Investing with s Solo 401k

[Tara Simms]

I am new to bigger pockets and new to real estate investing. I have opened s Solo 401k and plan on buying my first property with it. With a solo 401k, no mortgages are allowed so it will be a cash purchase. I feel like this goes against the no or low money down concept and increases risk but the thought is that all rental income is reinvested in 401k. My plan is to purchase a new property every 3 years with this and to grow a retirement portfolio. I also plan on purchasing property not as retirement for passive income now. Any thoughts, ideas, pros and cons of this vehicle are greatly appreciated.

[Brian Eastman]

@Tara Simms

It sounds like you do not fully understand the Solo 401k program you have established.  I would strongly suggest that you go to your plan provider and your CPA to get a better handle on this topic before you start transacting.

You may use mortgages with a Solo 401k.  The mortgage has to be non-recourse, meaning no personal guarantee from you.

The Solo 401k is for one purpose and one purpose only, and that is building future retirement wealth.  You cannot in any way benefit from the investments at the current time.  So your statement about creating passive income now is something you cannot achieve with your plan.  You would need to use other funds for that purpose.

A Solo 401k (or self directed IRA) is not a means for you to invest in real estate with tax-sheltered retirement money, rather it is a means for you to diversify that retirement savings into real estate instead of having it all in the stock market.

Not to pick on you personally Tara, but this week on BP and in our business, we have encountered a whole lot of people who setup a Solo 401k or were close to doing so with so little knowledge on the topic (or severe cases of misinformation) it was frightening.  

I feel I must raise a big red flag on this issue for the community as a whole.

A Solo 401k is a fantastic and powerful tool.  It is also a tool with a specific purpose (tax sheltered retirement savings) and severe tax penalties for misuse.  This is not something where you just "setup an account and start investing".  Any investor considering the use of such a plan should be sure to educate themselves thoroughly and work with professionals not only for the basic acts of implementing the plan, but more importantly with regards to the proper usage of the plan and developing an investment strategy that will meet their goals while remaining in compliance with IRS guidelines.  This is not the kind of knowledge you can expect to get from reading websites and paying a few hundred bucks to have someone churn out a set of plan documents for you.  As a new investor with such a plan, you want to be sure to have a guide who can help you navigate how the tax code intersects with real estate investing, specific to your intended strategies.