Real Estate vs 401k: Leverage Passive Real Estate Investing with Real Estate Syndication

Like my friend, Carol, you might have read or heard about comparisons between real estate vs 401k. Carol is a superstar at work, home, and in her community. My friend’s toddler absolutely loves her, which is really saying something because Carol is a dentist. Imagine a toddler who loves the dentist?! Carol isn’t only beloved by gummy tots, but the higher-ups as well, evidence being that she’s recently become a partner at her dental clinic.The little time she had prior to the promotion has now shrunk drastically, faster than you can say “cheese.”

Real estate vs 401k

Speaking of cheese, Carol admitted to me recently that her 401K and investment strategy is like Swiss cheese - full of holes. In fact, Carol hasn’t looked at her 401K in ages. Why? “Delphine, I’m too dang busy!”

But here’s the thing: for those of us who have old 401Ks lying around, a great strategy is to allocate a portion of those funds to a real estate syndicate as part of a robust, diversified investment strategy. Be sure it’s an old 401K though, as moving funds from newer 401Ks will incur penalties. And if you move a portion of funds from a 401K, I suggest you rollover into a SDIRA (or Solo 401K if you qualify). This will give you more control over the assets you invest in, including real estate syndication and stock market alternatives.

Like many of my clients, Carol earns a good income. She wants to save for retirement as well as plan for her bouncing twin boys who will be two college-bound students before she can blink. Carol is wise to inflation, painfully aware that inflation rises over 3% per year, which means prices for will double every two decades. Her money in the standard door #1 – the 401K - may earn her 5% per year, which makes her ahead of the curve by what, 2%? Carol can do better. I told her so and invited her to peek behind door # 2.

Care to take a peek as well?

Door Number Two - Real Estate Syndication

“Real estate investing, even on a very small scale, remains a tried and true means of building an individual's cash flow and wealth.” Robert Kiyosaki - Photo by Canva

Real estate syndi-what?

In case you haven’t heard, real estate syndication is a savvy way for investors to pool financial resources together and invest in big projects (and reap potentially big dividends) that they could never dream of participating in as individuals. What kind of big projects? Multi-million dollar rental property and commercial real estate, usually.

How do real estate syndication investors earn their return on investment and receive positive cash flow? Through rental income while the properties in their portfolio build equity. When the syndication sells, investors like Carol can earn 80%-100% of their initial investment after a holding period of 5-7 years.

Why Real Estate Syndication is Perfect for Carol - and You!

SEP IRA vs. Solo 401(k): Which is Better? - Photo by Canva

What I love about real estate syndication is that it’s a great way for investors like Carol to take the reins on their future retirement and the future college fund or inheritance of their children. With a real estate syndication, Carol can use a self-directed IRA account , putting her at the helm of her investment. (Note, funds from an employer 401K account cannot be self-directed).

Best of all, if you’re someone who is interested in reaping the financial rewards of rental property but don’t have time, real estate syndication is awesome because it requires minimal supervision. Real estate syndication investors get the benefits of investing in real estate without the hassles of being a landlord or dealing with property management companies.

Quick caveat - although you can buy real estate with your self-directed IRA, you can’t buy real estate from yourself, from a spouse, child, or parent. (I know, sorry!)

Why Ready to get Real - Let’s View the Numbers

“Great partnerships thrive because the people need each other.” - Courtney A. Kemp

Real estate yields huge opportunities to investors that they would not find in more traditional markets. In a traditional market, you may build wealth (such as in the stock market) however it is known for being volatile, and you may be in for a nail-biter of a ride.

With real estate syndication, you can make your retirement investments work for you.

Here’s how you get paid...

A group of investors choose a Sponsor who secures the property. As the property appreciates over time, the investors earn distributed funds on a monthly or quarterly basis, depending on the preset terms when the investment matures. For some syndications, maturity is 6-12 months while others may take as much as 10 years to mature.

Let’s do a thought experiment and compare leaving your 401K alone vs. opting for a real estate syndication.

Door #1 – Leave it “as-is”

Suppose Carol has $100,000 in her 401K. Suppose further that she’ll earn 7% on her funds over the next 30 years. Also consider Carol contributes $10,000 each year. Afterall, she wants to take advantage of compound growth. Can you do the math in your head? Oh, well I can’t. Getting my calculator...

In 30 years, Carol would have $1.8 million. Okay, not bad. However recall with inflation prices double every 20 years. This makes that sweet figure effectively $900,000 in today’s money.

Door #2 - Real Estate Syndication

In contrast, a self-directed IRA gives Carol more control over what she can invest in. The menu broadens beyond stocks, bonds, and mutual funds to include real estate. To be clear this doesn’t give Carol license to buy that chateau in France via her self-directed IRA. Nope, instead Carol can invest in commercial real estate syndications and rental properties – far more lucrative than chateaux, anyway.

Taking our earlier example, Carol invests that same amount - $100,000 - under a self-directed IRA towards a real estate syndication. Let’s say the investment matures in 5 years, with a 2x equity multiple. What do we get?

Every five years, Carol would double her initial investment, earning 20% annual returns.

So after 5 years, Carol would have $200,000.

But hold on....

We forgot to add one thing - that $10,000 yearly contribution. If Carol contributes that portion each year in her self-directed IRA account, she would have $6.4 million. My guess is Carol would invest more than $10,000 per year going this route, which makes real estate syndication a very enticing door to open, indeed.

Given these two options, Carol chose Door Number Two – real estate syndication via a self-directed IRA. Are you surprised?

Icing on the cake is that Carol’s investment in real estate would certainly help countless communities flourish. Think of all the small businesses that would rent a property in Carol’s portfolio, not to mention one of the many families her investment dollars helped, improving and fixing up apartments and developing the neighborhood.

"Many novice real estate investors soon quit the profession and invest in a well-diversified portfolio of bonds. That's because, when you invest in real estate, you often see a side of humanity that stocks, bonds, mutual funds, and saving money shelter you from." - Robert Kiyosaki - Photo by Canva

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Delphine Nguyen, Investor

Delphine Nguyen is a real estate investor and a licensed real estate broker in Illinois. She learned to be successful from a variety teachers, including her own mistakes. Real estate investing is her passion. Helping others to achieve their goals is another passion that she has. She does what she knows best, therefore, her focus is solely on multifamily and co-living investment types.

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