Investor · SAN FRANCISCO, CA - California · Member since 2014 · 78 posts · 32 votes
Hi everyone,
I am working with partners to purchase SFRs, rehab them, and then sell them. I would provide the bulk of the capital through my Solo 401k plan. I've been told by my Solo 401k guru that I can do this only if my name is not on title, but rather, if I act as the bank and lend money to the buyers. That is, they would buy it with a loan from me, they would rehab, market it, sell it, and we would figure out an equitable way to split the profits.
Are there any draft documents out there that people can point me to that could provide a platform for us to create a legal agreement for this kind of partnering? I'm sure that we'll end up hiring a real estate attorney to make sure that all of the legal verbiage is correct, but I'd love to see what other people have used in the past!
Real Estate Broker · Chicago, IL · Member since 2015 · 147 posts · 73 votes
10y
Steven, I'm no expert in this area, but from what I understand, that's just one option, and it sounds like one of the harder options.
To be able to self-direct your 401(k), any investment needs to be at arms-length. Basically, you're not allowed to use it as you would a personal bank account.
I also think you left out a very crucial piece of information. What's the relationship between you and your partners? Are they your friends and you've reached a verbal agree to that you're partners, but you're providing most of the funding because you have it? Or, have you and your partners formed a legal entity? Or entered into some other type of contract?
I'd get this last part figured out because it will also play a role in what or how you do anything.
Here are some of the main items to include on the promissory note.
After you have drawn up the note or if the borrower has composed it, review the note to make sure it conforms to your Solo 401k requirements and is in compliance with the regulations.
Confirm that the lender is your Solo 401k (it should read as follows, for example: Smith Do Solo 401k Trust)
Sign all documents as trustee of your Solo 401k
Make investment using funds from your Solo 401k checking account
When note payments commence, deposit all payments to your Solo 401k checking account (therefore, all payments need to be made payable to your Solo 401k)
Here are some of the main items to include on the promissory note.
After you have drawn up the note or if the borrower has composed it, review the note to make sure it conforms to your Solo 401k requirements and is in compliance with the regulations.
Confirm that the lender is your Solo 401k (it should read as follows, for example: Smith Do Solo 401k Trust)
Sign all documents as trustee of your Solo 401k
Make investment using funds from your Solo 401k checking account
When note payments commence, deposit all payments to your Solo 401k checking account (therefore, all payments need to be made payable to your Solo 401k)
Mark,
Thanks so much for the detailed instructions! They are very helpful, as it's easy to overlook one of these steps.
Thanks Michael, Mark and Zoran for the heads-up. I should clarify. I am planning outside of my 401k to partner with folks on the ground in a market outside of California to establish an LLC to purchase, rehab, and sell properties. I would put up the majority of the funding, but we would purchase the houses together, with all parties on title. We would agree to a split of the profits. I have purchased houses with these folks before as part of my buy/hold strategy (one of them is a RE agent).
However, I would also like to put some of my 401k funds into play in a similar scenario. In this case, I was told that it would be wiser just to act as the bank to fund the project, and not get on title, since getting on title and then selling properties could get me in hot water with the IRS.
If I understand you right, Michael, then I could/would have two LLC partnerships--one in my name with them, and one with my retirement account and them. Is that right?
In any event, I won't do anything until I speak with a RE attorney!