OK I really want to get moving

[John Dombrowski]

Hi All,

So I have been around BP for a year now soaking up all I can. I am 56 I finally lost my IT job of 19 years so I really want to try and get started with this RE gig. I have about $200K in my 401K that I need some help to roll it over into a solo401K or something so I can use to invest but from what I am finding out is that I can't do that unless I can show some self employment income. I also have about $40K of severance pay coming in too but I will probably need that to live on for a while.

If I can get access to my 401K funds I would maybe be interested in buying something out of state in the NW Indiana area because that is where i grew up but came to San Diego in 1989.

I will still probably get another regular job for a while but I don't think I can make anywhere near what I was making when I got laid off. But we also plan to retire somewhere in Colorado in about 5 more years so maybe something out there too would be of interest.

Anyway, if any of you out there on BP can help me get started with my RE investing I would love to hear from you.

Thanks and lets get this party started.... :-)

--JD

[Frank L. Bridges]

Hi @John Dombrowski. I just saw this thread. Sorry you lost your job.  

The use of a self-directed "Solo(k)" plan may be the correct vehicle for you, but you are right, you do need to have a sole proprietorship or LLC in which you (and potentially your spouse) are the only employee, that is throwing off earned income to you. If you are looking for another job with a new employer instead of starting your own business, the Solo(k) is not really an option.

If you are interested in the real estate market only to enhance the investments in your retirement account, and you don't plan to work for your self otherwise, the self-directed IRA is probably your best option. You can establish an IRA with a qualified custodian, transfer your 401(k) money at the former employer over to the new account (don't do a 60-day rollover, do a direct trustee to custodian transfer), and then instruct them to make the investment. It's worth it to do the due diligence to choose the right custodian. According to a recent GAO report there are approximately 26 qualified custodians to choose from who provide various services and permit specific types of investments.

If you are planning to buy and hold property, you can do it directly in the self-directed retirement account (I call all types of self-directed retirement "SDRAs"). Owing the properties directly in your SDRA means you have to instruct the custodian to write checks to vendors (like the plumber, contractors, etc.) and your tenants have to pay rent directly to the custodian. All the transactions can end up costing extra fees from the custodian and be a bit inconvenient for you. You have to compare the costs and charges.

Alternatively, you can establish a single member LLC to be owned by your SDRA in which you are the manager and then manage the investments owned by the LLC yourself. That's what people refer to as a "check book LLC."

There are, of course, disadvantages to a check book LLC. For example:

• There are restrictions on what you can do as manager of your SDRA's LLC to avoid prohibited transactions (e.g., services you can provide as manager are limited, avoid reimbursing yourself for expenses and never pay yourself compensation), 
• IRAs are subject to debt financed income tax if you borrow money (has to be non-recourse -- meaning you can't personally guarantee the debt) to purchase or renovate a property, and 
• There are transactional costs to establish and maintain an LLC that you don't have if you purchase properties directly in your SDRA,

to name a few key ones to consider. 

However, if you avoid the pitfalls and keep yourself informed of the rules and new developments, the IRA owned LLC is often the most convenient and efficient way to make real estate investment with your SDRA.

I hope this helps.