Using 401k to Finance a Property

I would also like to find out more about financing with 401K

JIM

Old 401Ks can be converted into self directed IRAs. When you use a self directed IRA, if you buy RE, all proceeds must remain within the IRA, and if you need financing you can only use a non recourse loan (a loan that is backed by the collateral of the real estate only; they can't personally go after the IRA or you if there's a default). Usually when you buy RE for yourself with your self directed IRA, you take title as 'Equity Trust Company (the neutral party holding your money) FBO (for Benefit of) Your Name). There can be tax implications if you get outside financing as well. There is strictly no SELF dealing with an IRA (or certain relatives.. IE, you can't buy your brother's home with your IRA). That doesn't mean you can't buy RE with a self directed IRA for yourself, but it can not benefit you personally; only the IRA for your retirement (considered an entity separate from yourself).

There's also another strategy to use with a self directed IRA. A self directed IRA can be used to hold a note. SO, lets say another investor has money in their self directed IRA. That person can become a private money lender to you backed by that real estate; OR it can also be an unsecured note, which is RISKIER (not collateralized). If BOTH of you have a self directed IRA, what you can do is lend the $ in your IRA at an interest rate to your fellow REI, and then they on the other hand will do the same for you. (NOTE: When doing private money collateralized by RE, the lender MUST be in the same STATE as the real estate). So, if you each had 50K sitting in an IRA, you can each lend one another 50K from your self directed IRA to invest in a property at say 15% interest. Then, you'll each be building the amount of your IRAs by the interest rate, AND have a private money loan.

The 3rd thing you can do is to take a loan out against a CURRENT 401K (which cannot be put into a self directed IRA) and pay yourself back interest into your 401K (while repaying the loan). That will give you use of the money. Some people recommend against this, but it is possible to do. Do your research, and check your company's policies for taking loans against your 401K (or 457K if you're with the government).

Hope you can use one of these 3 techniques!

Tammy,

Should have used Strategy #2 on my last two deals. But I have a question about that. Don't these notes have to be backed by Real Estate investments? In other words, a property located and identified as an investment and then the $$$ sent to a title company for closing.
I don't know why I am asking the question, I know you do your homework! I should just thank you ahead of time for the idea.

Roger Schafer
Jaguar Investments

You certainly CAN have them backed by RE, and that is most advisable! That would be the equivalent of being a private lender using your IRA, and then the other REI being a private lender for you. And the best way to transfer money to someone is through escrow or title. You can also make the private loan transferable to another property with the borrower's permission.

But, you CAN also just do a personal loan to someone pledging your own signature i/o a property.

One thing to note about a self directed IRA, check the custodian for the IRA. There are some self directed IRAs that only allow you to use their 'approved' list of investments in certain CDs , stocks bonds and mutual funds. Equity Trust Company is a company that allows you to truly direct. There are a couple of others. But generally, if a self directed IRA is run by a bank or brokerage firm, they are not 'true' self directed IRA custodians.

Tammy,

Thanks for the info. I just can't get over how helpful all the DGers are,
its amazing.

Jim Kendrick

This is financing I have used with real estate. Typically they will let you borrow half the amount you have in you 401K and you can set the repayment terms (the interest is usually already set). I know it was available to me, but I don't know if it is available on all 401K accounts. Check with your provider on the 401K account and see what they will allow. It is a creative way to get money for real estate.

posted on the wrong thread!

make sure your ##'s are right and remember 'Self Directed IRA' and as Greg said pay it back w/interest...its still your money