Where do you put money that you use to invest?

4 Replies

My father has over $100k in 401k account with a local broker and is not happy with the performance. He wants to use the money to do fix and flips. What kind of account would be ideal for this money to be used for the purchase of real estate and purchases during the rehab project?

Thanks

@Kevin Hurney

Your father needs to look into a self-directed IRA option. I cannot make a specific recommendation or endorsement in this forum. You can definitely ask recommendations from people on the forums who use SD IRAs and also syndicators who have invested with money from SD custodians.

The Simple Dollar has a quick point here on some of the perils of SD IRAs: http://www.thesimpledollar.com/questions-about-sel...

Often considered a gold mine from the 'raising private money' side of the real estate world, I recommend great care in what you choose to invest within a self-directed IRA. Some would call real estate a passive investment, but I have never had an ETF or mutual fund give me a call to replace a toilet. The reality is that REI has expanded near term risk, and that is very costly when it's your retirement at stake. The rewards are great, but I would not ever, ever, ever do my first deal with someone with retirement money.

My view of an IRA is the money that is there even if all my active endeavors (my business, real estate) fail on me. For this reason, it's mostly passive investments. Many people on the forums do not care for Wall St. investment products, and that is certainly their prerogative, I will not stoke that debate. As someone who has no issue with low/no load index funds, I think it's the best place for retirement money in most cases.

@Kevin,

The right type of account will depend on your father's situation.

If his goal is simply to boost the ROI of his retirement portfolio, but keep very much within the realm of a tax-sheltered plan, then a checkbook IRA LLC - or Solo 401k if he is self-employed - would be the right vehicle.

Flipping houses with a self directed plan can be financially rewarding, but all of that reward goes into the plan, and there are significant concerns about keeping all plan activities at arm's length. Your dad could essentially be a fund manager and deploy his IRA into flip transactions, but he could not be hand's on involved in the flipping or receive any compensation.

Further, there are potential tax implications if his self directed IRA or Solo 401k flips houses on a regular or repeated basis and therefore is considered to be conducting a trade or business. Hard money lending with the plan might be a good alternative.

If your father wants to be hands on and create spendable income a Rollover as Business Startup program would be an option to consider.

I like what @Trevor Ewen noted about being careful to understand the risk/reward component of any decision involving retirement funds.  Do some good homework and speak with both professionals who offer these services and your father's licensed tax advisor before moving forward with any plan.

Two more alternatives...

We have an investor who works with us in making funds available to rehabbers we support that buy, rehab, and sell HUD properties.
What he does is supply the EMD downpayment and receives a flat interest rate when the property closes, which is paid back into his self-directed IRA. The money is secured via a lien, it solves time crunch problem of having funds in place, and everyone wins.

The other would be to "joint venture" with investors where at the end of the rehab and sale process, there is a split of the profits. You Dad's role in this would be to use his good credit to obtain a hard money loan to purchase and rehab. It is secured by the real estate, usually has a short time committment, and worst case... he owns a house.