Nonrecourse Loan Debt for Self-Directed Solo 401k Investment
Can I make a non recourse loan to my solo 401k to complete a transaction? The loan will be short term in nature.
I'm looking to purchase a promissory note with the funds and currently, there is not enough liquidity to complete the transaction.
1. You cannot use nonrecourse loans for note investing through a solo 401k. Nonrecourse funds can only be used for a real estate purchase.
2. The rules do not permit the solo 401k owner to loan funds to his or her own solo 401k. The following banks will lend to a solo 401k for investing in real estate not notes.
Also, here is some general rules regarding non-recourse loans to a solo 401k plan.
- Non-recourse loan means that your Solo 401k can borrow (take a loan) from a bank, friend or investor for investing in real estate.
- Through the use of leverage or debt financing, the solo 401k greatly increases its available cash amount for investing.
- Non-recourse means that the lender cannot go after the Solo 401k trustee/participant or the balances of the Solo 401k (also referred to as self-directed 401k, individual 401k, self-directed solo 401k or Solo k).
- If loan default or foreclosure occurs, the lender can only go after the property for repayment, not any other asset of your solo 401k including cash or the Solo 401k trustee/participant’s personal assets.
- Since the property is the only asset attached to the non-recourse loan, these are the only funds that the solo 401k can use as collateral for loan.
- Non-recourse loans in connection with 401ks are not new but only started becoming popular in the early 2000’s.
- Non-recourse loans can be obtained through certain banks as well as hard-money lenders (e.g., whether friend, investor, or company specializing in non-recourse loans). The following bigger pockets page also references some lenders.
- While non-recourse loans can be structured for any term period, banks that specialize in them generally set 15 to 25 year loan payoff periods.
- Non-recourse loan frees up cash in Solo 401k for use in other investments including additional real estate purchases because only some of the solo 401k funds are used towards the real estate purchase that is utilizing the non-recourse loan.
- Since a non-recourse loan is quite different from a conventional loan, the qualification requirements are different in that the non recourse lender (assuming you are going through a bank) will NOT look at the following since the loan is to your Solo 401k, not you:
- Will not check to see if you are employed
- Will not check your income
- Will not look at your W-2’s
- Will not look at your tax returns
- Will only look at solo 401k assets not your personal assets
- Since non-recourse loan is to Solo 401k, the loan does not appear on your credit report since your social security number is not used. Therefore, it is important to use the Solo 401k EIN (employer identification number) on all loan documents in connection with non-recourse loan.
For more information regarding the solo 401k nonrecourse loan rules VISIT HERE.