As an investor, investing your 401k retirement savings in real estate can be an attractive option to earn rental income and capital appreciation. With major 401k provider Fidelity, there are several ways you can gain exposure to real estate by investing your 401k. In this article, we will explore the methods and pros and cons of investing your 401k in real estate with Fidelity.
The key to successfully investing your 401k in real estate is proper asset allocation based on your risk appetite, time horizon and investment goals. With Fidelity, you can invest in real estate investment trusts (REITs), real estate mutual funds, and real estate ETFs inside your 401k. You can also explore self-directed 401k to invest directly in rental properties. As always, proper due diligence and diversification is important when investing 401k in real estate.
Invest in REITs with your Fidelity 401k
One of the most popular ways to gain real estate exposure in your 401k is to invest in real estate investment trusts or REITs. REITs are companies that own and manage income-generating real estate assets and are mandated to pay out 90% of taxable income as dividends.
With Fidelity 401k plans, you likely have access to a selection of REIT mutual funds and ETFs. Some top choices are funds like Fidelity Real Estate Investment Portfolio (FRESX) which invests in REITs and real estate stocks or Fidelity MSCI Real Estate ETF (FREL) which tracks an index of REITs.
The key benefits of investing your 401k in REITs are liquidity, diversification and dividends. Investing in multiple REITs across sectors like residential, healthcare, retail, allows you to spread risk. Many REITs offer attractive dividend yields in addition to potential for capital appreciation. As with any investment, evaluate fees, past performance, portfolio holdings before investing.
Real estate mutual funds and ETFs with Fidelity 401k
In addition to REITs, your Fidelity 401k likely provides access to more broad-based real estate mutual funds and ETFs. These funds invest not just in REITs, but also real estate operating companies, brokers, developers and other real estate equities.
Some examples are funds like Fidelity Real Estate Fund (FRESX) or Schwab U.S. REIT ETF (SCHH). The benefit of these funds is that they provide very diversified exposure to the real estate sector, including stocks not just limited to REITs.
The downside is that they may have lower dividend yields than a dedicated REIT fund. Evaluate the holdings, past performance, costs and weigh suitability for your goals before investing your 401k.
Self-directed 401k for direct real estate investing
The most direct way to invest your 401k in real estate is through a self-directed 401k offered by some providers like Guidant Financial, PENSCO Trust Company. This allows you to use 401k funds to invest directly in rental properties, mortgage notes, tax liens among other alternative assets.
With a self-directed 401k, you have control over evaluating and picking individual rental properties to fund with your 401k. Key benefits are leverage, tax benefits and no contribution limits unlike other 401k. The downsides are costs, labor intensive paperwork, prohibited transactions, disqualified persons rules.
Thorough due diligence is vital before taking this approach for your 401k real estate investing to avoid penalties and added taxes from the IRS.
401k real estate investing risks
While investing 401k funds in real estate provides portfolio diversification, there are also important risks to consider:
– Illiquidity risk – selling real estate assets takes time compared to stocks or bonds
– Concentration risk – lack of diversification if majority of 401k in just real estate
– Falling property values – real estate sectors go through cycles, values can decline
– High costs – property taxes, maintenance, insurance eat into returns
– Vacancy risk – periods of vacant rental units impacts cash flow
– Leverage risk – amplifies gains but also losses if financed through debt
– Due diligence requirements – especially for direct rental property investing
Mitigate risks by proper allocation between real estate and other assets based on time horizon, goals.
With proper due diligence and balancing risks, investing your 401k retirement savings in real estate can provide portfolio diversification. Fidelity offers exposure through REITs, real estate mutual funds and ETFs. For direct control, explore self-directed 401k options. Consider risks like illiquidity before allocating 401k funds to real estate.