With Our Powers Combined: R.E. Investing & the "Four-oh Wunk"

Services for Real Estate Pros with Goomzee

A little bird fluttering about the office last week told me of a tantalizing opportunity for my 401(k).  For those of you in the dark, a 401(k) is a retirement savings portfolio and can be used to facilitate investments.  You may hear experts refer to it as a “four-oh wunk”; don’t be alarmed, this pronunciation also points to the same section of IRS Tax Code that serves as both an IRS Tax Code and the name of a retirement portfolio that can be used to facilitate investments. 


Among other things, the bird mentioned that I should be primarily looking into real estate investments.  Although I had heard of the NMTC (New Market Tax Credit), the RTC (Rehabilitation Tax Credit), and the benefits of using these in conjunction with a 401(k), I asked why real estate is so important, especially in light of our R.E. market woes.  The answer was two-fold:


“Buy Low, Sell High, and take advantage of the Tax Credits!”


Truer words have never been spoken.  With the options available today, real estate investment done right is so lucrative it should be illegal.  But what type of portfolio to use?  I’m no investment specialist, but the real experts say that self-directed IRAs or 401(k)s, both preferably with the Roth option, are the best for real estate investments.  The Roth umbrella shields your portfolio from income tax in certain scenarios, and is the best way to get the most out of your investment money.  You can work your way into a Roth IRA or “four-oh wunk” from a traditional account via rollovers and Trustee changes.  Roth IRAs/401(k)s are great because you deposit money after taxes, meaning you won’t have to pay tax upon withdrawal.  This allows you to save more in the long term than a traditional IRA or 401(k).  If you decide to stick with the traditional “four-oh wunk”, you are allowed to invest directly in real estate depending on the rules of your portfolio.  Also, you are allowed to borrow against your 401(k), but be warned: by doing so you are not eligible for the mortgage-interest tax deduction. 


Another option would be to use a real estate investment trust.  To my knowledge, this means that you would be placing investments through a trust of real estate specialists, thus alleviating some of the inherent risk from the shoulders of your portfolio.  This is a great option for inexperienced investors that want to turn a profit but are scared of getting burned.  If you already know your way around the real estate arena, most advise to skip the investment trust and the fees that come with them.


More important than the means of investment are the tax credits available to real estate investors.  The New Market Tax Credit (NMTC) offers a 39% return on initial amount paid via tax credits spread through seven year installments.  A private investor would receive these credits when he invests in a designated Community Development Entity (CDE).  The CDE in turn invests “substantially all” of your monies in a low-income census tract.  For more info on low-income tracts including lists per region and qualification criterion, click here.  The best part about the NMTC isn’t the credit itself, but its ability to “twin” with the Rehabilitation Tax Credit (RTC), a credit reserved for the renovation of historic properties.  The combination of these two credits “has a net effect of adding 30-35 percent more equity to the transaction”, offsetting the financial risks involved in renovating a historic property rooted in a low-income neighborhood.


A word of warning: consult both an investment and tax specialist before attempting to navigate this minefield.  There are a number of pitfalls throughout the real estate investment process so it is best to move forward per the advice of a professional.  If you can overcome the inherent risk of an investment coupled with the possible tax woes, a real estate investment holds the promise to be your biggest earner yet.  The silver lining to 2009’s R.E. market cloud is falling home prices.  True, this thought is heartbreaking in the sense that the net worth of many Americans is plummeting, but it is an “investor’s market”, and those with the cash should be chomping at the bit to get in while prices are low.  Real estate is long term, secure, and has great potential for varying sources of ROI, from new renters to property appreciation and more.


So to review, a self-directed IRA or 401(k), with the Roth option, is reportedly the best way to go when investing in real estate.  Alternatively, a real estate trust or loans are viable options.  If you do decide to put your hard-earned money into property, be sure to take advantage of both the NMTC and the RTC.  These credits “twinned” together, paired with low housing prices and an influx of inventory, means that NOW is truly the time to invest in real estate.


Comments (2)

Douglas Fischer
East Oahu Realty - Selling Honolulu, Hawaii Condos - Honolulu, HI

Oh.....Four-oh Wunk.....I get it....401(k).........you clever person you ; ))

Nov 25, 2009 09:18 AM
Austin Smith
Goomzee - Missoula, MT

Doug - Haha, I wonder if the title was a mistake that's driving people away in confusion.  Thanks for commenting Doug, hope it was helpful!

Nov 30, 2009 01:50 AM