Anyone using a solo 401k for purchasing properties

Irving, TX · Member since 2016 · 6 posts · 2 votes

Hello, I have a solo 401k that I have not done much with but thought about using it to purchase buy and hold rental properties. I'm interested primarily in multi unit properties duplex to fourplex and would be looking to carry mortgages on any properties purchased. Any experience with this out there? Success stories? Horror stories? All welcome I'm just trying to get a better understanding of this beyond what I've read in books. Or if you know of any good CPA's in or around Dallas Texas knowledgeable about this topic would be great info as well. Thanks!

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Mindy JensenPro Member

BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes

@Rona Faison , an alternative to purchasing the properties could be lending with your Solo 401(k) to others. This is what I do with my Solo 401(k).

The way I do it, is I know a guy who is brilliant with real estate. He brings me deals, I read over what he's proposing, but really, I'm lending to the person more so than the deal. He's about as no-risk as you can get. You want to be super careful if you go this route, as this is still coming from your retirement account. Don't do second position loans, and don't lend to people who give you a bad feeling.

I am NOT looking for borrowers. Please do not send me a note asking if I have any money. I only lend to people I know and this is not a solicitation.

[email protected]Podcast Guest on Show #261

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Bernard ReiszPro Member
CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
9y
@Rona Faison Investing in buy-and-holds with a Solo 401k is an excellent strategy. Real estate investing within retirement plans can sometimes encounter the complexity of UBIT (Unrelated Business Income Tax), which you will not encounter if using a buy-and-hold strategy within a Solo 401k.
UBIT is payable by tax-advantaged accounts when there is UBTI (Unrelated Business Taxable Income), which can result from (a) engaging in an active business within the account or (b) using leverage within the account (known as UDFI - Unrelated Debt Financed Income). Rental income is not UBTI and 401(k)s are, generally, exempt from UDFI on real estate acquisition indebtedness.
You must, however, be aware of the prohibited transaction rules that provide for adverse tax consequences for transacting with disqualified persons. One implication of the rules is that you cannot personally guarantee an indebtedness taken on by the Solo 401k.
[email protected]
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Rona,
buying rental properties with your retirement account is very common, many of my clients and myself done this. If you wish to use leverage you have to use non-recourse financing because as a disqualified person you are prohibited from providing personal guarantee (that is the reason conventional loan will not work). There are only several nationwide lenders who offer such financing, I've put together a list which you may find helpful:
https://www.biggerpockets.com/blogs/2810/50272-lis...
Talk to each one so you can get yourself familiar with their terms as each is little different.
4 Reply
Rona Faison
OP
Irving, TX · Member since 2016 · 6 posts · 2 votes
9y
@Bernard Reisz @Dmitriy Fomichenko thanks so much for your replies. Very informative. I had no knowledge of the disqualified person limitation good to know since I definitely would like to use leverage to purchase. I'll check out the lender list.
0 Reply
Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Rona, please don't be offended, but the fact that you didn't know about the disqualified persona which is part of the prohibited transaction rules is unacceptable. This is a major oversight on the part of your Solo 401k provider for failing to educate you on these essential rules. Since you have a self-directed Solo 401k plan and direct your 401k investments it is crucial that you understand the rules. They are not difficult to understand and the violation of the rules will result in serious consequences and penalties. Please study this carefully:
https://www.irs.gov/retirement-plans/plan-particip...
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Michael Pulka
Morrisville, PA · Member since 2016 · 13 posts · 1 vote
9y
Bernard/Dmitriy
If I were to secure the Solo K in my name and use it to buy say the land. Then Later my wife (who is not a participant) in the same plan were to secure a conventional loan to build the structure, would this be allowed? Or would it somehow conflict with the disqualified person rule?
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
@Michael Pulka, what you propose is not going to work because your wife is a disqualified person to your 401k. Your 401k can not engage in ANY transaction with disqualified person. It (the 401k) can buy the land but it would have to pay for the building as well. Or enter into an agreement with someone who is not a disqualified person to build.
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Bernard ReiszPro Member
CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
9y
@Michael Pulka Agree with @Dmitriy Fomichenko
In general, most attempts to circumvent the prohibited transaction rules are not technically sound. When using retirement accounts to invest, it's best to make peace with the prohibited transaction rules and steer clear of questionable dealings. There are some - it's recommended that those be thoroughly investigated before proceeding with them.
[email protected]
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Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
9y
@Rona Faison , an alternative to purchasing the properties could be lending with your Solo 401(k) to others. This is what I do with my Solo 401(k).
The way I do it, is I know a guy who is brilliant with real estate. He brings me deals, I read over what he's proposing, but really, I'm lending to the person more so than the deal. He's about as no-risk as you can get. You want to be super careful if you go this route, as this is still coming from your retirement account. Don't do second position loans, and don't lend to people who give you a bad feeling.
I am NOT looking for borrowers. Please do not send me a note asking if I have any money. I only lend to people I know and this is not a solicitation.
[email protected]Podcast Guest on Show #261
5 Reply
Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Mindy has a great suggestion. Using your retirement account as a bank (being a private lender) is great strategy, majority of my retirement funds are deployed this way. It is lower risk, less work and returns are nice. I typically don't lend more than 60% LTV. And I also lend only to borrowers I know.
1 Reply
Rona Faison
OP
Irving, TX · Member since 2016 · 6 posts · 2 votes
9y
@Mindy Jensen thanks good strategy to consider definitely gets around the disqualified person challenge. Thanks for sharing it always good to have a different perspective.
0 Reply
Rona Faison
OP
Irving, TX · Member since 2016 · 6 posts · 2 votes
9y
@Dmitriy Fomichenko no offense taken. Not all sources are equal as we all know. Glad to have BiggerPockets to fill in the gaps. Thanks for the link.
1 Reply
Michael Lee
Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
9y
Hello and welcome to BP! if it will be used for retirement and you do not need any current income or no other benefit and willing to use non-recourse loans at 40 or 50% down payment that is probably be the way to go. now the rules mentioned are on SF-IRA's and the only difference between besides your relationship qualifications is that the yearly contributions are higher. There is no bar bending here and any income made must go back into the account. the tax on it will be waved until you reach retirement age. if you are going to make a transfer and do that it directly 2 weeks before you need it, In other words do not to the money when transfering.
Good luck to you!
1 Reply
Michael Lee
Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
9y
i meant to say do not touch in that last sentence.
0 Reply
Gary Alford
Investor · Norfolk, VA · Member since 2014 · 164 posts · 51 votes
9y
I've been talking to a few people I know about doing this that have thought of getting involved with me on deals. You guys have provided some great resources to pass on to people, thanks!
0 Reply
Ryan Wright
Investor · Pensacola, FL · Member since 2016 · 17 posts · 4 votes
9y
I recently purchased a property (to rent) with Solo 401K funds. That's okay as long as the proceeds go back into the 401K correct? House was $77K and 39K was used from Solo 401K. Are there problems with this transaction?
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Katherine S.
Investor · Grosse Pointe Shores, MI · Member since 2017 · 160 posts · 74 votes
9y
@Mindy Jensen Could you describe how you structure a deal using your solo 401k?
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Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
9y
Hi @Katherine S.
My friend calls me up and says, "I need $X for a deal, are you interested?" If I have funds, I say yes, and he gives me more information about what he's going to do, and the actual property info.
He sets up the title company and pays all those fees, the title company sends me wire instructions which I verify over the phone. (Very important, wire fraud is growing.) The title company creates the note and deed of trust, then sends everything over to be signed. (My borrower is across the country.)
He pays me 10% interest only for a year, then sends a big check once he is able to refinance into a portfolio loan with his local bank, who likes to see the property rented for a year before they refinance.
He sends payments made out to my 401(k) trust - I don't have the use of this money except to lend out in the future. It's just another investment that pays dividends.
Then he finds another deal and we do it all over again.
I have also invested in syndications this way.
[email protected]Podcast Guest on Show #261
2 Reply
Mike Bicho
Investor · Westport, MA · Member since 2016 · 87 posts · 9 votes
9y
@Dmitriy Fomichenko, what an awesome list you provided, Big Thank you!
1 Reply
John Gach
Buffalo, NY · Member since 2017 · 62 posts · 56 votes
9y
I don't mean to hi-jack, I'm sure this is a simple question I have to ask. Is it a problem to borrow 50% of my 401k to use as a down payment for say and FHA loan or conventional? Will the bank not like it? I found a MFH I'm interested in that I didn't save up cash to prepare for a down payment etc. thx
0 Reply
Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Originally posted by @Ryan Wright:

