How one can spend money on actual property with a retirement financial savings account and keep away from the dreaded UBTI tax
Over the past year, you may have noticed that the public market has fluctuated quite a bit – and that’s to say the least. Retirement accounts such as 401 (k) s and IRAs have depreciated, sometimes dramatically, along with the market.
While the public market is notoriously volatile (especially amid a pandemic), real estate has proven to be much more even and consistent.
What if there was a way for an individual to allocate funds in their retirement account for real estate investments rather than the public market?
Today’s post is presented by MLG Capital, a private real estate company that has found a way to do just that. By providing access to an investment strategy normally only available to institutional investors, MLG enables individual investors to take advantage of the stable returns on real estate without paying additional taxes.
While this is not a sponsored post, MLG Capital is a sponsoring partner of our website.
As a background, MLG Capital is a private real estate company that has been in the industry for over 30 years. Over all investments made during this period, they have achieved an average 2.3-fold with an average holding period of around 6.5 years. Fund IV, their current offering, is a $ 200 million fund that aims to diversify across a basket of 25-30 smart real estate businesses and target a net investor return of 12-16%.
So without further ado, I’ll let Nathan Clayberg of MLG Capital speak for himself.
In a rapidly changing, uncertain world, many investors are tired of the roller coaster ride of the public markets. After falling nearly 40% in March, followed by an almost equally rapid rebound, the next few months in public markets will be far from predictable.
Over the same period, investments like private real estate have seen much less volatility, mainly because these asset classes do not correlate with public stocks. The following image shows three commonly used benchmarks:
- The S&P 500, a leading indicator of US large-cap stocks.
- The IYR ETF, which seeks to track Dow Jones US Real Estate investment results and measure the performance of the publicly traded real estate sector of the US stock market.
- The NCREIF Property Index is a quarterly measure of total non-leveraged return for residential commercial real estate held for investment purposes only.
As shown in the graph, the publicly traded REITs generally reflect the volatility of the S&P, while private real estate is much less volatile.
Investors often seek to diversify their investment portfolios by buying public real estate investment trusts (REITs). However, they usually don’t realize that REITs trade on the same exchanges as bonds and stocks. Because of this, these REITs correlate strongly with traditional stocks and fixed income securities.
At MLG, we know exactly how important it is to reduce risk through diversification. Our diversified fund structure is based on exactly this concept.
While most investors believe diversification is important, it is often difficult to access investments in private real estate within retirement accounts such as IRAs and 401 (k).
In particular, a passive investment in debt-secured real estate via a qualified account can trigger the so-called UBTI (Unrelated Business Taxable Income) in pension accounts. In other words, if you invest in a business that uses leverage (part of the financing), you are responsible for paying taxes on UBTI. This can have a significant impact on your bottom line.
For accounts that are looking to generate long-term returns, this is a problem.
What is the solution?
In order to solve this problem and to give investors continued access to private real estate investments, MLG has created an alternative way of accessing our current range. In fact, it’s designed specifically for retirement account investors and completely avoids potential UBTI issues.
This parallel fund is called 1099 Dividend Fund IVand it is located in a non-traded subsidiary REIT between the investments and the investors.
Put simply, this structure (see figure below) enables the reclassification of passive rental income into dividend income that is not subject to the UBTI.
This structure is actually quite common among institutional investors, but MLG has worked hard to make it available to individual investors as well.
1099 Dividend Fund investors get the same business as regular investors with the same target returns, but in a structure that better suits their specific needs.
In short, the 1099 Dividend Fund IV enables individuals to use their retirement accounts for private real estate, offering less volatility and more consistent returns than the traditional public market.
So, if you’ve ever heard that investing in personal real estate through tax-protected accounts can be problematic, you know there are solutions.
If you want to learn more about MLG and the 1099 Dividend Fund, you can check this out Here.