Investing in Real Estate
...with an IRA or 401(k)
This short eBook is specifically written to highlight the usage of a Self Directed IRA or Solo 401(k) plan
for investing into real estate assets. It is not technical, nor does it attempt to fully educate an investor as
to the exact processes whereby one could execute a real estate investment transaction.
Robert Hubbard, Founder & CEO
TABLE OF CONTENTS
Introduction Page 3 - 5
• What Is A Self Directed IRA & A Solo 401(k)?
• Employee Retirement Income Security Act (ERISA)
• History of IRA123.com / Safeguard IRA Advisors
Stock Market vs Real Estate Page 5 - 6
“Real” Real Estate Investors Do Not Speculate Page 7
Investing For Cash Flow Page 7 - 8
Foreclosures And The Future Page 8 - 9
3 Simple Reasons To Take Immediate Action Page 9
Two Types of Real Estate Investors Page 10
Managed Real Estate Investment Program Page 10 - 11
Summary Page 11
Highlights Page 12
Resources & References Page 13
What Is A Self Directed IRA & A Solo 401(k)?
A Self Directed IRA...is an IRA. A Solo 401(k)...is a 401(k). The term “self-
directed” is an industry term to differentiate a retirement plan that is
controlled by the account holder. All IRS rules and regulations that apply to
an IRA or 401(k) also apply to Self Directed plans.
Taking things a bit farther, a Self Directed IRA when coupled with a state-
sanctioned Limited Liability Company (LLC), gives an account holder
“checkbook control” over retirement funds.
A Solo 401(k), sponsored and self-administered by a sole-proprietor small
business owner, also provides “checkbook control”.
As you read through this eBook, bear in mind that all references to a Self Directed IRA or 401(k) are
related to the type of plan that offers the account holder complete flexibility and control over retirement
investment funds (we call it “checkbook control”).
Employee Retirement Income Security Act (ERISA)
In 1974, Congress passed the Employee Retirement Income Security Act (ERISA)
making IRA, 401(k) and other retirement plans possible. The regulations created by the
Act did not specify allowable assets for investments, rather it specified a very short list
of exclusions: collectibles & life insurance (IRS Code Sec. 401 IRC 408(a)(3).
Therefore, stocks, bonds and mutual funds are NOT the only assets in which a retirement plan may
invest...contrary to what Wall Street would have you believe. Allowable investments include real estate,
loans and notes, private company stock, precious metals, etc. By far, most investors are interested in real
estate for reasons that will become apparent later in this report.
Self Directed IRA LLCs have been structured and set up by tax attorneys for their wealthy clients for at
least the last 15 or 20 years. (And, it should be noted that LLC legislation in the 50 states has only been
in place beginning in 1978.) Similarly, 401(k)s were widely adopted as retirement plans for American
workers, beginning in the 1980s.
In 2001, significant changes to the tax code (The Economic Growth and Tax Relief Reconciliation Act of
2001 - EGTRRA) were implemented making it possible for self-employed small business owners to
easily and efficiently set up and operate their own Self Directed 401(k) plan (we call it a Solo 401(k)).
The reason that the utilization of Self Directed IRAs & 401(k)s to invest outside the stock
market has not been well known until the last 10 years is quite simple. Arcane and
complex tax laws had been the exclusive domain of highly paid professionals. They had
made their living interpreting and taking advantage of rules and regulations for wealthy
clients that the common man would never be able to decipher by themselves.
But that all changed with the advent of the internet, and especially “high-speed” connections capable of
moving vast amounts of information and files very quickly. This enabled the creation of websites that
were “media rich”...yet easy to download. Now, everyone could take a peak behind the curtain at
information formerly available only to certain professionals...think about LegalZoom.
In summary: IRAs, 401(k)s and many other types of pension and retirement plans have been around for
35 years. Self Directed IRA LLCs have been utilized for 15 or 20 years. Individual or Solo 401(k)s have
been available for about 11 years. The point is, none of this is new...it just hasn’t been well known for the
reasons cited above.
A Brief History of IRA123.com / Safeguard Advisors
In early 2003, it was brought to my attention that it was possible to use an
IRA for investing outside the stock market. In fact, by late 2003, I had
traveled to The Philippines and made a Self Directed IRA investment into a
private company based in Manila.
Recognizing the investment possibilities for myself, as well as the potential
to create a business helping other people unlock the power of Self Directed
IRA investing, I embarked on a quest to understand everything I could about what was (at the time), a
relatively unknown process.
Networking with attorneys, accountants, custodians, trustees and other industry professionals, I also read
everything I could find on the internet (which was mostly still running on dial-up connections in 2003 and
2004). The process was slow and challenging, to say the least.