I recently purchased a property (to rent) with Solo 401K funds. That's okay as long as the proceeds go back into the 401K correct? House was $77K and 39K was used from Solo 401K. Are there problems with this transaction?
Ryan, you said that you used 39K from the Solo 401k. What about the rest of the money? Did you get a loan or how did you finance that amount?
0 Reply
Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Originally posted by @John Gach:
I don't mean to hi-jack, I'm sure this is a simple question I have to ask.
Is it a problem to borrow 50% of my 401k to use as a down payment for say and FHA loan or conventional?
Will the bank not like it?
I found a MFH I'm interested in that I didn't save up cash to prepare for a down payment etc.
John, first you need to check with your 401k plan administrator if loans are allowed. Next, check with the lender if they would be OK with that because in essence you are doing 100% financing (money you are borrowing from the 401k is a loan which you have to pay back and have to factor that amount).
0 Reply
Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Originally posted by @Mike Bicho:

@Dmitriy Fomichenko, what an awesome list you provided, Big Thank you!
You are welcome Mike! Glad you found it useful.
0 Reply
Justin WindhamPro Member
Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
9y
@Ryan Wright
Are you renting the property to non-disqualified persons? Also, did the other $38k come from a non-disqualified person? The answers to these 2 questions will help determine if there are any issues with your investment.
0 Reply
Ryan Wright
Investor · Pensacola, FL · Member since 2016 · 17 posts · 4 votes
9y
I will be renting to people that have no relation to me.
0 Reply
Justin WindhamPro Member
Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
9y
@Ryan Wright
Ok, that is good. For the purchase of the property, did your 401k obtain financing or partner with another party?
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