Using Your Retirement Fund to Invest

retirement (Photo credit: 401(K) 2013)

Real estate is a hot commodity at the moment. Millions of people around the world are doing whatever they can to buy properties with the intent of selling them or renting them out to save for retirement. If you are looking to retire in the next few years, how can you use your retirement fund to invest in real estate?

Invest In A Superannuation Property

A superannuation property is a property that you buy using funds that you have saved up for retirement. The government changed the rules in 2007 to allow people to buy property directly from their retirement account. The upside is that you can potentially reduce capital gains and other taxes to nothing if you hold the proper inside of your retirement account long enough. Typically, you would have to pay capital gains and other taxes if you sold a property that owned outside of your retirement account.

What Should You Watch Out For?

If you are going to invest in a super property, you should consider the cost of doing so. While you can borrow money to help you finance the purchase, it is common for lenders to require a down payment of as much as 35 percent. This means that you would have to put down $35,000 to purchase a home worth $100,000. Interest rates may also be higher if you decide to invest with your retirement money.

How Much Do You Need to Invest?

Experts advise you to have at least $200,000 or more in your retirement account before thinking about investing in a super property. However, you can make any investment that you have the means to pay for. If you are over the age of 50, you should strongly consider making such a move because it can provide you with a stable income that can be earned for the rest of your life. Those who are interested in passing on wealth to their families, passing down real estate can be a good way to do that. 

What Are the Costs to Buying These Types of Properties?

Setting up a retirement account can cost thousands of dollars. There may be as much as $3,500 worth of initial set up fees. Each bank is allowed to charged more or less than that amount depending on how it operates. In addition to the cost of setting up the account, you have to take into account the extra interest that you are going to have to pay on any mortgage that you take out. It isn't uncommon to see lenders charge as much as 2 percent extra in interest per year.

Make Sure the Loan Is Gone Before You Plan to Retire

It is critical that the loan is paid off or almost completely paid off before you retire. If it isn't you could be relying on the mercy of the housing market or your tenant making timely rent payments. In addition, you need to make sure that the loan is a non-recourse loan. Loans that don't comply with this rule could be subject to a 46.5 percent tax. As with any other investment, make sure that you seek out qualified advice from someone who understands what you are trying to accomplish.

There are many good reasons why you should invest in real estate using your retirement money. However, make sure that you are doing it for the right reasons and have a plan to pay down any loan that you take out. Otherwise, you could have a hard time trying to recoup your money once you stop working on a full-time basis.