Family funding w/ private money

Baton Rouge, Louisiana
Personal Finance
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Family funding w/ private money

Shannon Carter
Baton Rouge, LA · Member since 2023 · 4 posts · 0 votes

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

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Brett SynickyPro Member
Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 874 posts · 498 votes
2y
Quote from @Rick Pozos:

Self directed IRAs are great. BUT Dad can NOT lend you money from his self directed IRA. There are prohibited people that the IRA can not do business with. Parents and kids can not borrow from, buy from or sell to parents and vice versa.

You can get an aunt or uncle, cousin, friend from work, Dads friend from work. Just not lineal: parents, kids, grand parents, grand kids or spouses of the above.

 If dad qualifies for a Solo401k (legitimate self employment activity and no w2 employees other than spouse working more than 500 hours annually) he can take a participant loan up to 50k or 50% whichever is less and use that for any purpose including loaning money to a prohibited party.   BUT - there's the current 50k loan outstanding.  @Shannon Carter I commented on your other post also - is the current 401k with a current employer?  

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  • Charles Carillo
    Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes
    2y

    @Shannon Carter

    He can set up a self-directed 401k, and they do not have to pay fees (except for the self-directed custodian fees). Your attorney can set up his SD 401k as the lender and create a formal mortgage for each property. 

    Since you now have some completed projects under your belt. I would start reaching out to private lenders in your area. You might be able to find some at local real estate events. Years back, I found a private lender on Craigslist.

    0Reply
  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    2y

    Self directed IRAs are great. BUT Dad can NOT lend you money from his self directed IRA. There are prohibited people that the IRA can not do business with. Parents and kids can not borrow from, buy from or sell to parents and vice versa.

    You can get an aunt or uncle, cousin, friend from work, Dads friend from work. Just not lineal: parents, kids, grand parents, grand kids or spouses of the above.

    1Reply
  • Brett SynickyPro Member
    Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 874 posts · 498 votes
    2y
    Quote from @Rick Pozos:

    Self directed IRAs are great. BUT Dad can NOT lend you money from his self directed IRA. There are prohibited people that the IRA can not do business with. Parents and kids can not borrow from, buy from or sell to parents and vice versa.

    You can get an aunt or uncle, cousin, friend from work, Dads friend from work. Just not lineal: parents, kids, grand parents, grand kids or spouses of the above.

     If dad qualifies for a Solo401k (legitimate self employment activity and no w2 employees other than spouse working more than 500 hours annually) he can take a participant loan up to 50k or 50% whichever is less and use that for any purpose including loaning money to a prohibited party.   BUT - there's the current 50k loan outstanding.  @Shannon Carter I commented on your other post also - is the current 401k with a current employer?  

    2Reply
  • Shannon Dennis
    Member since 2020 · 19 posts · 4 votes
    2y

    .

    0Reply
  • Shannon Dennis
    Member since 2020 · 19 posts · 4 votes
    2y
    Quote from @Rick Pozos:

    Self directed IRAs are great. BUT Dad can NOT lend you money from his self directed IRA. There are prohibited people that the IRA can not do business with. Parents and kids can not borrow from, buy from or sell to parents and vice versa.

    You can get an aunt or uncle, cousin, friend from work, Dads friend from work. Just not lineal: parents, kids, grand parents, grand kids or spouses of the above.


     Even if he’s lending to my llc ? 

    0Reply
  • Shannon Dennis
    Member since 2020 · 19 posts · 4 votes
    2y
    Quote from @Brett Synicky:
    Quote from @Rick Pozos:

    Self directed IRAs are great. BUT Dad can NOT lend you money from his self directed IRA. There are prohibited people that the IRA can not do business with. Parents and kids can not borrow from, buy from or sell to parents and vice versa

    You can get an aunt or uncle, cousin, friend from work, Dads friend from work. Just not lineal: parents, kids, grand parents, grand kids or spouses of the above.

     If dad qualifies for a Solo401k (legitimate self employment activity and no w2 employees other than spouse working more than 500 hours annually) he can take a participant loan up to 50k or 50% whichever is less and use that for any purpose including loaning money to a prohibited party.   BUT - there's the current 50k loan outstanding.  @Shannon Carter I commented on your other post also - is the current 401k with a current employer?  


    Yes it is , I was actually able to set him up a

    Traditional IRA with the same company.
    no penalty since he’s 62 and pay no taxes long as

    We put the money back in 60 days. So it

    Should work out I can just pay the 401k back with my personal lines of credit and that can hold me

    Until I refi with Dscr , that is my plan.
    would like your opinion if I am on the right track

    With this .

