Got a self directed 401K, now what?

Question

We are looking to open a self directed 401K to invest in more real estate.  There has been lots of posts on BP about the benefits and how to set it up.  However, we are looking for information on what happens after you open a 401K.

Question1: Can the BRRR method be used with houses owned by the 401K

Question2: Is there anything different about buying insurance for the home?

Question3: Once the 401K account is opened with checkbook control, do you need to open a bank account?  Does someone typically just write a check from 401K to bank account to fund?

Question4: If a bank account is required, can a debit card be used.  I read somewhere that credit cards are prohibited.

Question5: If a bank is not required, is there a way to get a certified check from the 401K?

Thanks in advance

Stone

Justin Windham · Answer

@Stone Jin

1. Yes

2. No, the insurance policy will just reflect the 401k trust ownership of the property.

3. Yes, you will open a bank account to hold the liquid assets of the 401k. A checking account at a bank is the final piece to have checkbook control. As trustee, you can write the checks for your 401k investments. These checks will be drawn on the checking account opened for your 401k trust.

4. Yes, you may use a debit card for 401k investments and expenses. Credit cards are generally prohibited because you are not allowed to extend credit to your plan or sign as guarantor on credit extended to your 401k based on the prohibited transaction rules.

Brian Eastman · Answer

@Stone Jin

You can use the BRRR method with a Solo 401k.  The amount of leverage you will be able to utilize will be slightly less, as the plan must have a non-recourse loan and those lenders typically want 30-40% down, but the principals still apply.

The 401k is a trust, and does not come with any built in banking.  The first thing you do with your plan once it has been authored is open a bank and/or brokerage account at the institution of your choosing.  Funds from a prior plan are then rolled directly to the new plan and deposited to this account.

You can use most banking features such as debit cards, wires, cashiers checks, etc.  You cannot get a credit card because you cannot put a personal guarantee on any 401k debt.

Stone Jin · Answer

@Justin Windham

Thank you for the info.

Justin Windham · Answer

@Stone Jin

As Brian mentioned, any loans your 401k takes must be non-recourse loans. These usually have a lower max LTV per the lender compared to more conventional loans, so you will be limited by the amount of funds you have for down payment. There is no regulatory limit to how many loans your 401k could have or how many properties with loans you invest the plan into.

Brian Eastman · Answer

Stone,

Not likely, though you would want to check with non-recourse lenders directly.  The borrower is the plan and the security is the property.  This is not a type of lending subject to the same limitations as loans using you as the qualifying party.

Stone Jin · Answer

@Justin Windham and @Brian Eastman

Thank you so much for the feedback.  Last question, if I wanted to leverage and get a mortgage using the 401K, is there a limit to how many I can do?

Got a self directed 401K, now what?

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