As soon as you decide to set up a solo 401k to invest in real estate, you should make yourself familiar with the non-recourse loan process. This process is also known as debt financing or leverage. This process is not that simple to understand unless you are familiar with the world of real estate. Understanding the basics of a solo 401k non-recourse loan obviously does not mean that you will have to wait to open solo 401k.
The Solo 401k Non-Recourse Loan Process
Below are the top 10 things you need to know regarding a solo 401k non-recourse loan:
- To make things extremely simple, what non-recourse loans actually means is that you can take loans (borrow) to invest in real estate. You can obtain these loans from investors, friends, banks etc.
- You can greatly increase the investment amount in your solo 401k by cleverly using debt financing or leveraging. In fact, the increase in the amount of available cash will surprise you
- The lenders don’t have the right to go after the balances, participants, or the trustees of solo 401k. This is also referred to as Solo K, self-directed solo 401k, individual 401 k, and self-directed 401 k.
- If there is an incident of foreclosure or loans, the lenders can only pursue property for repayment. They cannot go after any other asset that includes the participant’s or trustee’s cash or personal assets.
- Non-recourse loans only have the properties attached to them as assets. The solo 401k can only use these funds as collateral.
- Contrary to popular belief, non-recourse loans are not anything new. They have been present for numerous years. Their popularity started to climb in the early 2000s.
- There are certain banks from where you will be able to avail non-recourse loans. The North American saving banks is among one of the most famous banks where you can get a non-recourse loan. Alternatively, you can also obtain these loans through, investors, friends, family, or any company specializing in non-recourse loans.
- Despite the fact that you can structure these loans for any period, some banks set a 15 to 25-year payoff periods for these loans.
- You will find that your cash will free up in 401 k through non-recourse loans. You can use this cash for other different investments, which also includes purchases in real estate.
- Because conventional loans and non-recourse loans are polar opposites, the qualification requirements vary as well. Non-recourse lenders do not look at the things mentioned below since the loan is not to you but for solo 401k: (1) Instead of looking at your personal assets, the lender will only look at your 401k assets; (2) The lender will not consider your IRS tax returns; (3) They won’t verify your income; and (4) They won’t check your employment records.
If you are considering debt financing in a solo 401k make sure you understand the difference between recourse and non-recourse financing. The loan does not show on your credit report because you don’t have to share your social security number. Using the Solo 401k employer identification number is important for every loan document relevant to the non-recourse loans.