But, timing is everything. Just as I was completing my research, broadband
internet was starting to take hold and it was apparent that high download speeds
could push massive amounts of information, not to mention streaming audio and
video. Self Directed IRAs were not to be a secret for much longer.
By the end of 2004, I had gathered adequate information and developed enough resources, including a tax
attorney who completely understood the legal side of setting up Self Directed IRA LLCs, and I was ready
to launch the company...Safeguard Advisors / IRA123.com.
In 2005 and 2006, we conducted countless seminars on the West Coast, wrote articles, made video and
audio recordings for the website and learned how to harness the power of internet marketing.
In 2007, the internet began to dominate our business and by 2009 our advisors were talking to as many as
250 to 300 potential new clients every month. Today, we have several thousand investor clients scattered
across all 50 states and in several dozen foreign countries, where ex-patriots are living and working.
Our team is comprised of expert advisors, diligent processors, a tax attorney, a
CPA, a legal services group and Certified Partners who provide turn-key real
estate investments. Our advisors are also seasoned real estate investors who
utilize their own Self Directed plans to invest into real estate related assets.
STOCK MARKET vs. REAL ESTATE
In late 2011, we posted a blog article entitled “A Dose of Realty: Stocks
vs Rental Property”. The article points out that most Wall Street
bankers, brokers and financial planners are guilty of distorting reality, at
best, and outright deceit, at worst, when comparing the performance of
the stock market vs the housing market.
(Anytime figures are published about this subject, the actual comparison is not stock investing vs real
estate investing...it’s a comparison between stock performance and owning a home to live in.)
The numbers that are generally compared are stock gains against
home appreciation, and quite naturally stocks appear to perform
better. Why? Because the comparison is between a stock
investment that has the potential of producing income...and a
home in which there is no potential at all of earning income? It’s
what as known as an “apples to oranges” comparison.
Frankly, if the comparison was between stock investing and real
estate investing...the stock market would not even belong in the
same league. So, the Wizards of Wall Street must create
distortions and deceit in order to scare people away from real
estate. After all, their fees and commissions are at risk.
To illustrate the point, let’s take a look at some cold, hard facts. The Dow Jones Industrial Average, over
a 12 year period from Sept 10, 1999 to Sept 9, 2011, went from 10,462 to 10,992. That’s 530
points...representing a 5% total gain. So, a $100,000 investment would have produced a $5,000 gain...
$417 per year or .4%. (And, that’s only if your own investments did as well as the Dow. Most investors
actually lost 20% or more.)
What about investment real estate over these same 12
years? Using the national average of 10% of value for
gross rent for a typical $100,000 home ($1000 per
month), subtract 25% for expenses (primarily taxes and
property management) and the net rent is about $750 or a
$9,000 annually. (Vacancy rates and maintenance aren’t
factored in, but neither are rental increases, appreciation
or re-investment of profit, which would more than offset
Multiply the annual net rent of $9,000 and over the 12 year period, you would have a total gain of
$108,000, or 108% (9% annually).
Some readers might be thinking “what if the value of the property actually falls? What then? Well, that’s
a very easy math question. Let’s say the value of that $100,000 property fell by 20% during the 12 year
To start with, the yield would still be the same -
$108,000. But, to be fair, let’s deduct $20,000
from the yield (representing a 20% drop in
value). That would reduce the yield to $88,000.
Divide that by 12 years and the annual yield
would be $7,333 or 7%...still an excellent return.
Bottom Line: Stock Market gains of $5,000 vs
Real Estate gains of $108,000. (And, we bet that
your Stock Broker told you to avoid real estate
like the plague...it’s just too risky. As we pointed
out, the stock market doesn’t even belong in the
same league with investment Real Estate.)
“REAL” REAL ESTATE INVESTORS DO NOT SPECULATE
Even though the facts are undeniable, many retirement
investors are still reeling from the the effects of the
implosion of the real estate bubble beginning in 2007 and
the ensuing stock market collapse in 2008 & 2009.
In 2004, “real estate” fever was sweeping the nation.
Government policy makers had forced the relaxation of
lending standards. Their Wall Street partners, wanting to
cash in, began packaging up loans known as “mortgage
backed securities” and selling them off to unsuspecting pension plan managers and even to foreign
countries. (No speculation here...just well-known facts.)
People began using their homes like a piggy bank...many of them refinancing and pulling out equity
several times per year. And even for someone who had never owned a home or had bad credit, if they
could “fog a mirror”, they could get a mortgage loan.
The inevitable conclusion was a real estate bubble like the world has never seen. And, when the perfect
storm of greed finally passed the point of no return, the bubble collapsed and with it, millions of people
ultimately lost billions of dollars of net worth...both real and on paper.
