Self Directed 401K

Enjoy the benefits of owning real estate inside your retirement plan.

It is not widely known but since 1974 individuals have been able use their self-directed 401K and IRA plans to invest in real estate. Investors are not limited to Wall Street investments such as stocks, bonds, index funds and mutual funds. There are many benefits to owning real estate inside your retirement plan. The property is insured against catastrophic loss. The investor controls the asset. The real estate can be sold without capital gains tax. You can buy and sell inside your plan without the need for a 1031 exchange.  There are differences between a 401K and an IRA plan when it comes to investing in real estate. Be aware there are prohibited transactions and disqualified individuals you cannot invest with.

Case Study 1

Investor purchases a small home for cash using funds from their self directed 401K plan. A licensed bonded contractor is hired to rehab the home and all expenses are paid from the self directed 401K plan. The investor plans to rent the home with all rental payments coming back into the 401K plan. A home buyer contacts the investor and expresses an interest to purchase the home. Buyer has some credit issues, so investor agrees to sells the home to the buyer using a land sales contract with a balloon payment due in 5 years. Buyer makes monthly payments into a collection escrow account which are then automatically deposited to the 401K plan account. Investor receives a solid down payment and 5.5% interest on the monthly payments. At the end of the 5 years, buyer has restored their credit and obtains a refinance, paying off the land sales contract. All proceeds from the sale go back into the 401K plan. Investor is ready to look for another real estate opportunity.

Case Study 2

Investor agrees to make a loan to a couple of rehab experts using their 401K plan. Investor signs a note and trust deed which is recorded against the property in first position as a lien. Loan to value is 50%. Investor charges 9% interest during the term of the loan. Once the property is sold, the investor receives the loan proceeds plus 9% interest. Worst case scenario if the rehab experts should default on their loan, the investor could foreclose on the property and sell it for a return of the loan and likely a tidy profit. The loan was made at a 50% loan to value. Meaning the value of the property was twice the value of the loan. Loaning money from your retirement account requires that you know the borrower, their track record and that you know the real estate and real estate market. 

 It is important to work with a knowledgeable professional prior to establishing a self-directed retirement account to invest in real estate. If you would like more information about self directed 401K, and whether this type of investment would be a good fit for you, please contact us.