Self Directed 401k - Brrrr

15 Replies

Is BRRRR investing one of the prohibited transactions in a self directed 401k?

I’m sure others will chime in but my understanding is that it depends. I believe you can use it to loan to someone else so they can do a BRRRR as long as they are not yourself or a prohibited person, husband, wife, parents, kids, siblings.

@Kevin R.

An IRA can apply the BRRRR model and it can be a powerful strategy to grow your IRA savings.

The key principle with the IRA is keeping all transactions at arm's length and exclusively for the benefit of the IRA.

The IRA purchases the property.

The IRA hires vendors to do the rehab. You or a disqualified party to your IRA cannot add value to the IRA through the provision of services such as being the plan's handyman.

The IRA is the landlord to a renter. You can property manage in an administrative fashion or the IRA can hire a property manager.

The refinancing loan must be non-recourse, meaning no personal guarantee from you. In the more conservative underwriting space of a non-recourse loan, the IRA will pull somewhat less out of the property than you could personally with lower LTV limits. Similarly, the use of debt-financing in an IRA creates exposure to a generally small tax known as UDFI. You will want to study this concept of non-recourse lending in an IRA and plan accordingly. Even with these limits, it is still the ability to pull a portion of the value that has been added to the property out as capital to begin the next project, which is the principle behind BRRRR and a great means to accelerate growth.

We've had clients deploying this strategy long before Brandon and his team here at BP coined the phrase.

@Brian Eastman

Thanks for the detailed response. Very helpful.

Do you have a preference for SD IRA or 401k? Is there a huge difference?

@Kevin R.

A Solo 401k can have some advantages over an IRA, but in the end it all comes down to fit. The Solo 401(k) requires that you be self-employed with no full time employees for as long as you operate the plan. If that is your situation, great. If not, then the IRA will be the better option.

@Kevin R.

Compared to an IRA, Solo 401k contributions limits are roughly 10x higher and there is no custodial requirement for the 401k. You can take participant loans from the 401k, you don't need the additional expense and administration of an LLC to have checkbook control, and there is a built in-Roth component. A spouse can also participate in the same plan, there are additional tax benefits compared to an IRA, and there is generally greater privacy. Finally, the plans are often quicker to setup and cost less money over time especially compared to most IRA LLCs.

A lot of people consider the Solo 401k to be significantly better, but it really depends on your use. If you are not eligible for a Solo 401k, there is no decision to make and a self-directed IRA can be a great investment tool. If you are eligible, the Solo 401k will most likely provide at least some additional benefit for you.

I understand the requirements for a Solo 401k, but are you only able to contribute earnings from the business you have setup? Or can you contribute additional capital from say a savings account to reach the max contribution limits? Also, can you deposit funds that are made out to you personally (as part of earnings from your business)?

@Darren Budahn

Good question. You can only make contribution from net self-employment income not your personal savings.

See the following:

https://www.irs.gov/retirement-plans/one-participant-401k-plans

Kevin, regarding the "refinance" part:

First, the loan must be non-recourse (because you are considered to be a "disqualified person" to your 401k you are prohibited from providing personal guarantee, that's why conventional financing won't work). There are only select few lenders who offer such loans, here is a list that I've put together:

https://www.biggerpockets.com/blogs/2810/50272-lis...

Second, many lender will only use 'purchase price' as the value of the property, not the current appraised value if you are refinancing few months after acquiring property. Some private lenders however might be more flexible but you will most likely end up paying more. The bottom line is that if you find the right property and have the right team in place this may work for you.

@Brian Eastman @Dmitriy Fomichenko I am about to close on such a property now in my SD 401k. It needs significatn rehab (down to the studs in some rooms). How involved can I be in the rehab? Can I visit the property and meet with the contractor? Can I provide design direction? Can I pick out finishes? (and is picking from ones that contractor presents different vs researching myself and saying 'i want this tile and this fixture'? Just want to make sure I don't cross the line (which I know is fuzzy anyhow!) This is for BRRRR strategy vs flip.

@Elizabeth Goff

You should consult with your Solo 401(k) provider for questions about the operation of the plan they provided for you.

The IRS rules are not as specific as "you can do this and may not do that" when it comes to real estate investing in your retirement plan.  The rules state that you may not add value to the plan via the provision of goods or services.

Generally speaking, administering investments by selecting vendors and overseeing that they fulfill your requirements should not create any issues.

@Elizabeth Goff

I second the recommendation to check with your Solo 401k provider. Typically, a Solo 401k trustee is able to provide decision-making input as long as they are not actually performing work in scenarios such as what you describe.

@Elizabeth Goff

The rule of thumb is that the trustee of the solo 401k can perform managerial services provide he or she is not compensated. Who is your solo 401k plan provider?

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