Using 401K Financing for Investment Properties
Many people save for retirement through various savings accounts such as a 401K. However, the problem with these accounts is that the funds have to remain in the account until a certain time otherwise there are negative repercussions. For business owners that work either independently or only with his or her spouse, there is an option called a Solo 401K. This retirement plan is ideal for real estate investors because it can be used to finance real estate investments. There are three main options available for how to do the 401K financing.
Use the 401K as the Bank
The 401K can be thought of as a private lender or bank. The way this would work is that the retirement plan lends out the funds. It then passively collects principal and interest payments. A huge benefit of using 401K financing in this scenario is that the retirement plan is a tax-free zone. So, the interest collected is either tax-deferred or tax-free. This can increase the profit that is earned exponentially. It is just important to do the due diligence and make sure the money is lent to a non-disqualified person and that it is a wise investment.
Another option for 401K financing is to use the plan to invest directly into real estate. A self-directed plan has very few, if any, limits on what type of investment can be made. The funds are available to purchase land, commercial and residential properties. One thing to be careful of is that the plan is the investor. This means that the owner of the plan is only acting in behalf of the plan. This can get tricky in terms of maintenance and repairs. All funds most come from the 401K and not from the personal money of the plan owner.
Use Non-Recourse Financing
In the event that the plan owner would like to invest directly but the plan does not have sufficient funds, there are other options available. The last resort option is to do non-recourse financing. This type of loan allows the property to be used as collateral. The only security for the loan is the property which means that no guarantor is necessary. This keeps it in accordance with 401K rulings.
Using 401K financing is a great option for real estate investors. It allows invested money to be invested again. This allows a person’s money to continue to accumulate while he or she is preparing for a life of retirement.