By: Bryan Uecker, QPA, QPFC, AIF, AIFA
Thinking about using your retirement savings to enter the real estate market? Here’s a concise guide on how to leverage your 401(k) or IRA for a real estate operating or property management company.
Why Real Estate?
Real estate is a compelling investment due to its potential for passive income and long-term appreciation. It also provides financial benefits like diversification and tax advantages, including depreciation and deductions.
Can You Use Retirement Funds for Real Estate?
Direct investment in real estate through a traditional 401(k) is not permitted. While self-directed IRAs allow real estate investments, they come with complexities and fees. Direct withdrawals from retirement accounts incur taxes and penalties, reducing your investment capital.
Enter the BORSA: A Tax-Advantaged Solution
BORSA (Business Owners Retirement Savings Account) also called ROBS: (Rollovers for Business Startups) offer a way to use retirement funds without taxes or penalties. Here’s how the BORSA works:
- Start a C Corporation: BORSA requires a C Corp to issue Qualified Employer Securities (QES).
- Start a 401(k): The new C Corp adopts a 401(k) plan.
- Roll Over Funds: Move your retirement funds into the new C Corporation’s 401(k) plan.
- Invest in Real Estate: Use the funds to purchase stock in the C Corp, which then finances your real estate business.
What You Can Start with BORSA
Real Estate Operating Companies (REOCs): Manage and invest in commercial or residential properties.
Property Management Companies: Handle property maintenance and tenant relations for other property owners.
Pros and Cons
Pros:
Diverse Investment: Real estate offers potential for high returns and diversification.
Debt-Free Funding: Avoids debt service and loan complexities.
Cons:
Market Risks: Real estate is affected by local market conditions and economic cycles.
Liquidity Risk: Selling properties can be time-consuming and challenging.
Next Steps
If you’re interested in using BORSA for real estate, consider consulting with a specialist. DRDA can assist with setting up your BORSA, ensuring compliance, and guiding you every step of the way.
