How to Use a 408k Plan to Purchase Real Estate

Whenever I share my strategy for purchasing properties with my 401k, a few people undoubtedly ask if the same strategy is applicable to a 408k plan. What is a 408k? Like a 401k, a 408k is an employee sponsored retirement plan.

A 408k not as common as a 401k. It’s used in companies with fewer than 25 employees. I like to think of the 408k and the 401k as cousins.

Just like a 401k, most plans allow account holders to take a loan from a 408k. It’s the same strategy I’ve discussed before: not withdrawing from the plan, but instead taking a loan.

Withdrawing a loan is a surprisingly simple process. You can log on to your 408k providers website, request a loan, and have a portion of your balance transferred to your bank account. Then you have a large chunk of cash with which you can purchase a rental property. 

You might be wondering about repayment. There is interest on this kind of loan. The good news is you’re paying interest back to yourself! You’re not borrowing from some big bank or other type of lender. Not only are you borrowing from yourself, but you’re also making your retirement account larger in the end!

Also, most plans require that the loan be paid back automatically. The repayment is deducted from your paycheck until paid in full. Usually this strategy can be utilized once per year. 

10 Tax Deductions for Real Estate Investors

My favorite tax accountant Tom Wheelwright likes to say, “if you’re a real estate investor and you’re paying taxes, then you’re doing something wrong!” One of the top benefits of real estate investing is the enormous overall implication on your tax burden.

We aren’t CPAs, so please consult your own tax advisor. However, as you grow your portfolio, it’s incredibly important that you work with an accountant who understands real estate. Hear Tom Wheelwright’s tips for hiring the right accountant.

Here are ten deductions your tax advisor should be accounting for: 

  1. Interest. This is one of the most important deductions for real estate investors. If you’re using some kind of loan to attain properties, the interest you pay every year is a write-off.
  2. Depreciation. The current tax code allows you to claim depreciation on each property for 27.5 years. Claiming depreciation is a powerful tool for mitigating your overall tax burden. For more on depreciation and how to calculate it, see this blog post!
  3. Repairs. We do repairs on all of our properties in order to make them into great homes for our tenants. And luckily these repairs are deductible in that tax year. Win-win!
  4. Local travel. If you live within driving distance of your rental properties, travel expenses count as business expenses. Keep track of your mileage, and receipts from renting vehicles.
  5. Long-distance travel. As you know, I’m a big proponent of purchasing properties across state lines. Airfare, hotel stays, and team meetings are all business expenses, and therefore are eligible write offs.
  6. Home office. If you have an office in your home used solely for business purposes, you can claim part of your home as a business expense. There are strict stipulations surrounding this one—your office must have a door, and it must be exclusively an office. A guest bedroom/office or home gym/office does not qualify.
  7. Employees. The whole purpose of the tax law is to encourage businesses to stimulate the economy. If you hire contractors or have people on staff to make your business run smoothly, you can write it off! The government wants to incentivize you to continue creating jobs. 
  8. Casualty losses. This isn’t something you want to plan for, but in the event of a disaster, such as a fire or a flood, the IRS allows you to write a portion off as a loss.
  9. Insurance. Most investors think about building insurance costs into their expenses, but forget that insurance costs are a write off at the end of the year! Again, it’s a business expense, and the government loves to incentivize stimulating the economy!
  10. Professional or legal services. Any fees you pay to a property management company, lawyer, or other professional can be written off as business expenses.

If you’re serious about saving on your taxes through real estate, there’s one resource I can’t recommend enough: Tax-Free Wealth by Tom Wheelwright. If you can’t tell, I think Tom is a brilliant accountant! 

Taking the Emotion Out of Real Estate Investing

I speak with a lot of investors, and one of the things I always ask is how they purchased their first property. I find that many people end up holding onto a home that they used to live in, simply because they love the property.

They keep the property as a rental, not because it's a smart investment, but because they love the home. They have years of memories in the home. They love the paint colors they chose. 

For instance, I recently spoke to a couple based in Philadelphia who owned one property. It was their first home, and when they had to move, they couldn’t bear to let go of the house.

When I asked them about their return on investment, they said they were in the process of paying down the mortgage, and that they were basically breaking even. They projected that they might begin to make a profit in ten years.

This is a huge red flag for me; the whole point of investing is to make money! If the return on investment is low or non-existent, it’s simply not a good investment.

