Real Estate Purchase Methods

Self-Directed Solo 401k Real Estate Purchase Methods

Ways to invest in real estate using a solo 401k

There are a number of methods that a self-directed 401k  also known as a Solo 401k can purchase/invest in real estate. The typical 4 (four) methods are as follows with each having its own set of rules:

  1. All Cash Purchase
  2. Use of Non-Recourse Loan (debt financing)
  3. Via a LLC
  4. Tenants in Common

Method 1: All Cash Purchase Solely Using Solo 401k Funds

Just using solo 401k funds to invest in real estate is the most common method. Under the all cash method, the solo 401k ends up owning the property free and clear. This all cash purchase method is further discussed CLICK HERE.

Method 2: Solo 401k Plan Real-Estate Investment Using a Non-Recourse Loan (Debt Financing)

Bank Loan for Solo 401k Investment

Third-Party Lenders

If debt financing is incorporated when investing solo 401k funds in real estate, the non-recourse loan can be obtained from banks and hard money lenders, but not from the solo 401k owner’s relatives that fall under the disqualified persons umbrella, or from any business owned by the solo 401k owner or her family members. Here is a list of disqualified persons.

Self-Directed 401k Disqualified Parties

The Solo 401k also must have enough liquid funds to make the ongoing non-recourse loan payments. For this reason, lenders typically only allow for a limited amount of leveraging.

Solo 401k Non-Recourse Loan Items to Consider

  • The solo 401k owner may not guarantee a loan to the Solo 401k, as the regulations do not permit it.
  • The loan to the solo 401k must be a non-recourse. This means the solo 401k owner cannot be held personally liable for the repayment of the loan.
  • The lender  cannot take recourse against any other assets of the Solo 401k, only the property purchased with the borrowed funds. It is for this reason that most lenders will only process loans for certain property types, and  a 65% to 70% maximum loan-to-value (LTV).
  • Since the non-recourse loan is to the solo 401k plan, the solo 401k plan still takes title to the property. Here is an example of how title is taken: Chad Lane, Trustee of Rayders Rock Trust

Debt Financing Solo 401k Bank Criteria

Making the Non-Recourse Loan Payments  

Because the non-recourse loan was made to the solo 401k plan, the loan must be paid by the solo 401k plan. Therefore, make sure to plan accordingly so that the solo 401k does not run into liquidity issues. Remember that solo 401k funds must also be used to cover ongoing property expenses such as the following:

  • mortgage
  • property taxes
  • insurance
  • miscellaneous expenses such as HOA dues and repairs

To learn more about the solo 401k non-recourse loan rules, VISIT HERE.

Method 3: Placing Solo 401k Plan Real-Estate Investment Using a Single Member LLC

While solo 401k real estate investments are typically made directly through the solo 401k plan, some investors will create an LLC  for placing real estate investments.  This solo 401k LLC investment method is further discussed CLICK HERE.

Solo 401k LLC

Method 4: Co-Investing Solo 401k Funds Through a Tenants in Common  Transaction

Another creative way to invest solo 401k funds is to partner with another investor or the solo 401k owner via a tenants in common (TIC) investment. This solo 401k  investment method is further discussed CLICK HERE.

Co Investing Solo 401k Funds

SOLO 401(K)