This article was written to create awareness for investors about alternative options available for their retirement planning. Investing in real estate syndications through an IRA or Solo 401(k) is a great way to diversify your investment portfolio but unfortunately many people are unaware of this great investment vehicle.
What exactly is diversification? According to the Investopedia definition, it "is a risk management technique that mixes a wide variety of investments within a portfolio." The basic theory behind this concept is that a portfolio that includes a variety of different kinds of investments will typically yield better returns with lower risk, on average, compared to any single individual investment.
So, how can we apply diversification wisely today when investing for retirement? There are numerous opportunities to diversify, and real estate is one of the most popular investments because it offers higher return potential and lower risk due to the investment being secured. The IRS does allow alternative investments -- including real estate -- in an IRA, but to take advantage, you need a self-directed IRA or a truly self-directed Solo 401(k). Using your IRA or solo 401k for real estate investments can be a smart move, depending on your goals and needs.
Deciding whether you want to take a more active role when investing your retirement funds or a more passive role will help you to choose what alternative assets you should consider. If you're looking to take a more passive role, real estate syndications are a great investment vehicle to consider. There are many real estate asset classes to choose from but some of the most popular syndications to invest in include multifamily, self-storage or manufactured home parks.
Real Estate Syndications
One of the hottest trends in alternative investments right now is investing in real estate syndications, which are becoming more well known as investors learn of this lucrative investment vehicle that can be utilized to unlock capital from retirement accounts to fund real estate investments. Real estate syndication is an effective way for investors to pool their financial and intellectual resources to invest in properties and projects much bigger than they could afford or manage on their own. This group real estate investment allows you to passively invest in large real estate investments such as: apartments, self-storage facilities, mobile home parks or any other commercial real estate project. The syndicated project can range from just a couple million dollars to tens of millions and have a typical investment horizon ranging from three to ten years.
Real estate syndications are offered by a sponsor who identifies the real estate opportunity then makes the investment and management decisions. The sponsor usually contributes some percentage of the capital needed and then raises the rest of the funds needed from private investors.
To participate, you are usually required to be an accredited investor and minimum investments are typically higher ($25K - $50K) than those required for real estate crowdfunding.
Alternative investments are a great way to diversify your investments while earning higher returns and having some fun in real estate investing. Here at McKenna Capital, as a hedge against bad times and for generating wealth, we gravitate towards alternative investments as they have historically been uncorrelated to the broader economy and have proven to be recession-proof. So, while other sectors of the economy suffer in a downturn, value-add multifamily, self-storage and mobile home parks continue to generate income without a glitch.