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Repositioning your 401k or 457b for Commercial Multifamily

Updated: Apr 24, 2020



The DCAR or Deferred Compensation Asset Reposition is a technique many of our investors utilize to invest in our projects. It's a diversification, risk mitigation and asset reposition tool and strategy which provides our investment opportunities to virtually any investor with a 401k or 457b plan. In this article, we will briefly touch on the process of utilizing a DCAR and an example of how we use them. Full disclosure, this article is intended for informational purposes only, and you’re advised to consult with your CPA or financial planner to learn more.


In this article we discussed the benefits and considerations of transitioning a portion of your available capital into a fyre CAPITAL commercial multifamily project. Some of the reasons an investor might want to do that were highlighted and included diversification, risk mitigation and potentially higher returns. Let’s briefly go over those considerations again.


Diversification

Diversification is a concept investors use to spread risk across multiple asset classes and capitalization sizes. Macroeconomic factors often affect certain segments of industry while leaving others alone.

A portfolio is another name for the basket of investments an investor is invested in. If one of these investments were negatively affected, the overall impact is lessened the more the portfolio is diversified. This works in reverse too, the less concentrated a portfolio is, the less likelihood an investor will reap the rewards of a breakout in one asset or investment.

401k and 457b plans are typically concentrated in domestic stocks and bonds. While they are diversified in the sense that multiple companies and company sizes are included in the portfolio, when it comes to diversification across entire markets, diversification is largely ignored. International currency markets, equity markets and both domestic and international real estate markets are generally not included in a domestic 401k/457b portfolio. This poses a significant risk as well as missed opportunity to the 401k/457b plan investor as these other vehicles are largely ignored.


Many investors understand the value of a well diversified portfolio but are limited to what their employer has set up for them stopping short of exploring what other opportunities are out there.

Employee investments are limited simply to what has been previously set up by a human resources division in partnership with a 401k plan sponsor.

Risk Mitigation

Walking hand in hand with diversification is risk mitigation. As mentioned, an adverse drop in capital markets such as what we saw in 2008 can negatively impact an investor’s portfolio. By transitioning a portion of an investor’s portfolio into another asset class belonging to another market, risk is reduced.


For example, in the 2008 financial crisis, 401k and 457b plan holders lost around 50% or more of their invested capital when markets turned. This impact was felt universally across all types and sizes of markets across the entire globe. However peel back the curtain on which asset classes and which markets suffered the largest impact, and a different story emerges. Commercial multifamily assets not only survived, but thrived in many cases. Commercial multifamily investments reaped the rewards of a growing rental pool as homeowners were forced to sell.


Not only that, but a long lasting cultural shift resulted from this downturn which had a cascade effect across generations. Millennials have largely accepted and embraced multifamily living as an alternative to single family homes.

This bodes extremely well for the future growth prospects of commercial multifamily investments.

Asset Reposition

A DCAR is a tool that we employ to offer investors an opportunity to invest with us. The vast majority of qualified retirement plans do not allow you to simply withdraw funds and pay taxes on them for use elsewhere - the IRS imposes an early withdrawal penalty. This is a tool the IRS uses to ‘incentivize’ you to keep your retirement funds put. The problem is that for an investor interested in diversifying their portfolio, there is no way to avoid paying the penalty. Those funds are locked into that account for life, and Wall Street wouldn't have it any other way. After all, not only are they the plan sponsors receiving a commission for setting up the plan, but ongoing asset management fees are collected as a portion of assets under management.


Enter the DCAR the DCAR is an intermediate level strategy to reposition funds from your retirement plan. Many qualified plans offer the ability to take a ‘loan’ against your deferred compensation account. ‘Loan’ is in quotes for a very specific and powerful reason - the interest paid on the ‘loan’ is actually payable to yourself. By law, any loan against a 401k or 457b plan must charge interest. However that interest may be payable to the account holder him or herself. So essentially it is not a loan at all, rather it is a temporary withdrawal which must be paid back to the plan.


The idea is to take this ‘loan’, use it to diversify into a different asset and reap the benefits of that reposition. Any interest that is ‘charged’ and paid back to the investor’s plan can be seen as a contribution back into their plan. Investors are encouraged to never contribute less than whatever the vested match offered by the plan is - after all not many investments out there can beat a 100% immediate return. But beyond that, an investor is simply choosing one asset class over another. In the case of the 401k or 457b plan, the promise is deferred taxes. But at what cost? At what returns? At what investment choices? At what liquidity? And finally, at what tax cost come retirement?


Commercial multifamily investments enjoy tax treatment more aligned with asset appreciation - or capital gains rates compared with income taxes. Additionally if a 1031 exchange or Delaware Statutory Trust tax strategy is utilized, there is virtually no additional benefit of keeping assets in a qualified retirement plan as these strategies are ways to defer taxes in an identical way to a 401k or 457b plan.

Qualified retirement plans are taxed at income tax rates, while investments into real estate are largely taxed at capital gains rates.

Depending on your personal tax picture, that could spell out significant long term tax savings. Consult with your CPA or financial planner for more.


Summary

Investors taking advantage of a qualified retirement plan (401k or 457b) should consider the benefits of a DCAR. A DCAR is a deferred compensation asset reposition and is used to move capital from one asset into another. This is done for a variety of reasons which include diversification, risk mitigation and potentially higher returns. Loans from qualified plans aren’t really loans at all, rather they are a temporary withdrawal. Interest paid on these ‘loans’ is typically payable back to yourself as an investor. This unique aspect of these loans opens up an opportunity to take advantage of other asset classes not available in your retirement plan.


Invest with fyre CAPITAL

fyre CAPITAL is a commercial multifamily investment firm. We purchase and/or partner in 150-600 unit, value-add apartment communities in fast-growing Tier 1 & 2 U.S. markets. Together with our strategic partners, fyre CAPITAL represents over 500 Million Dollars of successful real estate acquisitions. Our developers, sponsors and capital partners have amassed a network of over 1,500 unique investors. We provide new opportunities to invest in projects targeting a 14%-21% Internal Rate of Return . If you would like to join us on our next project, your first step is to Submit an Interest Card. We look forward to partnering with you.