How Can a Solo 401k Help a Real Estate Broker?

First and foremost, if you’re not making enough money as a real estate broker (or just not as much as you would like to), you need to be a party to more transactions. The Denver area market is hot. Actually, it’s on fire. It may be too hot, making it an oddly tough market, but more on this later.

Regardless of market oddities, there are a ton of deals closing every day. But there are also a lot of real estate brokers out there splitting this huge pie. Of course, some brokers have much bigger pieces than others, and if you want a bigger piece, you have to do something to get it. One way is to stand out by offering something that others don’t. Let’s discuss a few ideas here.

A Solo 401K (also known as a Self-Employed 401K or Individual 401K) is a retirement plan for employers with no full-time employees other than the business owner and their spouse. The right Solo 401k plan offers a wide range of features that can benefit you in a variety of scenarios. What’s the right Solo 401k plan? That depends, but let’s take a look at a self-directed self-trusteed plan, as these are the most powerful for the end user.

With one of these plans, a real estate broker could put away up to $59,000 a year in tax-deductible savings. The plan would also accept incoming rollovers of existing retirement funds and allow all funds within the plan to be invested into an almost endless list of assets, including direct ownership of real estate. You could borrow up to $50,000 from the plan for almost any reason and whether funding a loan to yourself or making an investment, you can do so by simply writing a check from your 401k account. Let’s see how some of these features play out in real life scenarios.

Scenario 1 

For our first scenario, let’s talk about investor clients. If you already work with real estate investors or want to do so, there is a big opportunity here. There are a lot of real estate investors who want to buy more property, but can’t at the moment. Many investors are maxed out with regard to what a bank will loan to them. Some of these investors have retirement accounts with funds locked into Wall Street. What if you could show them how they could put that money into real estate?

If you can help an investor unlock their retirement funds and purchase real estate, not only would you get a commission on their investment property, but you are also providing a higher level of service compared to 99% of brokers out there. Most successful real estate investors understand real estate and prefer physical, tangible assets. If you can help them move away from being restricted to prepackaged financial products that almost no one understands and move toward what they know and love, you’ll become their hero! The icing on the cake? The investment you helped them make is now completely tax deferred (or tax-free) as opposed to investments made outside of the plan. In their eyes you’re not just some agent who got a cut of their money, but a uniquely outfitted professional who made the deal possible in the first place.

Scenario 2

What about people who want to live in the house they’re trying to buy? Remember I mentioned the Denver real estate market is a tough one at the moment? For a variety of reasons, there is an inventory shortage that poses some serious challenges for buyers and their brokers. On average, how many offers do you have to write to get an acceptance? My last employing broker said four. Maybe it’s higher for you, especially at certain price points. In any event, if the number is more than one, your job becomes harder.

It’s not enough to bring a ready, willing, and able buyer to their seller counterpart. Other brokers are doing that same thing at the same time for the same property. There is too much competition! Instead, imagine for a moment that your buyers have an extra $50,000 in cash assets. Do you think you could put together stronger offers and do more deals? Remember, participants in the right Solo 401k can borrow up to $50,000 cash from their accounts tax and penalty free!

Scenario 3

What about you? Do you have retirement assets locked into Wall Street? That might make sense for a stock broker, but not as much for a real estate broker. The person who makes a living selling Chevys but drives a Ford is doing herself a disservice and risks sending the wrong message to prospective clients.

 Not only are you the experts in real estate and the ones who can stand to benefit the most from this asset class, but in thinking about your clients, it says a lot about your alignment and understanding of real estate if your retirement vehicle is able to go in that direction too.

Scenario 4

In the fourth and final scenario, perhaps you have no retirement account at all. In this case, do you have income you're unnecessarily paying taxes on? Regular contributions to a Solo 401k are tax-deductible. For many people, contributing just a couple thousand dollars to a plan allows the 401k to pay for itself in tax savings alone. And if you have no retirement account because you don’t have enough income, the fix is easy- do more deals. Review scenarios two and three above for some ideas on how to do just that.

So whether you want to make more money as a real estate broker, keep more money by paying less in income taxes, help investor clients obtain property, or be able to offer a higher level of service and broader options to your clients, a self-directed Solo 401k plan may be just the ticket.

Justin Windham is a DMAR Affiliate Member & Guest Writer