Solo 401K and Hard Money

12 Replies

Has anyone used a Solo 401K to fund down payment on a home and hard money to finance the rest of the purchase and rehab of a fix/flip property?  I understand that you can only use non-recourse loan with the Solo 401K.  If the hard money lender bases their financing solely on the asset, then this would be considered non-recourse, right?

@Leo B.

while I have not done this personally, some of my clients have. Yes you are correct that the loan to 401k must be non-recourse. You are also correct that many hard money lenders will do non-recourse loans. 

To add, @Leo B. , non-recourse is not defined by how the lender bases their financing, it's defined by whether they require you to sign a personal guarantee or not.

No personal guarantee=non-recourse. Requiring a personal guarantee becomes a recourse loan and you are correct, you cannot sign one of these if the borrower is your Solo 401k plan.

Some lenders, both banks and HML's, will absolutely not loan money without a personal guarantee. Period. Others, perhaps those who are a bit more diversified and are willing accept the additional risk, which I think is minimal, will. Just ask around.

Following are some banks that our clients have used for non-recourse loans to their self-directed solo 401k plans.

Also, it is worth noting that flipping real estate in a solo 401k plan may subject the plan to UBIT; therefore, you may want consider using a ROBS as a rollover as business startup plan is not subject to UBIT.

@Mark Nolan

 Thanks Mark for the input.  I was under the impression I would be exempt from UBIT when using a Solo 401K.  Is this if my business claimed under the solo plan is for flipping real estate?

@Leo B.

Folks often confuse UBIT and UDFI (which is a subset of UBIT).

UBIT (Unrelated Business Income Tax) applies when a tax exempt entity engages in a trade or business on a regular or repeated basis.  Flipping houses is considered such an activity, and the gains would be subject to UBIT.

UDFI taxation (Unrelated Debt Financed Income) applies when a tax exempt entity uses debt financing such as a non-recourse mortgage. The percentage of the income that the entity receives derived from the borrowed funds is taxed. UDFI does not apply to 401k and other qualified plans, but does apply to an IRA.

We lend to LLCs and self-directed IRAs/401ks.  For sure you can borrow with a private lender, but banks will not write a non-recourse loan

Originally posted by @Darren Eady :

We lend to LLCs and self-directed IRAs/401ks.  For sure you can borrow with a private lender, but banks will not write a non-recourse loan

Darren, while most banks will not do a non-recourse loan, there are some bank that specialize in these type of loan. So as long as the property qualifies it is not difficult to get a loan like that from one of those banks. 

The solo 401k can also process a non-recourse loan from private investors not just banks. 

There are lending institutions, as previously mentioned, that will lend on a non-recourse basis. If you would like to borrow through your IRA or 401k, you should approach one of these institutions first. Your IRA or 401k custodian will probably have a list for you with loan characteristics. If you cannot get a loan through one of these institutions, private money will also work for you. Let me know if I can help further. I've done over 4000 loans to SDIRA/SD401k or LLCs.

@Brian Eastman

Thanks Brian for clarifying.  This is very helpful.  How would a ROBS help defer taxes on the gains?  I've read that a ROBS account fees are higher than a solo plan.

I've contacted a number of non-recourse lenders.  The minimum down payments are between 30-40% and I am looking for alternatives that require a lower down payment (20%).  Hence, the post.

@Leo B.

In a Solo 401k or IRA, the gains are tax sheltered back to the retirement plan and you must remain entirely at arms length. In the case of flipping, there is the trust tax of UBTI at the transaction level. This model is comparable to having a 401k invested in the stock market, but with different choices for investments. It is all about future retirement savings.

In the ROBS plan, the retirement plan purchases shares of an operating C Corporation.  You can be an owner-operator of the corporation, be hands-on with the business activities (i.e. real estate development/re-development) and draw a salary.

All income to the C corp will be taxed at corporate tax rates, which top out at about 25% in most scenarios for this type of activity. Additionally, any income you draw as salary will be taxed to you - but, that is the case when you take distributions from the IRA, so kind of a wash in a certain sense.

So, the key difference is WHY are you investing?  

If you are investing for the future of your retirement, then a Solo 401k is better.  Sure, you will have the high tax rate on flips, but over time you will accumulate capital and have a mix of passive income such as rentals or hard money loans or (dare I say it?) stocks that are not taxed.  You can create a real nice nest egg.

If you are really looking at that retirement plan as a means to put yourself in the business of flipping houses, then the ROBS plan can make a lot of sense.  

And, if you do well with the ROBS plan, you can have the best of both worlds.  Once you start spinning off some real cash, you don't just take a paycheck, but you also make hefty profit sharing contributions back into the retirement plan that owns your corporation and make tax-sheltered investments with that.

Darren.....we are looking for private investors to supplement the personal funds we have in our flips. Please contact me if you provide this type of funding. Looking for a $2Mm line. Thank you.

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