401(k) is a long-term savings account that can give you the benefit of some tax advantages, provided that certain IRS regulations are followed. In specific cases, these retirement savings accounts are self-directed, so you can choose how to invest the funds in the account. For instance, you can invest in mutual funds, bonds, and much more by using a self-directed 401(k). Nonetheless, 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 basically have two options. First, to take a loan against your retirement account, or second, transferring 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. For this reason, it would be more advantageous 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 arrange for a self-directed IRA, you’ll need to go through 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 process is something your IRA custodian should know. Then, when you’ve located your residential rental property and are ready for the purchase, you’ll need to submit a direction of investment form and get it approved. As soon as it’s approved, you can request the funds you need to complete the purchase. To make this happen, the name of your IRA must appear on the title of the property, permitting your custodian to issue funds. You would then own, through your IRA account holder, an investment property.

When you use an IRA and because of the peculiarities of the ownership structure, all ongoing expenses and revenue from the rental property would need to go through your IRA custodian account. This also means 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 this process is that your funds are spared from being taxed immediately. The tax liability of these funds is referred to when it gets used in the future.

Another thing you should know when investing in real estate through a self-directed IRA is that you aren’t able to manage your rental property by yourself. Instead, you will have to hire a professional property management company such as Real Property Management to take charge of the ongoing operations of the rental property. Don’t think of this as a disadvantage or limitation because, in reality, this approach 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 provide the stability and potential that residential real estate has to offer. When you work with Real Property Management Hartford Metro/Greater New London, you will receive assistance for your investment activities from a comprehensive and professional team of property management of professionals. We will attend to all the tasks including the mundane ones that eat up so much time. This would give you all the time you need to focus on growing your investment portfolio to reach total financial freedom. Contact us or call us at 860-316-4388 for more information.

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