Solo 401k and personal funds - Arms length question
I'm interested in lending both solo401K funds as well as personal funds to the same borrower. He's a flipper. He wants to record one deed for his personal residence as opposed to recording a different deed each time he acquires a different property. I've verified there is enough equity for my pennies.
If two deeds against his property are recorded, one in my name and one in the name of the solo401K, would this negate the arms length rule?
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#3 Private Lending & Conventional Mortgage Advice Contributor
- Lender
- Los Angeles, CA
Strictly speaking it won't negate anything, but I think you really mean self-dealing, not arms length. You're allowed to partner with your retirement plan, Purnell.
Before everyone jumps all over loaning to an owner occupant, it's legal. The use of the money, in this case, is for a business purpose – the real criterion. Dodd-Frank won't apply. Talk to a good lending attorney, but you'll need a document from the borrower describing the use of the money in detail (flipping). This document, and your note, should indicate that the money will not be used for personal, household, or family use.
In sum, you can do all of this, but why?
"He wants to record one deed for his personal residence as opposed to recording a different deed each time he acquires a different property."
I assume you'll charge and annual interest rate? Your proposed arrangement will prevent you from charging points with each deal, unless you have an arrangement in the note to charge these periodically. More importantly, it will also prevent you from approving each flip.
With the shortage of good deals, my observation is that many rehabbers are taking some unnecessary (i.e. dangerous) risks. Whether they like it or not, you always want your borrower to be financial healthy and your arrangement precludes your approval of his deals. Foreclosing on a flip is one thing. Could you foreclose on his personal residence?
What's wrong with recording a different deed each time he acquires a property? You'll use a broker to do this and the fees and inconvenience should be minimal.
Your money, your rules, Purnell.