As real estate continues to be a popular investment asset class, more and more investors are looking into ways to gain exposure to real estate through their 401k retirement accounts. Investing in real estate through a 401k account provides benefits like tax-deferred growth and potential employer matching contributions. One of the leading providers of 401k accounts, Fidelity, offers several options for those who want to invest their 401k into real estate. This article will explore the different methods available at Fidelity for 401k real estate investment.
Invest in REIT ETFs and Mutual Funds
One of the easiest and most diversified ways to invest 401k funds into real estate is through Real Estate Investment Trust (REIT) ETFs and mutual funds. REITs own and operate income-generating real estate and are required to pay out at least 90% of taxable income as dividends. Fidelity offers a wide selection of REIT ETFs and mutual funds that can be purchased commission-free within a 401k account. Some popular Fidelity REIT fund options include the Fidelity Real Estate Index Fund (FSRNX) which tracks the MSCI US REIT index and the Fidelity Real Estate Investment Portfolio (FRESX) which is an actively managed REIT mutual fund. Choosing low-cost REIT funds is a simple way to gain broad exposure to the real estate sector.
Invest in Real Estate Companies
In addition to REIT funds, investors can also use their 401k to invest in stocks of publicly traded real estate companies. These could include home builders, property managers, real estate brokers and other real estate service providers. Fidelity offers the ability to screen for stocks in the real estate sector and offers research tools to analyze and compare companies. Some of the largest real estate companies like Zillow and Realogy can be purchased commission-free in Fidelity 401k accounts. Picking individual real estate stocks carries more risk than diversified funds but also provides the chance for higher returns.
Use Self-Directed 401k for Alternative Real Estate Investments
For investors interested in more direct real estate investments like rental properties, flip projects or private real estate funds, a self-directed 401k account may be an option. Self-directed 401k plans allow you to invest in nearly any type of real estate investment outside of just stocks, bonds and funds. Companies like Guidant Financial administer self-directed 401k plans by partnering with a third party custodian for compliance and administration. Keep in mind that self-directed plans come with more paperwork, administration expenses and stringent prohibited transaction rules. Make sure to do your due diligence before pursuing alternative real estate investments in your 401k.
Take Out 401k Loan for Down Payment
If you want to purchase a rental property or primary residence, some 401k plans allow you to borrow against your own savings. 401k loans let you borrow up to 50% of your vested account balance, up to $50,000. Loan terms are usually 5 years, with interest paid back into your own account. While convenient, the downsides are missing out on investment returns during the term of the loan and risking default if you leave your job. Make sure to crunch the numbers to see if a 401k loan makes sense or if you have other options for coming up with a down payment.
Fidelity provides multiple options for investors who want exposure to real estate in their 401k accounts. Choosing low-cost REIT funds is the simplest approach while self-directed plans offer access to more alternative investments. Work with your advisor to find the right real estate investment strategy for your 401k goals and risk tolerance.