CA land investment with 401K

[Steve C.]

I recently went to one meetup event from one investment group.

They suggested to buy land in Southern California (Antelope Valley near Los Angeles) area. 

About 2.4 acres were sold as 4 units and you can buy 1 unit for about $40K. 

It was suggested to use money after rollover 401K to IRA account.

I never considered land investment before, so this was an eye opener for me. 

Also, it was good opportunity to learn how your retirement account can be invested for real estate. 

But I wasn't sure how to evaluate this deal, so I just passed on. 

How can I evaluate this kind of deal in the future? Any advice?

[George Blower]

@Steve C.

Good question!  Here are some considerations.

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

2. If you are self-employed with no full-time employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate.  In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and if you will you debt to acquire the real estate, it must be non-recourse financing.  See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira...  If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, you can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. In either case, you must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. In either case, you should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).