Rental Property Investor · Fort Wayne, IN · Member since 2014 · 251 posts · 129 votes
Hey everyone!,
I recently set up my Solo 401(k), and will soon be up and running! I am curious to know - what is your preference for your Real Estate dealings within your Solo 401(k)? Flips or Buy and Hold?
Investor · Caledonia, NY · Member since 2013 · 114 posts · 41 votes
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Hi Drew,
I am also in the process of setting up my Solo 401(k)! For my first purchase, I'm buying a non-performing note with a partner.
I am certainly not a tax expert, but Tom Wheelwright (the CPA and Rich Dad/Robert Kiyosaki advisor) advises to NEVER put one tax-advantaged strategy (such as rental property) into ANOTHER tax-advantaged strategy (an IRA or 401(k)).
There are a couple of reasons why... The beauty of rental properties include:
Tax deductions - but since IRAs and 401(k)s don't file or pay income tax, you lose the tax benefit if the property is held in one, and
Leverage - YOU can put a % down and get a mortgage for the remainder, but your 401(k) or IRA will have a MUCH harder time doing this!
So if you are trying to decide between a flip or a buy/hold in your 401(k), I would suggest the flip. BUT, there are other things you could do with your 401(k) too: hard money lending, buying vacant land for appreciation, buying notes...
If you REALLY want to go the buy/hold route, you could make yourself a loan from your 401(k) (being careful about the rules and limits), buy the property in your personal name, and make loan payments back to your 401(k). That way, you still get the tax advantages of the rental property AND you can use leverage (you don't have to pay 100% cash for the property).
Rental Property Investor · Fort Wayne, IN · Member since 2014 · 251 posts · 129 votes
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Actually, no I haven't! That's one niche I haven't researched very much. Any suggestions for good places to find intro information? (...in addition to the forums of course)
Investor · Caledonia, NY · Member since 2013 · 114 posts · 41 votes
11y
Hi Drew,
I am also in the process of setting up my Solo 401(k)! For my first purchase, I'm buying a non-performing note with a partner.
I am certainly not a tax expert, but Tom Wheelwright (the CPA and Rich Dad/Robert Kiyosaki advisor) advises to NEVER put one tax-advantaged strategy (such as rental property) into ANOTHER tax-advantaged strategy (an IRA or 401(k)).
There are a couple of reasons why... The beauty of rental properties include:
Tax deductions - but since IRAs and 401(k)s don't file or pay income tax, you lose the tax benefit if the property is held in one, and
Leverage - YOU can put a % down and get a mortgage for the remainder, but your 401(k) or IRA will have a MUCH harder time doing this!
So if you are trying to decide between a flip or a buy/hold in your 401(k), I would suggest the flip. BUT, there are other things you could do with your 401(k) too: hard money lending, buying vacant land for appreciation, buying notes...
If you REALLY want to go the buy/hold route, you could make yourself a loan from your 401(k) (being careful about the rules and limits), buy the property in your personal name, and make loan payments back to your 401(k). That way, you still get the tax advantages of the rental property AND you can use leverage (you don't have to pay 100% cash for the property).
@Tara Piantanida-Kelly - That's very insightful! Thx so much for the feedback! I have so many questions, I don't know where to start. I may have to follow up with you downstream.
I only mention Flips vs Holds as that's what I have done in the past. Have considered Hard money loans and Tax Liens (....but we have just passed the annual Tax Lien sales in most counties in my area). Haven't given any consideration to notes investing! I'll need to dig in.
Residential Real Estate Agent · Lake Havasu City, AZ · Member since 2014 · 89 posts · 9 votes
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I am the VP of Operations for Summerlin Asset Management. I can talk to you about NPLs and newly originated loans where you are the 1st lienholder if you'd like to get a hold of me.
Investor · Fort Wayne, IN · Member since 2009 · 391 posts · 257 votes
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Drew,
Something to bear in mind when investing in retirement accounts: If you do an active business like flipping you will be subject to the UBIT. This is not a show stopper just something you should be aware of as you analyze different options for your retirement account.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
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Drew,
Lots of interesting info you are getting here. My back round is that I currently own one buy-n-hold rental in my SDIRA, and am looking for more opportunities in either that or potential flips. My my goals are building wealth for retirement in a secure and high return fashion, and secondarily possibly current income with non SDIRA funds.
My comments are this;
1) when people say 'dont put one tax advantaged product within another tax advantaged product' *I* think that needs to be taken on an individual basis. What I mean is this; in MY case, 90% or so of my available funds are ALREADY in my IRA funds. So, with that in mind, if I can get say a 10% average return in stocks, or say a 15% return in real estate not figuring any depreciation benefits, why would I NOT put my funds into real estate? Even if the returns were the SAME, maybe the diversification of stocks AND real estate would still make sense?
2) At the same time, IF your funds are NOT already in a retirement type of vehicle, maybe it would most likely NOT makes sense to put them into one if your main goal was to invest in real estate.
I hope that makes some sense, just a little different way of looking at things.
Rental Property Investor · Fort Wayne, IN · Member since 2014 · 251 posts · 129 votes
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Dan - Thx so much for the insight! I appreciate hearing the other side of the "argument," for lack of the a better word. It sounds like you've found success in simply holding rentals in your SDIRA - Do you have others manage said properties so that you're not directly involved?
