Real Estate Consultant · NH · Member since 2019 · 27 posts · 5 votes
Can anyone speak to buying investment property using a self directed 401K? My understanding is the cash flow must go back into the 401K and it must be a non recourse loan. love to get some input / feedback
Your understanding is correct: all income from the investment (rental property or otherwise) owned by the 401k belongs to the 401k. Likewise, all expenses directly related to the investment must be paid from the 401k.
Yes, if you wish to finance the purchase of the property - loan must be non-recourse. Here is a list of lenders offering such loans:
Rental property can be a great way to secure and grow your retirement savings, especially if you already understand the asset class.
The key thing to understand is that with a self-directed IRA, you are not buying the property with retirement money. The retirement plan is investing in property, instead of investing in something like shares of Amazon or Ford. All expenses of acquisition and maintenance are paid by the plan, and all income from rents or the future sale of property are returned to the plan. Being inside the 401(k), that income is tax-sheltered.
A Solo 401(k) can use mortgage financing, but it must be non-recourse. You cannot benefit from or provide benefit to the plan, so you cannot pledge a personal guarantee on the plan's debt.
Your understanding is correct: all income from the investment (rental property or otherwise) owned by the 401k belongs to the 401k. Likewise, all expenses directly related to the investment must be paid from the 401k.
Yes, if you wish to finance the purchase of the property - loan must be non-recourse. Here is a list of lenders offering such loans:
Using a Solo 401k to purchase investment property can be a great way to improve the performance of your retirement funds. You'll just need to be aware of the prohibited transaction rules and as a result, the 401k's investment does not equate to you investing into real estate personally. Retirement investment returns go back to the retirement account (and receive the tax benefits of the retirement account). We've seen these self-directed investment strategies work well in addition to smart investments made outside of retirement funds to get the best of both worlds.
As others have mentioned, if you would like to use financing for your 401k investments the loan must be non-recourse because of the prohibited transaction rules. These rules prevent the Solo 401k participant (as well as other disqualified persons such as some family members) from transacting with or benefitting from the investments of the Solo 401k. Those rules also prevent any extensions of credit between a disqualified person and the Solo 401k. This is what makes the non-recourse loan a requirement. It is common for these loans to be limited to 60-70% of the value of the property.