Because the collapse was so visible, and values dropped so precipitously, many people haven’t really
recovered from the shock of it all. They just aren’t sure that real estate is the right place to be investing
today after watching all the real estate speculation that led to the bubble.
But, to set the record straight, “real” real estate investors do not speculate or gamble. They run the
numbers and detach themselves emotionally from the property itself. They are entirely focused on “cash
flow”. That’s why seasoned investors sat out the last part of the run up in real estate values. The numbers
just didn’t make sense anymore.
INVESTING FOR CASH FLOW
Many books have been written about how to profit from real estate
investing. Some of these publications are quite technical and others are
very simplistic. But, the bottom line message of all of them is...the
numbers don’t lie. In other words, with a good deal, the numbers work.
With a bad deal, they don’t.
Investing in real estate is all about the numbers. Emotion has nothing to do with the process, such as
when a couple is trying to decide which house to buy, live in and raise a family, or retire. That’s not what
investing is about.
Investing in real estate contemplates a number of factors in order to arrive at a conclusion regarding what
is a good deal and what is a bad deal. While appreciation is always good, fundamentally, “cash flow” is
the most important aspect of real estate investing.
Now, the nice thing about investing with a Self Directed IRA or 401(k) is that
profits are tax-deferred, just like stock investing. Calculating cash flow is really
quite simple - it’s the flow of money...income in, expenses out: Rental income -
Vacancy - Expenses = Cash Flow.
To determine the yield, or return on investment (ROI), annual cash flow is
divided by the amount of cash invested into a property. As an example: If cash
flow on a $100,000 investment is $9,000, ROI would be 9%. Or, if cash flow on
a $65,000 investment is $7,800, the ROI would be 12%.
(The purpose here is to keep things as simple as possible. Obviously, there are a number of factors that
come into play in terms of finding the right property, acquiring the property, rehabbing if necessary,
finding a tenant and employing a property manager that you can trust, or managing it yourself. Those
issues will be addressed a bit later.)
FORECLOSURES AND THE FUTURE
In early 2009, I wrote a 3 part series entitled “IRAs and
Distressed Property”. As pointed out in the series, it’s a
combination of declining values and the inability (or
unwillingness) of the owner to continue to make loan
payments that usually causes a property to be classified as
distressed. Depending upon which stage the property is in, it
is is known as a short-sale, foreclosure or bank owned
property (REO - real estate owned property).
In 2010, we were told by experts to expect a property market bottom in 2011. However, not only did we
not hit bottom, the foreclosure crisis accelerated. Late in 2011, again the experts said we could expect
“peak foreclosure” in 2012. But, according to many other sources, it’s not likely to happen since there are
still millions of properties at risk of foreclosure.
Since 2008, declining property values, as a result of foreclosures, have left millions of homeowners
upside down in their homes. Predictably, many of these homeowners simply give up and walk away.
Their homes then go back to the lending bank and most of the time the property is purchased by an
In simple terms, this perfect storm of
foreclosures and loss of value means that
real property is changing categories of
ownership. It’s shifting from “owner
occupied” to “non-owner occupied”…from
owners to investors. And, while it is
unfortunate that people are losing their
mortgaged, upside down homes, there is a
silver lining...at least for investors.
The foreclosure market has created a very
favorable environment for real estate
investing. In 2010 alone, rents increased nationwide by 11.6%, moving from $1181 to $1319.
Opportunities to pick up distressed properties as part of an investment portfolio that will accelerate
growth in a Self Directed IRA or 401(k) plan will continue to abound.
3 SIMPLE REASONS TO TAKE IMMEDIATE ACTION
1.The shift from home ownership to rentals has essentially wiped
out the gains of home ownership that started in the mid 1990s.
Renting is now the only option for many people. And, regardless of
circumstances, the first priority for every American is to have a roof
over their head…one way or another.
2.Values have plummeted, and for the first time in a long while,
investors can buy a home and get an immediate positive cash flow.
In fact, investors are enjoying instant profits, even as the market
values go down.
3. Rental growth will continue for years to come because of foreclosures, a continued drop in home
values, elimination or reduction of government sponsored subsidies for home ownership and the
continued worldwide economic decline because of sovereign debt and the unwillingness of politicians
to make the right choices.
TWO TYPES OF REAL ESTATE INVESTORS
Real estate investors fall into 2 categories:
Hands-on: Manages their own properties, do the maintenance, drive by the
property several times a month and generally stay very involved with their
Hands-off: Prefers processes involving turn-key
income producing properties managed by others, and/or participating in loans or
notes related to real estate.
Over the past 35 years, I have been both a hands-on and a hands-off investor. I
have developed property, owned and managed single-family and multi-family rental property, invested
into large condo conversions, and loaned funds for rehab of existing properties and for new construction
of residential properties.
