There are plenty of great reasons for investors to move into the real estate market. Unlike stocks or bonds, real estate is a tangible asset that you can monetize through rentals or sales. If you’re a high net worth investor with a sizable Solo 401k, luxury real estate can be a serious investment opportunity that can generate healthy returns; but there are a few things to think about.
1. Know the Rules of Investing with a Solo 401k
Before you even think about investing in a luxury property, the first step is to be fully aware of the constraints of a Solo 401k. While it does offer greater flexibility than other retirement plans, Nerd Wallet emphasizes that the properties purchased as direct investments, can only be used for rental purposes. Under this classification, you can’t live in the high-rise condo with a doorman if you wanted to—only your tenants can. You also can’t perform anything that counts as “work” on the property and any upgrades or fixes must be done by a third party. Similar to the case study on Nabers Group clients Bonnie and Tom, all the income gained through the property must be deposited into the plan and cannot be used for personal gain other than growing your retirement savings.
2. Choose the Right Market
The basic rule of investing in real estate, high-end or not, is to analyze the market. Broker Jason Haber explains that the primary reason luxury properties are so expensive is that they cater to international clients. This means that you will do better in leasing your property in an area that attracts foreigners and wealthy potential renters. But that’s not all, you also have to consider the supply and demand in the area. For instance, Haber mentioned that New York City is oversaturated with luxury developments, which affects the price points that the properties are sold or rented at. This is true in areas like Manhattan but Brooklyn is an emerging market for luxury properties, according to another report. Make sure to factor in trends as well and how local politics and economy impact the market.
3. Find a Premium Location
In choosing to invest in a luxury property, it’s important to take into account the kind of lifestyle that potential tenants lead. Be it a condo or a home, it has to be close to high-end activities and entertainment, luxury shopping outlets, and fine dining. How are the amenities of the building such as its pools and gyms? Security and convenient access to transportation are also priorities.
4. Timing is Everything
Even with a healthy Solo 401k, luxury real estate is a huge investment. Depending on the market, $1 million is the minimum entry point, which means that you shouldn’t rush into the decision. According to real estate firm Yoreevo, you also need to consider timing when buying a property especially in prime real estate locations like New York. Setting up a Solo 401k plan is actually the easy part but you’ll need at least six months to do your due diligence, look at trends, canvass properties, and close the deal. From then on, you’ll be cashing in the rental checks to replenish your retirement funds and maybe even looking at a new real estate investment.