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Fund Your First Towson 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 finding the funds for a down payment can feel like an overwhelming challenge. However, the solution may be simpler than you think. It may not be too difficult for you to access the funds you need so you can invest in real estate. You can fund a rental property purchase in Towson through a 401(k) plan or an Individual Retirement Account (IRA). If you have them, then you can use them to get you started. More than that, if you plan it right, using a retirement account to fund an investment in real estate could result in little or no tax implications. By utilizing your existing funds, you can really 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). Although, the law prohibits direct investment into real estate from a 401(k). So, in order to get to your 401(k) funds, you will need to go through a few additional steps.

To use a 401(k) to invest in real estate, you have two options. You may take a loan against your retirement account or you may transfer the funds in your 401(k) to an IRA account. The challenge when it comes to taking a loan against a 401(k) is the tax burden. That’s because taking out this loan might result in the funds being taxed, and investors would rather avoid that. Because of this, the better route is 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 establish 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 is something an IRA custodian should be able to do for you. Then, when you are prepared to purchase your residential rental property, you’ll have 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 do so, the name of your IRA must appear on the title of the property. This gives the green light your custodian needs to issue funds. So, through your IRA account holder, you would be an owner of 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. Any proceeds from the eventual sale of your investment property are also included. 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 approach is that there is no immediate tax liability for the funds. Instead, it’s the future use of the funds that get taxed.

Another thing you need to know when using a self-directed IRA to invest in real estate is that you can’t manage your rental property by yourself. Instead, you have to hire a professional property management company such as Real Property Management to take care of the day-to-day operations. However, this isn’t a limitation; instead, 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 team up with Real Property Management Essentials, you know that you will have a comprehensive and professional team of property management experts on your side. We will handle everything, including the mundane and time-consuming hassles. This will leave you free to grow your investment portfolio into total financial freedom. Contact us or call us at 410-832-3138 for more information.

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