In Your 20s or 30s? Start Your Real Estate Investment Portfolio Early
I’ve been blessed with many years of personal and professional experience. I’ve walked through challenges, stuck out difficult times, and have ultimately built a life, career, and investment portfolio that I’m proud of.
What brings me ultimate joy, however, is sharing my experiences and knowledge with others so they can put tools in their financial toolbelt. I especially love when I can help those a couple decades behind me learn how to build a solid financial foundation. As I reflect on my life and investments, I often consider what I might do differently if I were in my 20s and 30s. Here are a few tips I’ve learned in the course of my personal financial journey.
Start Early
When you are in your 20s and 30s, you have the most valuable gift on your side: time. You have time to educate yourself, time to take risks, and time to compound your investments. You open yourself up to a world of possibilities when you begin early.
And unfortunately, with longer life expectancies, the new norm could look more like a 60-year career because of rising medical costs and longer retirements. Creative and diversified investments could not only help you prevent the 60-year career, but thrive in both your personal and professional lives.
House Hacking
House hacking is becoming increasingly popular and it’s an excellent way to jumpstart your investment portfolio. House hacking refers to renting out part of your primary residence in order to reduce or completely eliminate your housing costs. This could mean you buy a duplex and live on one side while renting out the other or buying a 4-bedroom house and renting out 3 rooms.
Regardless of how you end up renting out the space, you’ll be seeing significant savings every month from one of your biggest budget line items. Your 20s and 30s are an opportune time to house hack because you’re likely still figuring out where you want to live and what job or career you want to settle into. You can simply rent out the space you’re currently living in if you need to move for a job or take on fewer renters if you need more space for your family.
House hacking is a gentle approach to the world of real estate investing because while you are taking on a major liability (a property), you are simultaneously subsidizing your housing costs. You’ll also learn valuable skills like how to be a landlord and manage the upkeep of your property.
Contribute To A Self-Directed IRA
After house hacking and saving a significant amount of money each month, where would I put it? If I was in my 20s and 30s, I would contribute the income from these properties into a self-directed IRA (SD-IRA).
Up until age 50, you can contribute $6,000 a year to an SD-IRA. These accounts allow you creatively invest in non-traditional assets while enjoying tax advantages. One of the most exciting assets you can invest in with an SD-IRA is real estate.
Revving Up Your Real Estate Portfolio
Now that my investment portfolio is underway and I have discovered the unique benefits of SD-IRAs, it’s time to use these contributions to start investing in more properties.
SD-IRA real estate investing offers many advantages such as increasing your monthly cash flow, hedging against inflation, generating higher returns and building equity and wealth. It also provides exciting flexibility in terms of the types of property you can purchase, such as single-family homes, commercial properties, farmland, storage units, etc. The investments purchased from an SD-IRA cannot be used for house hacking, these properties would be entirely investment-based.
You can also enjoy the tax advantages of traditional or Roth retirement accounts when investing in real estate through an SD-IRA.
With greater flexibility and opportunity comes greater responsibility. SD-IRAs are not managed by banks or brokerage firms because there are entirely too many rules and regulations to keep up with. A specialized custodian can ensure you are keeping in line with IRS regulations and make transactions a breeze. Your custodian will not provide investment advice or recommendations, it’s still up to the individual investor to make decisions, but they will be there to complete your administrative needs.
Self-Directed IRA Real Estate Investing Basics
Using a self-directed IRA to invest in an income-producing asset such as real estate is exciting and can provide you with larger than average returns. Here are a few things to consider:
SD-IRA Real Estate Investing Rules
A custodian can help you understand these rules and ensure you are following them, but they are good to be aware of before investing.
As we mentioned above, the investment properties must be purely investments. You cannot use it as a vacation home, second home, or for your family to live in, even if they pay rent. Basically, you cannot personally benefit from the property (outside of it being an investment in your portfolio).
When you purchase a property with your SD-IRA, the IRA is the owner, not you. All costs associated with the property such as maintenance and property taxes must be paid from the IRA. Additionally, any rental income the property generates must flow directly into the IRA.
Non-Recourse Loans
If you do not have enough money to purchase an investment property outright, you’ll need to apply for a loan. The only option for SD-IRA real estate loans is non-recourse loans. The investor is not personally liable for these types of loans, but rather the IRA itself. Each lender has different requirements and restrictions, but non-recourse loans typically have more scrutinous requirements and higher interest rates than traditional loans.
Unrelated Business Income Tax (UBIT)
If you take out a non-recourse loan for your property, then you will have to pay unrelated business income tax on any profits that are attributable to the debt-financed percentage of the property. This percentage is hefty – around 40%.
1031 Exchange
In order to help offset the UBIT, investors can use the 1031 Exchange. This exchange allows investors to replace their current property with a new one without creating a taxable event. This helps defer the UBIT taxes on a realized gain.
Start Your Real Estate Investment Portfolio Early With Chicago Trust Administration Services
Chicago Trust Administration Services is a trusted partner for self-directed investments. We relish the complicated tax codes and transaction rules that help you diversify your investment portfolio. Our experience, expertise, and professionalism can help you and anyone on your financial team understand the world of self-directed IRAs.
Starting early can have a significant impact on your finances and on your life as a whole. It’s never too early to get educated and immersed in the fascinating world of personal finance. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.