This is why the worst way to invest in real estate is emotionally. When you invest in a home or a neighborhood solely because you love it, chances are, it’s not a profitable investment.

Real estate investing should be all about the numbers, and nothing else should matter. Here’s how to calculate ROI to determine if your investment is sound.

The Truth About Crime Data Websites

If you’re like most people, you do a lot of research on the internet before making a big decision. That’s an excellent way to be an informed consumer, but when it comes to real estate investing, the internet isn’t always the most accurate resource.

One of the biggest hang-ups that new investors face is hesitation about crime. Many people are curious about this topic, and the thought of crime can totally demolish their real estate investing dreams.

If you focus on the potential for crime, or are put off by the data you read on websites like Zillow or Trulia, you may decide not to invest at all. I’m here to tell you, get that idea out of your head. Don’t let crime data debilitate and discourage you. 

I understand why this data can be so overwhelming and troubling. If you’re new to real estate investing, you only have the internet to rely on, especially if you’re not purchasing in your own neighborhood. But the truth is, the internet is often wrong.

Crime data is calculated by zip code, and that simply doesn’t make sense. These sites can accumulate data from a mile away. Zip codes were created specifically for mailing purposes; they have nothing to do with the quality of a neighborhood.

When you’re looking into real estate investing, don’t be discouraged by this data. If you search hard enough, you can find reasons not to invest. There are much better ways to measure whether or not a property is a sound investment.

So how exactly can you measure if a neighborhood will be riddled with crime? Talk to your property management team! They will have accurate information and experience to share. Also, are other investors purchasing on the same streets? If so, that's good reason to think it's not a high crime area. 

Check out our list of the five rental markets with the highest crime rates. 
 

The Quick Guide to Neighborhood Classifications

Neighborhood classifications can be a tricky subject for new real estate investors. Many newbies find the lingo intimidating, but don't let that stop you from taking action! Neighborhood classifications are simply a system used by investors to measure if a property fits within their investing strategy.

These classifications are not an exact science, but loose terms. I talked about this topic extensively on the podcast; you can find that episode here. Let’s dive into what some of these neighborhoods are like.

An A class property is typically a bigger home in a great neighborhood. You can expect a variety of bells and whistles like garages and central air. These properties cost a good chunk of change, and the rent will be higher as well.

I know what you’re thinking: “Higher rent means more income!” Not so fast. The ROI is actually lower in an A neighborhood, because the up-front cost is so high. And not to mention, A class properties typically are the biggest headaches for investors! It’s counterintuitive, but tenants in an A property have much higher standards, and need more maintenance and attention. Think about all of those bells and whistles I mentioned. More amenities = more upkeep!

Also, an A neighborhood is going to be most affected by a recession than any other neighborhood. Tenants with higher incomes are more likely to lose their jobs when the economy is down. If you’re looking to earn a steady, passive income, you’ll want to consider this before purchasing an A property.

I like to think of a B class property as “in transition.” This would be a neighborhood on its way to being an A neighborhood. You won’t collect as much rent as an A property, and the houses will be cheaper, and more distressed.

Imagine a home that an elderly woman lived in for 40 years. It’s in good condition, but is dated. This kind of home might have wood paneling, ugly wallpaper, and old carpet. The house has good bones, but needs some updating. That’s a B property. Recently on the podcast I talked about why you might want to have a few B class properties in your portfolio; you can hear that episode here.  

A C class property, however, needs much more work. These homes are typically older than 40 years old, and often have been sitting vacant. When I purchase a C property, I tend to put a new roof, windows, plumbing, and electric—the works! Yes, it’s an extensive rehab, but what you come out with is basically a brand new house. Then, big repairs are unlikely for the next 20 years.

If you feel fearful of a C property, you must know that there are a lot of misconceptions out there about C neighborhoods and the people that live there. I love C neighborhoods, and in fact, that’s where I purchase the majority of my properties! The homes can be acquired at a low cost, I’m able to put a ton of value into the property, and then get a high return on investment. My tenants are fantastic, blue-collar Americans who work hard. By renovating these properties, I’m giving them a great house to come home to at the end of a long day, and that is so rewarding. 

A D class property is typically located in a neighborhood with higher levels of crime. The homes will be more dilapidated, maybe even abandoned. These properties typically need a lot of renovations. Personally I don’t purchase properties in these neighborhoods.

