The self-directed Solo 401k retirement plan offers powerful advantages for real estate investing. The Individual k or Solo 401k is an IRS-qualified retirement plan that has been simplified for the self-employed and small business owner. The structure of the plan gives participants more options than a traditional 401k. The Solo 401k’s investment capability, direct access, loan feature, and tax benefits make it the perfect vehicle for investing in real estate.
Unlimited Investment Capability
The Solo 401k allows investment into non-traditional assets, such as real estate. Most retirement plans only allow investment into traditional assets, such as stocks, bonds, and mutual funds. The Solo 401k can be invested into both traditional and non-traditional assets.
Investing in real estate with the Solo 401k is fully permissible under the Employee Retirement Income Security Act (ERISA) of 1974. The only exception is an investment with a disqualified person.
The Solo 401k can be invested in the following types of real estate:
- Residential property
- Commercial property
- Foreclosures
- Single family rental property
- Apartments
- Townhomes and condominiums
- Mobile homes
- Manufactured homes
- Mortgage notes
- Tax deeds
- Tax liens
- Raw land
The process of investing in real estate with the Solo 401k can be very similar to purchasing a property personally. After establishing the Solo 401k, the plan is ready to be invested into real estate.
Once a property is identified and due diligence is conducted, the property is purchased in the name of the Solo 401k plan. The title to the property and all transaction documents are in the name of the plan. As trustee of the plan, the participant signs all documents in the name of the Solo 401k. All expenses must be paid from the Solo 401k plan, and all income and gains from the investment must be returned to the Solo 401k account.
If the Solo 401k account does not have sufficient funds to purchase the property, there are two possible options. First, the Solo 401k can purchase an interest in the property in partnership with another non-disqualified person. For example, the Solo 401k can be used to purchase 50% of the property with a non-disqualified partner purchasing the remaining 50%. The investment from the Solo 401k account would go directly into the property. All property expenses would be divided between partners, in relation to the percentage of ownership. All income or gain from the property would also be divided between the partners in relation to the percentage of ownership in the property.
A second option to purchasing a property with the Solo 401k is obtaining a non-recourse loan. A non-recourse loan is the only form of debt financing that can be used in conjunction with the Solo 401k. A recourse loan is considered a prohibited transaction.
Fast, Direct Access
Investments using the Solo 401k do not require custodian consent. The participant is trustee of the plan and can direct funds without the delays and additional fees of obtaining custodian consent. Decisions can be made and acted upon quickly. This gives an advantage in real estate investments, in which time is of the essence.
Loan Feature
The Solo 401k also contains a loan feature that allows the participant to borrow from the account at any time and for any purpose. The Solo 401k loan can be made for up to 50% of the account or $50,000, whichever is less. These loans can be used for any purpose, such as investment expenses- repairs, upgrades, and renovations.
Tax Benefits
Using the Solo 401k to purchase real estate enables tax-free or tax-deferred gains and income. Profits from Solo 401k real estate investments return to the account to continue growing sheltered from taxes. All income and gains generated by the investment produce tax-deferred profits.
The Solo 401k retirement plan offers many advantages, making it the perfect vehicle for real estate investments. Its unlimited investment capability, direct access to funds, loan feature, and tax benefits give real estate investors the power and freedom to do what they do best – invest in real estate.
