Buying my existing investment property with self-directed IRA

Buying & Selling Real Estate
8yFollow

Buying my existing investment property with self-directed IRA

Usman U.
Colorado Springs, CO · Member since 2018 · 5 posts · 1 vote

Hello all,

I've been reviewing these forums and have been doing a lot of thinking of paying off my existing investment property with my 401k funds.

Current State:

1. Investment property has 150k mortgage left. Valued around 350k.

2. 401k has a total of about 400k. I've been doing my own investments in the market at around 20-30% returns per year. I'm a bit nervous about the next 2-3 years in the market, so I'd rather use the existing funds to just pay off my investment property (that I own).

3. With the pay off and the extra 150k cash balance (I've lived it in 2 out of the past 5 years), I could use that to pay down my current mortgage of my primary residence heavily, and ultimately my goal is to pay off my primary residence by the end of this year.

I want to do this for the following reasons:

1. Be debt free by the end of the year.

2. Have the 401k self directed own the investment property. It gives around 2k per month return. I know I lose out on deductions for personal, but I honestly don't care b/c I'd rather just have the 401k flat out own it and collect as a retirement.

3. The extra 150k personal profit won't be taxed due to capital gains < 500k and I've lived in the property for 2/5 years. The existing tenant / management company won't be affected b/c I'm still technically the owner/landlord. The extra 150k money can make a huge dent into my current mortgage primary residence and will help me pay of primary residence mortgage this year.

Is this a dumb idea? I am happy investing in the market, and have been doing very well over the years picking stocks/funds, but I'd rather just flat out own my investment property and 'cash out' of the market and into the investment property. 

I don't really understand the nuances on how this would all work so just looking for any advice before proceeding.

0Reply
30 views

Most Popular Reply

Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
8y

Usman, 

I invest in short term notes (up to 1 year), long term notes (3-5 years, but there are also options for 15 years), and note fund. Here is an example of a short term note investment that I did recently: local investor wanted to buy distressed property, he could not get a loan from the bank because of the property condition. I was the lender, the terms of the loan were 12% interest and LTV was 65% (he put his own money into the deal 35%). To me this was pretty low risk investment because if he defaults on the payments I would foreclose and take the property that is worth significantly more than my original investment.

Actually one of my notes in the past had defaulted so I ended up with the property. I still own that property, it is worth about 40% more than note amount, and the rent amount is 80% higher than the loan payments I used to receive. If you do it correctly - that is what the worse case scenario looks like. 

I also invest in note fund with @Dave Van Horn, they do all the work and pay me 12%. 

2Reply
See this reply in the discussion

6 Replies

Jump to latestLatest
  • Usman U.
    OP
    Colorado Springs, CO · Member since 2018 · 5 posts · 1 vote
    8y

    Also, investment property has a sweet mortgage deal. 2.5% 15 year note, and only about 8 years left. About 4k / year in mortgage interest. So i'd save roughly 32k in interest if I paid off property. 

    I know I can beat 2.5% in my 401k account in the market, but I'll have a lot of funds remaining that I can continue to invest in the market, and will also have enough in the self-directed IRA to take care of expenses of the rental property such as taxes, management company fees, miscellaneous repairs, condo fees etc. and at least 6 months of lack of tenant expenses.

    0Reply
  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    8y

    @Usman U.

    What you are trying to do cannot be accomplished because it is prohibited for either a self-directed 401(k) or an IRA to purchase an asset such as real estate that you already own.

    Specifically, this would violate the following prohibited transaction rule:

    See the following for more on the prohibited transaction rules. 

    https://www.irs.gov/retirement-plans/retirement-pl...

    0Reply
  • Usman U.
    OP
    Colorado Springs, CO · Member since 2018 · 5 posts · 1 vote
    8y

    Ok, that answers my question and I appreciate it!

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    8y

    Usman,

    even if it was possible to pay off the loan on your personal residence using your retirement funds it would not be wise financial move for the following reasons:

    1) You lose mortgage interest deduction you currently have

    2) The interest rate on your primary mortgage is probably below 5% - poor investment of your retirement funds when you can use your 401k funds in much more effective ways. If this 401k is with previous employer you can roll it over into self-directed IRA and then use it as a bank by investing in notes. Here is what you can expect by investing this way: secured investment by deed or trust, LTV ~60% (very low risk), interest rate 10-12%.

    3) If you also factor that your investment can grow tax-deferred the difference in just 10-15 years can be hundreds of thousands of dollars. 

    0Reply
  • Usman U.
    OP
    Colorado Springs, CO · Member since 2018 · 5 posts · 1 vote
    8y

    @Dmitriy Fomichenko Interesting points. Well, I can't even perform this, but let me follow-up with you.

    1. Losing mortgage interest - the counter argument is I save that "interest" to the bank to almost 40k. I don't technically deduct it today, as it's a wash b/c of the rental coming in; so, if I were to be able to do what I wanted to do, then I would actually have to declare my rental as all gains and pay more for taxes.

    2. You've really piqued my interest here on LTV @ 10-12%. I've been using fundrise.com and get some returns, but can you explain more secured investment by deed or trust?

    3. Agreed.

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    8y

    Usman, 

    I invest in short term notes (up to 1 year), long term notes (3-5 years, but there are also options for 15 years), and note fund. Here is an example of a short term note investment that I did recently: local investor wanted to buy distressed property, he could not get a loan from the bank because of the property condition. I was the lender, the terms of the loan were 12% interest and LTV was 65% (he put his own money into the deal 35%). To me this was pretty low risk investment because if he defaults on the payments I would foreclose and take the property that is worth significantly more than my original investment.

    Actually one of my notes in the past had defaulted so I ended up with the property. I still own that property, it is worth about 40% more than note amount, and the rent amount is 80% higher than the loan payments I used to receive. If you do it correctly - that is what the worse case scenario looks like. 

    I also invest in note fund with @Dave Van Horn, they do all the work and pay me 12%. 

    2Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free