In this article, we’re exploring how to invest in real estate passively through your retirement account. We’ll show you different ways to invest and explain which types of retirement accounts can be used for these passive real estate investments. But first, let’s define a few terms.
What Is Passive Real Estate Investing?
Passive real estate investing is when you financially invest in properties without having to invest any sweat equity in maintaining the property or any of your own time in the management of the property.
Some investors confuse passive real estate investing with passive recurring income from real estate investments. Passive recurring income is cash flow earned from passive investments. For example, if you own a rental property, the monthly rent from residents (minus property expenses) is passive rental income because you are receiving recurring payments without directly trading your time for dollars (although some might argue this isn’t fully passive if you’re actively managing the property as a landlord).
But you can also have passive real estate investing without recurring cash flows. For example, if you invest in a multi-family development project through a real estate crowdfunding or syndication platform, you may receive a lump sum disbursement once the development is completed and sold. This would not produce recurring cash flow payments, but it would still be a passive real estate investment because the entire project would be managed by the sponsor.
More Examples of Passive Real Estate Investing
In addition to privately-managed rental properties and real estate syndication/crowdfunding, you can engage in passive real estate investing through:
Real Estate Investment Trusts (REITs): Publicly or privately traded companies that own and manage income-producing real estate and share the proceeds with investors via dividends. Shares of a REIT can be easily bought and sold like stocks, but REITs are whole fund investments, meaning that you have no say in which properties are held in the REIT.
Private equity funds: Professionally managed funds that invest in multiple properties or developments. These funds are not marketed to the public, so you typically need to be an accredited investor with a strong network to access these deals.
How to Invest in Real Estate Passively Through Your Retirement Account
Now for the retirement account element. By investing through your retirement account, you get the additional tax benefits of retirement investing. Depending on your account type, you can either:
Contribute pre-tax dollars to your account, which means your contributions are tax-deductible and your investment can grow tax-deferred. In this case, you would pay income taxes on amounts withdrawn during retirement.
Contribute after-tax dollars to your account, which means your contributions are not tax-deductible, but you are not taxed on withdrawals when taken as allowed during retirement. This is typically referred to as a Roth arrangement.
Retirement Account Types That Can Invest in Real Estate
All retirement account types can invest in real estate-based stocks, bonds, and funds traded on the stock exchange. This means you can invest in publicly-traded real estate companies with any retirement account type.
But if you’re looking to have more control over passive real estate investing through your retirement account, you need a self-directed or checkbook retirement account, such as:
Self-Directed Traditional IRAs
Self-Directed Roth IRAs
Self-Directed SEP IRAs
Self-Directed SIMPLE IRAs
Self-Directed Traditional 401(k)s
Checkbook IRA LLCs
Checkbook IRA Trusts
Checkbook Solo 401(k)s
Self-directed retirement accounts typically require the involvement of a third-party custodian, also referred to as an Alternative Asset IRA Custodian, while checkbook accounts can typically be managed directly by the account holder.
How to Invest in Real Estate Syndication Projects Through Your Retirement Account
Real estate syndication is ideal for passive investment through retirement accounts because each syndication project has a real estate sponsor that handles every detail of the project for you. Each deal is pre-vetted by real estate analysts so that only the projects with the highest return potential are offered to investors, and all you have to do is choose the project(s) you want to invest in!
If you're investing through a Self-Directed account, Gatsby will coordinate directly with your custodian to supply the necessary documentation and process the transfer. If you're using a Checkbook IRA LLC, Checkbook IRA Trust, or Solo 401(k), you can initiate your investment by wiring or ACH-transferring funds directly to Gatsby.
Track your investment’s progress in real time through the convenient online dashboard.
Take advantage of passive real estate investing through your retirement account to maximize tax advantages and grow enough to retire comfortably today!
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