But that doesn’t mean you can’t be successful doing so. Every investor has a different strategy. In fact, I’ve known investors who have entirely transformed neighborhoods by renovating multiple properties. That’s exactly the strategy I would employ if I were going to purchase a D class property. I would pick up multiple homes on the same street in order to make it a better place for my tenants to live.

Neighborhood classifications can be a tricky subject for new real estate investors. Many newbies find the lingo intimidating, but don't let that stop you from taking action! Neighborhood classifications are simply a system used by investors to measure if a property fits within their real estate investing strategy.

How to Convince Your Spouse to Invest in Real Estate

So you’re ready to take the plunge and purchase your first rental property, but your spouse isn’t so sure? I’ve been there. You’re not alone. We hear from investors facing this same predicament all the time! Chances are, there’s a more financially conservative partner in every relationship, and so it’s no surprise if your spouse needs little convincing. Natali and I experienced this in our relationship, and we want to share with you how we got on the same page.

If you find yourself in this situation, it's important to prepare convincing information and facts to help your spouse better understand real estate investing. Here are a few specific strategies you can use to get your spouse on board:

Convincing your spouse to join you on a real estate journey is all about supplying them with the proper education. The first thing you should do is take a look at your current investments, and have a discussion about the realities of the stock market. We know that market crashes are inevitable and cyclical. These investments are not as safe as your spouse might think. Many of us have been taught that the stock market is THE way to invest, but it’s just not true. That’s not to say the stock market is necessarily bad, but perhaps it should be used as just one investing tool, instead of your entire arsenal.

You should also talk with your spouse about the fees you are paying inside of your investment accounts. Most of these stock market-based accounts are riddled with high fees, as your account is charged on the basis of the transactions that occur inside of your mutual funds. One simple way to track these fees is to use a website like FeeX. All you have to do is sign into your investment accounts, and it will tell you what kinds of fees you’re paying, and how high they rank. Once your spouse sees the concrete numbers, he or she might be more likely to discuss alternative investing options.

Address their concerns about appreciation. One of the first things hesitant people ask about real estate investing is, “what if the property value dips?” Real estate is no longer an appreciation game; that ended back in 2008 when the housing market crashed. In buy and hold investing, it’s all about cash flow. It shouldn’t matter if your property value drops, because you’ll be consistently bringing in rental income. Plus, you won’t be looking to sell this property, so the value is not of great significance.

Show them the deals! Come to this conversation equipped with specific examples of investments, and how they can perform for your family. Once your spouse is able to compare the ROI on real estate versus a traditional investment, the wheels will start to turn. That being said, don’t overwhelm your spouse with an excess of information. Speak in simple terms of total cost, cash flow, and ROI.

For more tips on convincing your spouse to invest in real estate, check out episode 73 of Investing in Real Estate! 

So you’re ready to take the plunge and buy your first rental property, but your spouse isn’t so sure? I’ve been there.

How to Plan for Financial Freedom

Did you know that only 3% of people write down their goals? It’s so powerful to set a clear goal, and start moving toward it. Success rarely happens by chance. Especially if your goal is financial freedom, it’s not just going to fall into your lap.

I’ve found that the best way to create financial freedom is through real estate investing. And the best way to get started is to set a clear, attainable goal. That’s why I’ve created the Financial Freedom cheat sheet. 

The Freedom cheat sheet is a free PDF designed to help you calculate how many properties it would take for you personally to be financially free.

This cheat sheet contains the exact step-by-step formula I, along with hundreds of others of investors have used to begin building passive income and legacy wealth.  Once you have a specific goal in mind, the possibility of attaining it becomes very real.

All you have to do is download the PDF, sit down and map out a plan. If you want to reach your financial goals, you’ll need to take a closer look at your expenses, and calculate the exact amount that you’ll need to feel secure at the end of the month. It doesn’t take long to find your unique number, but I think you will find it will help get you in the right mindset.

What is your Freedom Number? We want to know! Book a free call with our team to learn about how turnkey real estate can help you reach your real estate goals.

Want to know more about creating a passive income? Here are five stories of real people just like you who are earning a passive income and reaching their Freedom Number through real estate investing.

 

It’s so powerful to set a clear goal, and start moving toward it. Success rarely happens by chance. Especially if your goal is financial freedom, it’s not just going to fall into your lap. I’ve found that the best way to create financial freedom is through real estate investing. And the best way to get started is to set a clear, attainable goal. That’s why I’ve created the Financial Freedom cheat sheet.