    0Reply
  • Shannon Dennis
    Member since 2020 · 19 posts · 4 votes
    2y
    Quote from @Charles Carillo:

    @Shannon Carter

    He can set up a self-directed 401k, and they do not have to pay fees (except for the self-directed custodian fees). Your attorney can set up his SD 401k as the lender and create a formal mortgage for each property. 

    Since you now have some completed projects under your belt. I would start reaching out to private lenders in your area. You might be able to find some at local real estate events. Years back, I found a private lender on Craigslist.


     Thank you, my goal was to actually have him be my private lender. I want both of us to profit 

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y
    Quote from @Shannon Carter:

    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


     If dad wants to take it out, it would be taxed. you can convert it to Roth but it does not make sense as you will pay taxes on the conversion. 

    7e investments53 Reviews
    WebsiteView Page
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  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    2y

    @Shannon Dennis who owns the LLC? YOU do, so he is still dealing with you, prohibited transaction. If he pulls money out of the ira or takes a loan, then he can do whatever he wants with the money, but then its not ira money anymore.

    0Reply
  • Shannon Dennis
    Member since 2020 · 19 posts · 4 votes
    2y
    Quote from @Rick Pozos:

    @Shannon Dennis who owns the LLC? YOU do, so he is still dealing with you, prohibited transaction. If he pulls money out of the ira or takes a loan, then he can do whatever he wants with the money, but then its not ira money anymore.

    Okay, thought I had found a loophole. Lol guess not. Thanks 
    0Reply
  • Christie Gahan
    Investor · Hillsboro, OR · Member since 2016 · 310 posts · 153 votes
    2y

    For the sake of discussion ....  I'm gonna take your Dad's side.

    Your Dad should not take the money out. Why?  Losing that tax deferred status is a big deal.  If Dad left the $50k in a tax deferrd acct invested in mutual funds that have a similar rate of return to the last 100 years ....  it should double aprox every 7 or 8 years.  He could live another 30 years so his money could double four times.  Starting at $50k ....First, doubles to $100k .... Second, doubles to $200k, Third, doubles to $400k and Fourth doubles to $800k .   Hmmm.  That's starting to look like real money.   : )     Tax deferred or Tax free compounded growth is no joke.   If he were to take the money out, he just wouldn't make this kind of traction.  Everytime he makes $100 , $50 goes to taxes.   

    Shannon: You have been doing well and your Dad has prob had fun watching you.  ( I would)  But, think about the experienced investors that post here.  Candidly, 1 in 10 deals will be stinkers.  Even if you do everything right.  Squatters, insurance hikes, zoning changes, supply chain issues .....  No body is immune from this junk.  How much of your Dad's retirement savings do you really want tied up in this?  10% ?   25% ?   

    I love self directed accounts but they are not going to be much help here.  I love that you are taking action and learning.   If Dad wants to move forward with the lending .... he  could form his own business.  Charge you points and fees and 12% or more.  The "profit" goes in to his new Self Directed Solo 401k .... and he starts a new tax deferred account.  But, we are getting a little paperwork heavy ......   If you are not afraid of the Lawyer/Accountant factor .... your Dad could partner with you on a deal with a lot of first year deapprectioation to offset some of the taxes from the 401k w/drawal.

    It's time to get a really good accountant that loves strategy.  Not a tax preparer.  You want an accountant that specializes in small business / self employed.  Take Dad.  Have him/her run the numbers.  Awesome investment in your future.  Best of Luck!

    1Reply
  • Christie Gahan
    Investor · Hillsboro, OR · Member since 2016 · 310 posts · 153 votes
    2y

    P.S.  Private money lenders get paid upfront.  : )

    0Reply
  • Jeffrey DixonPro Member
    Irvine, CA · Member since 2014 · 94 posts · 44 votes
    2y

    If your dad moved money to a Self-Directed IRA, he cannot loan you money from that IRA. That would be a prohibited transaction.

    1Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    2y
    Quote from @Shannon Carter:

    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



    My partner transferred a significant amount of money out of a 401K into an SDIRA and became a lender.  So it's a good idea, but before you advise your father to do it I recommend you research the rules around lending to family members.  I'm not an expert, I just know there are some rules that you should research before pulling the trigger.  
    312-681-7487
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