You can invest your Solo 401k funds in the real estates’ sector like commercial buildings, homes or land if you are a trustee of a Self-Directed Solo 401k. You can as well partner with your solo 401k to invest in a bigger real estate, commonly known as tenancy-in-common ownership. A third-party member, who is not the solo 401k owner or their family members can take a loan to finance a real estate investment, which is known as debt financing.
The following steps are followed when using a Solo 401k to invest in real estate:
- Determine the real estate investment size and if your Solo 401k funds will be enough or a debt finance or a tenancy-in-common ownership will be required. Debt financing is also known as a non-recourse loan.
- Choose the type of investment property, whether you would invest in homes, apartment buildings, land or commercial buildings.
- If you would need to borrow, investigate on a suitable lender and agree on the terms of the loan.
- Contact the seller to make an offer.
- Have an attorney or a Title Company to help draw up the documents for the real estate purchase.
- Explain to your third-party, the attorney that your Solo 401k is the one doing the purchase or you are using it to purchase the investment and hence will be listed as the buyer.
You as the trustee of a Solo 401k should keep the following important documents after purchasing a real estate investment:
- A copy of the Purchase Contract
- A copy of the Settlement Agreement
- A copy of the Escrow Instructions
- A copy of the Preliminary (unrecorded) Deed
- A copy of the loan document in case of a debt financing
- You will then sign and forward the documents as a trustee of the Solo 401k, to the escrow agent with a check from its checking account for the purchase.
You should always consult your solo 401k provider to give you a document allowing you as a business owner, to be the trustee of your own solo 401k investment. If you allow the provider to be the custodian, he will keep the real estate documents and use his own procedures on the investment and thus charge asset holding fees.
Tenancy-in-common ownership allows you to invest in a real estate using your personal funds together with the Solo 401k funds. You will have a percentage of the property and the solo 401k will have the other percentage, the income and expenses will also be apportioned according to the ownership percentage. The investment can also be entered with a family member like a spouse, the ownership should, however, be documented and income and expenses be apportioned accordingly.
Debt financing or non-recourse loan allows you to take a loan to purchase an investment on real estate. However, if the Solo 401k cannot pay back the loan, the lender could take the property used to secure the loan, but will not affect other assets not listed as loan security. You should, therefore, ensure that you specify the asset to secure the loan when taking a non-recourse loan.