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
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Drew,
I did a lot of reading on that part of it when I set it up. I chose to do the 'tenant management' myself. I know there are arguments on both sides if it is 'legal' or not, and I read enough to feel safe doing it. I also have a great mentor in a relative who works for me and has about a dozen rentals himself, with a great track record as far as the quality and turnover of them goes.
We do hire any 'work' such as painting, carpet cleaning, repairs, etc..... I know there has been talk on here and other places I read that seem to make pretty good case for an owner being able to do 'maintenance' but NOT 'improvements'. It is a bit hard to explain the logic of it, but a summary is you are not suppose to 'make money from your labor' within your SDIRA - meaning, in my interpretation , that you can say fix screens, paint rooms, etc... that do not IMPROVE your property, but not say replace windows, upgrade from say wood siding to metal or add a room etc... as you would be 'making a return in value' from your work.
We have not chosen to go there, partially as we have not had any of those types of things yet, but just food for thought.
Rental Property Investor · Fort Wayne, IN · Member since 2014 · 251 posts · 129 votes
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Very interesting! In all honesty, I haven't yet done the thorough research required to understand the appropriate level of personal involvement. Honestly, from a true "investor" standpoint, I'd like to minimize my involvement, but @Daniel Dietz's comments have caused me to think about it. Good stuff! Thx!
Rental Property Investor · Yorba Linda, CA · Member since 2012 · 336 posts · 69 votes
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Drew, there is UBIT in a self directed IRA, but if you qualify for a solo 401K you by pass that tax issue. The solo 401K with check book control should be every investors goal, you just have to qualify for it by having a business that generates income and have no full time employees. You can still be a W2 employee yourself, just have a business on the side.
A Solo 401(k) is not subject to the UDFI taxation that applies in an IRA to returns generated from leverage such as a mortgage.
If an IRA or a Solo 401(k) engages in a trade or business on a regular repeated basis (such as flipping more than one house), then the gains from that business activity are taxed as UBTI (Unrelated Business Taxable Income). A 401k is NOT EXEMPT from this type of taxation.
That said, you can flip houses, pay the UBTI taxation and still walk away with superior returns. I'd rather gross 30% return on a flip and net 20% after UBTI taxes than simply earn 7-10% on a passive rental.
Rental Property Investor · Fort Wayne, IN · Member since 2014 · 251 posts · 129 votes
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Just as a follow-up.....
....my Solo 401(k) is up and running! (Thanks @Dmitriy Fomichenko !) I started with being a hard money lender, and actually sent out my first loan today with a group I have a 3 yer track record and plenty of confidence in. It's set to be a PHENOMENAL return.
As I continue to let it grow passively from others, I intend to explore some of the aforementioned options.....primarily Notes and likely buy and holds. MAYBE Tax leins when October rolls around again.
My information is correct, but I do admit it lacked specificity. I was referring to leverage when I made the comment. Brian is absolutely correct when you are running a business in your solo401K, the UBTI tax does come into play.
Brian, thanks for making this distinction, I certainly do not want to mislead anyone.
Drew, good luck on those loans, a solo401K is a great vehicle to use when lending, especially if you have check book control.
I would not self manage an SDIRA property. There is not a case directly on this, but the code is clear that you can not benefit from your IRA and vise versa. If your investment can't carry professional management, how good of an investment is it.
If audited and it was determined that your management was a prohibited transaction, it would blow up your IRA, disallow it and suddenly become all taxable.
Rental Property Investor · Fort Wayne, IN · Member since 2014 · 251 posts · 129 votes
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Thanks @David Krulac ....I'm in agreement with you. I respect others' opinion/desire to manage buy and holds themselves, but I am not that brave. I'll have my PM handle it. Besides....if I manage it myself, I've simply created another job for myself (regardless of how noninvasive it may prove to be).
Real Estate Investor · State College , PA · Member since 2009 · 594 posts · 173 votes
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@David Krulac
David are you referring to checkbook IRAs. If so I am glad you raised the point because I hear 2 different sides to them. Are there cases of the folks getting slammed by the IRS for their use. I am talking about reasonable use by reasonable folks. Where are the pitfalls. I am getting ready to roll my retirement funds into something. Still not quite sure what. One of the big issues I am facing is how to buy on the court steps using IRA money. Seems the only way would be to use one of these checkbook IRAs.
David are you referring to checkbook IRAs. If so I am glad you raised the point because I hear 2 different sides to them. Are there cases of the folks getting slammed by the IRS for their use. I am talking about reasonable use by reasonable folks. Where are the pitfalls. I am getting ready to roll my retirement funds into something. Still not quite sure what. One of the big issues I am facing is how to buy on the court steps using IRA money. Seems the only way would be to use one of these checkbook IRAs.
Information Technology · West Chester, PA · Member since 2014 · 40 posts · 20 votes
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Creating and holding a note for a rental property/flip through your 401k or SDIRA in which the property is in your name sounds really illegal. Am I missing something here?
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
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@Account Closed
It you personally or through an entity own a rental property, your IRA can't touch anything to do with your non-IRA property. Check out the IRS list of prohibited transactions.
HOWEVER, if you have a rental property owned by your IRA, then your IRA can sell that property and take a note, that is still owned by your IRS and NOT you.
Transactions between you and your IRA is a NO NO. Transactions between your self and yourself is OK. And Transactions between your IRA and your IRA are ok.
Before you do anything check with your qualified Attorney and CPA, and I am neither and I am not giving either legal or account ting advise.