Different Ways A Solo 401k Plan Can Invest In Real Estate

As a real estate investor, you are most likely to know that the Solo 401k retirement plan is allowed to invest in real estate. However, are you aware of all the different ways your Solo 401k plan can participate in real estate investing? As a flexible investment vehicle, a Solo 401k account can play different roles in real estate: as an investor, a lender, and also a borrower. Let’s take a look at the many different ways a Self-employed Solo 401k can get involved in real estate:

As a real estate investor

Unlike traditional retirement plans, the self-directed Solo 401k option is allowed by the IRS to invest in real estate assets. This gives the plan holder the freedom to invest their retirement savings in the field of their choice. Many choose to purchase residential or commercial properties using their Solo 401k funds, and collect rental payments directly to their retirement account. The only restrictions applied are that the self-directed retirement account cannot deal with any disqualified person and that all income and expenses have to be paid to and from the account itself. For a list of disqualified persons, please see this page. Other than that, plan owners are free to choose any type of property and even raw land.

As a lender

Since it is allowed to invest in any type of real estate assets, the Solo 401k account can also be a private lender. Most investors take advantage of the fact that the Solo 401k plan is allowed to invest in assets like mortgage notes and trust deeds. With this option, the self-directed Solo 401k can lend money to other investors, secure the loan with a deed to the property, and collect interest and principal payments. The passive nature of these investments makes them a good fit for a retirement portfolio.

In a private lending transaction such as trust deeds and mortgage notes, typically, the Solo 401k plan cannot lend to the plan owner, or any other disqualified person.

However, aside from its investment, the Solo 401k plan owner is also allowed to borrow from the plan for any reason. The loan amount cannot exceed the lesser of $50,000 or 50% of the plan value. Using the loan option, a plan owner can use the borrowed amount for a down payment or help pay for his mortgage later. The typical loan term is 5 years, but if the loan is used to purchase a primary residence for the plan owner, it can be extended to 15 years.

Here is another perk: if a plan owner borrows from his Solo 401k, he will pay back the interest and principal to this self-directed retirement fund instead of any other mortgage banks or lenders.

As a borrower

The Solo 401k plan also has the option of borrowing money to invest in real estate. This is made possible with non-recourse loans, which doesn’t require the plan owner to act as a guarantor of the loan. With non-recourse loans, the Solo 401k plan can obtain financing on its own, using the investment property as collateral.

While this option is also available with an IRA account, it will trigger the Unrelated Business Income Tax (UBIT). This tax, however, doesn’t apply to a Solo 401k account. With the tax-free leverage, the Solo 401k plan has a great competitive advantage in real estate investing.