Can I use my 401 K to invest in realestate

Question

Can anyone tell me how I can use my 401k to finance rental property. are there private lenders that will use a 401k minus the penalties to provide you financing.

its the only cash I have to take the leap.

Thanks

Tim

Joseph Firmin · Answer

There are many ways! You can transfer it into a Self-Directed IRA (SDIRA) and then use those funds to invest passively in syndication deals, your own active investments and other real estate deals. You can also get a loan from your 401K and buy a property with the cash and repay yourself the interest and principal back into your 401K each month. Check out many of the SDIRA firms out there and have a chat with them to see how they can assist. Advanta IRA, IRA Services, Equity Trust, etc. Let me know if you have any other questions! Best of luck @Tim Lovell!

Tim Lovell · Answer

Patricia the amount you pay back. Does the rental income cover that payment? Are you cash positive

Randy Ritchie · Answer

I have a friend who has used  multiple times.

https://www.theentrustgroup.com/

Patricia Taveras · Answer

@Tim Lovell

I am employed full time. I have taken out 401k loans to help me purchase 3 of my properties. I was able to borrow 50% of my 401k funds which I pay back to my 401k over 5 years from my paycheck. I have used 401k loans as a down payment for a house, as cash to purchase a double wide, and for rehab money for my different purchases.  Just am idea.

George Blower · Answer

1) See more info re non-recourse lenders at the following post: https://www.biggerpockets.com/member-blogs/9552/70408-ira-and-solo-401k-non-recourse-lenders

2) Given my understanding that you are looking to invest your retirement funds in debt-financed real estate, you may wish to consider opening a Solo 401k if you are eligible (i.e. self-employed with no employees) because unlike a Self-directedIRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income taxPlease see more info below:

There are certain advantages of setting up a Solo 401k instead of a Self-directed IRA (if you are eligible to do so). Please see more below:

Solo 401k vs Self-directed IRA:

A Solo 401k has several advantages as compared to a Self-Directed IRA including the following which specifically apply to your situation:

• Unlike a Self-directed IRA, you can have the account for the Solo 401k at a bank or brokerage that does not charge maintenance fees and where you will have checkbook control.
• Unlike a Self-directed IRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income tax

General Considerations Re Investing Retirement Funds in Real Estate:

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

2. If you are self-employed with no employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and if you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, you can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. In either case, you must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. In either case, you should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

Considerations in Setting up a Solo 401k to invest in real estate:

1. First, you must be eligible to set up a Solo 401k. In order to be eligible, you must be self-employed (e.g. providing goods and/or services through your personal effort), reporting self-employment activity on your taxes (e.g. Schedule C if you a sole proprietor) & you do not have any w-2 employees working for your self-employed business or otherwise.

2. If you are self-employed with no employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. All of the income and expenses will need to flow in and out of the retirement account.

4. If you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira...

5. You can't live on the property or otherwise use it for personal use.

6. You can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. You must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. You should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).

Considerations in Choosing a Solo 401k Provider:

1. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).

2. You may wish to confirm that the new 401k provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).

3. You may wish to confirm that the new 401k provider will handle the ongoing compliance support such as any required 5500 filing (e.g. 5500-ez for a one-participant plan with assets in excess of $250,000), any required tax reporting (e.g. 1099-r in the event of a distribution or in-plan Roth conversion), mandatory plan updates and amendments, etc.

4. If you might take a 401k loan, you may wish to confirm that the new 401k provider will prepare the required 401k participant loan documents.

Roni E. · Answer

I would look at if you are truly committed to investing in real estate or something else at doing a solo 401k.

Can I use my 401 K to invest in realestate

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