As a hands-on investor, I was intimately involved in every aspect of the deal. Whether it was changing
out a toilet for a tenant or performing due diligence for the next acquisition, I was right in the middle of
everything. And most of the time, I had a full-time job or was operating an unrelated small business.
Except for about a 2 year period, real estate investing was my second job.
Although I have enjoyed every minute of it, I now prefer to be a “hands-off” investor only. Frankly, I’m
a bit older and I no longer need a “second job” but, it’s also because I have access to excellent,
trustworthy investment Partners who have decades of experience.
(Note: Both hands-on and hands-off investors have the
potential to be very successful. There is no right or wrong
approach. Typically, seasoned investors tend to be hands-on.
Hands-off investors tend to be very busy people, or they may
be less experienced. Regardless, investing in real estate with
either methodology is much better than putting all your eggs
in one basket in the stock market.)
MANAGED REAL ESTATE INVESTMENT PROGRAM
In the last five years, and especially since the foreclosure market has presented such incredible investment
opportunities, more and more clients were telling us that they would appreciate help in finding “hands-
off” real estate investments for their Self Directed retirement plans.
As we began to work with these clients, we realized that they were asking for
a “turn-key” process similar to what they were accustomed to in the stock
market... pick a stock or mutual fund, call the broker (or get online) and
execute a transaction. Easy, with no hassles.
Because we had already worked with several investment Partners who
operated in this fashion, we knew exactly how to set things up. So, we developed the Managed Real
Estate Investment Program. Similar to the stock market, it’s an approach that is highly effective, allowing
an investor to pick from numerous turn-key, cash flow real estate investing options...strictly hands-off.
Investments have been structured to provide an environment in which the investor
does not risk the possibility of a prohibited transaction, self dealing or otherwise
violate the rules and regulations which are intended to insure that retirement funds
are preserved for the future benefit of the account holder.
Certified Partners have passed extensive criminal and financial background checks,
are properly licensed (if required) and are conducting business in accordance with
the real estate and other laws of the state(s) in which they are operating.
As an investor, if you prefer to hold title to real estate, income-producing properties will be for you.
Properties have been fully rehabbed, a tenant and expert management
is in place, and in most cases, a rent guarantee and home warranty is
part of the deal. Property yields are projected at 10% to 14%,
depending upon price and location.
On the other hand, if you want to be a banker, or lender, you can
participate in private mortgage lending and hold a note (5 years) for
one of our Partner’s investment companies. Annual interest rates
range from 9% to 12%.
For more about our Managed Real Estate Investment Program, go to www.IRA123.com/invest.
Properly structured Self Directed IRA & 401(k) funds are eligible and suitable to invest into real estate, in
accordance with applicable laws, rules and regulations as established by the Congress of the United
States, the Department of Labor and the Internal Revenue Service.
Investing in Real Estate with an Self Directed IRA LLC or Solo 401(k) is not a difficult process.
Regardless of whether you’re a hands-on or hands-off investor, Safeguard Advisors can assist you with a
real estate investment strategy that can accelerate the growth of your retirement funds.
To learn more about Safeguard Advisor services, call toll free 887-229-9763, or simply fill out a form on
any page of our website, www.IRA123.com.
1. IRAs, 401(k)s and other pension and retirement accounts have been available since 1975.
2. Self Directed IRA LLCs have been available for 15 to 20 years.
3. Solo 401(k)s have been available since 2001.
4. Self Directed IRAs and Solo 401(k)s give the account holder checkbook control over funds.
5. When compared to stock market investing, real estate investing is far superior.
6. “Real” real estate investors do not speculate...they invest purely for cash flow.
7. Real estate investing is all about the numbers. Emotion has no place in the equation.
8. Foreclosures are likely to continue into the foreseeable future.
9. The foreclosure market has created a very favorable environment for real estate investing.
10. Foreclosures are causing a shift from being an owner to being a renter.
11. In 2010 alone, rents increased nationwide by 11.6%. Rents will continue an upward trend.
12. There are 3 reasons to take action:
a. ownership shift to rentals
b. home values have plummeted
c. because of foreclosures, rental growth will continue for years
13. There are 2 types of investors: Hands-on & Hands-off
14. Hands-on investors manage their own properties, typically in their home town or nearby.
15. Hands-off investors prefer turn-key processes managed by others, no matter the location.
16. There isn’t a right approach to investing. Both types of investors can be very successful.
17. The Certified Partner Investment Program is a result of client requests for turn-key solutions.
18. The Investment Program is a managed approach that is highly effective
19. Investments are structured to prevent the possibility of “prohibited transactions”.
20. Investments are categorized as “income-producing properties” or “short-term loans & notes”.