So you want to invest in real estate with your self-directed retirement account, like an SDIRA, solo 401k, or eQRP, but don’t know what kind of investments are best?

Of course, you should always consult your CPA, lawyer, and tax strategies to create the best plan for you and your finances. Those are the experts here. We’re the experts in note investing.

The great news is that you can invest in real estate with your retirement accounts. We go into more detail in our first video in this series about what these accounts are and how they are open to anyone who wants to invest in real estate with a retirement account (since that is a side business). 

Below, we are going to talk about which specific types of real estate make the most sense in these accounts. Spoiler: it has a lot to do with taxes.

Investing in Rentals or Apartments with your Self-Directed Retirement Account

Many people love investing in rental properties or apartment buildings because of the tax benefits. With real estate, you can offset your income through depreciation or cost segregation strategies to reduce your total earned income and lower your tax liability. 

However, if you invest in these types of real estate inside your tax-sheltered, self-directed retirement account, you can’t use those tax breaks. You also may have to put down a more significant down payment to be able to get leverage on any property inside a retirement account. Finally, any income earned from rental properties inside your self-directed retirement account may be subjected to UBIT, or unrelated business income tax. So you may actually be on the hook for some taxes in the end.

Notes as a Self-Directed Retirement Investment

There are many reasons why we love note investing. They can have a huge positive impact on people that need it most. They can mitigate risk in multiple ways. They can have great returns by leveraging the value-add strategy. And more. 

Additionally, investing in Notes is a great way to grow your wealth in a retirement account. Here’s 4 reasons why:

#1 – Notes Generate Income Interest

Notes generate interest income which is generally taxable as ordinary income on your federal tax return. You may be paying upwards of 33% or more of your return profits back to the government each year with the money earned from Note Investing. 

However, you won’t be paying those taxes inside your retirement account since these are tax-sheltered accounts. You will be paying taxes on your earnings either before you put them into the account or when you withdraw them, but that is true with any money earned inside self-directed retirement accounts. 

Since our note partnerships typically provide returns within 1-2 years, you can be reinvesting those earnings without paying the taxes. This can help you grow your wealth much more quickly.

#2 – Notes Can Be Purchased at a Discounted Price

Second, Notes can be purchased at a significant discount, especially non-performing notes like those we target at Flow state investing. These have the potential for increased yield, which I’m sure you’d love to shelter from taxes.

The steeper the purchase price discount, the more room you have for that increased wealth building.

#3 – Note Investing Means Less Responsibility

Third, Notes are less hands-on than owning and managing the physical property. Because there are restrictions on what you can and can’t do with your investments inside a self-directed retirement account, note investing is just simpler and fits that mold easier. 

If you own a rental property inside these accounts, you have to be very diligent that you never play an active role in the management or use of that property. This means you can’t do any work on it yourself, in addition to other limitations.

If you work with us as your partner, you’ll have a licensed servicer and debt collector on your side to mitigate risk, speed up our timelines, and manage any filings. This means that you don’t do any of the work – which isn’t allowed inside a self-directed retirement account.

#4 – Diversify your investments with Note Investing

Finally, by owning several smaller Notes instead of one property your risk is spread out across multiple markets and multiple investments. Think of it as owning 4 different assets for 50 thousand dollars each instead of one property for 200 thousand dollars.

We always advocate for a diversified real estate investing portfolio. 

If you’re interested in getting started with Note Investing, join our Flow State Investor Circle. The link is in the description below. You’ll get access to more education about growing your money through Notes. I’ll also jump on a call with you to discuss your investing goals.