Using retirement funds for REI seems terrifying - HELP!

16 Replies

I'm looking for moral support as I consider moving funds from 403B accounts (heavily invested in equities) to Solo and self-direct accounts (mine and my husbands) for the purpose of acquiring buy and hold properties. I have secured the services of a reputable CPA with expertise in REI - so I know I am in good hands. However, on the psychological side, the thought of taking that money and using it for something that is new to me (although I am determined and committed) seems terrifying -- maybe just as terrifying as leaving it in the stock/bond market given that retirement is just around the corner.

Let's assume, for the sake of discussion, I can be successful at finding a solid deal or two... any words of advice on using money from Solo/self-directed accounts? Cautions? Any personal stories - good or bad?

I realize this is a very general question, lacking substance. But, any pep-talk or motivational words of wisdom would be appreciated!

@Patricia Miller

From the self-directed standpoint, a good understanding of the prohibited transaction rules is key. Having a provider who can help you develop that understanding can be very valuable. Most people focus on making good investments (and that is important as well) but when it comes to real estate in a self-directed IRA or 401k, you want to choose investments that will provide good returns among assets and transactions that are not prohibited. Once you know the rules and how to follow them, it really can be exciting to see all the possibilities you have for taking your retirement funds from a very limited account to one that allows you to acquire the assets this whole community was created for. Being able to combine high real estate returns with the tax advantages of a retirement can be a fantastic boost to your nest egg. I'm glad you found a good CPA to help.

@Patricia Miller

Make sure all funds flow through the retirement account. Make sure you don't perform any sweat equity work and don't use the property for personal use.

@Patricia Miller

I can completely understand your concerns - I had many of the same when I first started down this path about 4 years ago. We have owned our first property for about 3 years now and have added to that and will be adding more. 

A few things to be aware of;

  • Get your accounts ready WAY ahead of time/ It takes a while to get it all done. Our first one was from an auction and it was REALLY close to not working since we did not have things set up yet
  • IF you are going to borrow funds, make sure you know what kinds of properties will qualify. We found out that pre 1940s, converted houses and loans under 50K do NOT work with non-recourse lending - that is our target property here :-(
  • Make sure you understand the 'prohibited transaction rules well. You can learn a LOT on here about it as well as other sites - it just takes lots of time.
  • Make sure to plan to have reserves on hand. If something goes wrong such as a roof, furnaces, etc... you cant just add personal funds in. You either need to have reserves, be able to make your yearly contribution, or have some more funds to roll over.

But with all that said, I do not regret at all doing it at all. One of the main reasons I  chose this route instead of investing outside of retirement accounts is that is where 90%+ of my funds were sitting, and it is also a great diversification from all equities too.

Good Luck, Dan Dietz

@Patricia Miller I will second what Dan and others said. I have been using a SDIRA for real estate investing for 9 yrs now and it's worked for me. It did it for the same reasons to diversify out of the stock market and to get good income into the IRA. It will be argued by some on the forums that real estate held in a SDIRA doesn't get the tax advantages of holding it outside of one but that wasn't the reason I did it. Make sure your CPA really knows how to properly set it up or you could have trouble with the IRS. Nonrecourse loans are possible but not easy to get and you have to have a good relationship with a local bank to get one. If the loan is big enough (usually >$500,000) you can get one from an insurance company through a commercial mortgage broker. They are higher cost but longer term. Good Luck but persevere and it'll be worth it.

@Justin Windham @Dennis Tierney @Mark Nolan @Daniel Dietz All of this is enormously helpful and motivating. I will buckle down to get a little more background on some of these finer points with the goal of having everything set up for a purchase before year's end. 

NOTES TO SELF:
-prohibited transaction rules
-flowing all funds through SD account/no sweat equity/no personal use
-have everything set up well in advance before attempted purchase
-have reserves within SD accounts for unexpected expenses

Just after posting this, I sold equities from 403b accounts and moved them into same account money market funds - to ready them for transfer to SDIRA and SOLOk once SD accounts are set - so that I don't get cold feet if the market takes a dive and I decide to wait for a recovery before mobilizing funds.

Thanks a million, all!

@Patricia Miller FYI the trust company that holds my checkbook SDIRA  account is in the Denver area: Trust Company of America. They're easy to work with and not expensive.

@Mark Nolan

Question I had with using a solo 401k account is, if I buy a non-performing note and get it performing, is that considered sweat equity? 

Also, with having a solo 401k setup, to invest in real estate I am reading the docs in the 401k plan and it is setup with its own EIN number - so to confirm that would be the name of the entity that any real estate or notes purchased would be under correct.

@Chris Seveney you have other people, ( servicers) get the note re-performing. I have NPN notes in my SDIRA and I do not do anything on these ( self dealing is not a good idea) I also have a JV partner on a deal who used a SDIRA and I have to make all the servicer calls, record title, etc. @Patricia Miller go for it! I look at it like this, I had stocks but they wont perform as well as real estate! 

@Jay Raught - So what your saying is if I buy a non performing note and want to work out a deal with the homeowner that the servicing company I have does all of that include calling the homeowner? I was under the impression I would do that to call and get their story and see what we can work out then any modifications I would bring to the servicer. 

Originally posted by @Chris Seveney :
Question I had with using a solo 401k account is, if I buy a non-performing note and get it performing, is that considered sweat equity? 

Also, with having a solo 401k setup, to invest in real estate I am reading the docs in the 401k plan and it is setup with its own EIN number - so to confirm that would be the name of the entity that any real estate or notes purchased would be under correct.

Chris, are you selling the note after you make it performing? If you have a truly self-directed Solo 401k plan it comes with a trust that is established with the purpose of holding all assets of the 401k. The trust will have it's own unique name and EIN. Typically you as the trustee or the trust itself would take the title of the real estate or any other investments you acquire with your 401k. Your plan provider should be able to guide you through the intricacies of this.

I never talk to the home owners, the servicer does that. I am not licensed to collect debt. Everything goes through the servicer. You tell the servicer what you want and they reach out. They are your go between. You have to be careful not to self deal in situations. In some NPN situations you are not going to get any story from the borrower until you initiate foreclosure.

@Justin Wyndham Thank you SO MUCH for asking that question. I was about to reply that I didn't know the details behind "checkbook control" when I decided I should at least do a Google search. It took me to bankrate.com http://www.bankrate.com/finance/retirement/account...

Lacking confidence as a new investor as well as looking just now, for the first time, at how this all works (with or without the LLC and checkbook control) I feel like I am sprinting backwards. All of this seemed like a good idea, but, unless I am investing in killer deals, I see that I could be very disappointed in the results using these precious retirement funds. It also seems that the way to start off with REI is not to try every trick in the book on first deals.

Brief background... we were about 3 weeks from closing on our current home, anticipating some cash to begin investing with. The deal just fell through. I was really hoping to begin by year's end since I have start-up costs and wanted to legitimately apply those as business expenses come tax time. Plan B was to free up retirement funds in the event Plan A (house sale) fell apart. However, with a weak background in this area, it seems unwise to rush forward and do something that I know little about. Yes, I know there are ways "...with little or no money down." 

I am also realizing that a lot of my funds are in Roth IRAs (I am the one who would go the Solo K route, being self-employed) and the larger pot of money between my spouse and me, is what would go into the SD IRA, as he is full-time employed. I am seeing so many complex restrictions and fees here, as far as pursuing rental income goes.

More studying needed.

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