Using 401k withdrawal like private money
Hello Bp,
I would like some feedback on this creative financing I am trying to do.
I have done 2 successful flips and also have one 1 buy and hold.
Now that I have a little skin in the game I’d like to ask my dad who is 62, with a 6 figure 401k to allow me to use $50,000 to invest in more real estate. I’d like to pay him as if he’s my private money lender after each deal.
He’s funded my deals by taking out a loan from his 401k and I would make the biweekly loan payments , and pay him a fee once I sold my flips and refinanced my last property. That way we both made profit.
But we can’t do another 401k loan for another 6 months .
My question is , what steps would I need to take if he does the 50k withdrawal instead of the loan? Since he's 62 I know we can withdraw with no penalty, but is there a way to avoid taxes ? Like transferring the funds to a SDIRA or Roth IRA ?
Thanks for the feedback
Also, I'd like to maybe do 2 deals at a time this year if the opportunity presents itself, should I start building relationships with HML's ? Or am I on the right track by avoiding fees and points and keep partnering with my dad. Thanks
Hes going to have to pay the income taxes on the withdrawal, plain and simple. Though if you can make him money, and keep snowballing that money, it will be more then worth it to him to do so.
I think its better to partner with your dad and give him the interest and points instead of a stranger, this way you both prosper. Maybe he can purchase equity too instead of just issuing the loan, or both. Say youll give him 5% equity/profit if he loans to you for 2 points and 8% or 1 point and 5% , whatever you guys feel comfortable doing.
Thanks for your response , I was thinking I could just pay the income tax (reimburse him) so I can continue to use the funds, as I increase my own capital and we both profit like you mentioned.
Is there a certain type of IRA that will allow me to do this, or will I be paying income tax for EVERY withdrawal when I go to close on another property again and again ?
@Shannon Dennis The only IRA option for investing in alternative assets is either a sep IRA or Self Directed IRA and both have IRS rules regarding probited parties and transactions. Prohibited parties are spouse, child and their spouse, and parents. Think of a vertical line. Can't go up or down. Uncle or brother is ok, cousin or friend is fine. In your case it's a non-starter with father and daughter.
@Shannon Dennis take dad out of the equation. You can open an SDIRA and invest in real estate and the only tax you would have is the UBIT generated on the UDFI generated by the income on financed portion of the real estate. There's no UBIT tax on financed real estate in a SOLO 401k.