Real Estate Strategy using a Self Directed 401(k)/IRA

[Nick Rittmann]

Hey Bigger Pockets,

Firstly, bear w/me on the exorbitant length of my post. 

I've already spoken with a couple of financial consultants about self-directed 401k's, but all I get from their perspective are the specifics/details on how the financial vehicle in question (self-directed 401k) functions. NOT, advice or strategy on HOW to maximize your return by using this type of financial vehicle. That's where you all come in. But, on top of that, I've been dabbling in real estate investing for over decade now and either my either naivete (entirely possible), or ignorance (also, entirely possible), I was NEVER aware of "self-directed 401k's" until a couple of months ago when the topic was brought up on a Bigger Pockets podcast that I happened to be listening to. By posting this, I'm hoping to do my little small part in spreading awareness about this beautiful, yet all-to-unknown option that I'm sure many of us can tap into and help springboard our real estate portfolios, but just don't know that it exists. 

To get started, I'm looking to switch my 401(k) from one of the default options that my employer affords us, to an outside company where I can manage it myself as a self directed account. The reason for this is simple: so I can use the funds to invest in real estate

My 401k is 100% vested and currently has a value of around $180k.

Yes, I realize the stock markets are doing well right now and there's inherent risks to doing this such as the opportunity cost of missing out on any gains accrued from the stock markets and/or potentially losing money from investments in real estate. There's no need to harp on those aspects and besides, I'm here on a real estate investment forum soliciting advice real estate investing, not stocks, bonds, index funds or any of that other boring stuff where you have virtually no ability to improve the value of an asset Sooo, with that little diatribe out of the way...

Per my understanding, I've outlined below how the process works for investing in Real Estate using a self-directed 401k. Also, I'll be using the following hypothetical figures to help illustrate the power of using a self-directed account, but more importantly, so someone calls me out if any of my info or comprehension on this isn't correct!

Balance of Self-Direct 401k: $150k

Purchase Price of  Investment Property (single-family house): $75k

Cost of Repairs to Flip: $25k

Cost of Repairs to Rent: $10k

ARV (After Repair Value of House): $150k

1.  I transfer the funds ($150k) from my employer-provided account manager, to an outside firm who specializes in managing self-directed 401k accounts (I'm 100% vested, so this should not be an issue ...or, so I would think?)

2. Once the transfer is complete, I can then use those funds to purchase real estate for any investment purchase (so long as it's not for the purpose of being owner-occupied, or in some other way to be used by my family as their residence) 

3. I find a property I like, with the numbers used above, and when making an offer on an investment property, I'm seen as a "cash buyer", correct? (provided the offer doesn't exceed my cash balance in my self-directed 401k account)

4. In being a "cash buyer" there are several major advantages from having the flexibility to purchase any investment property you wish because 

a.) There's no need to be concerned about a property qualifying for financing from a lender

b.) You can close more quickly on the property

c.) You pay less in acquisition costs to buy the property (lender associated fee's, etc.)

d.) Due to these factors, if making an offer on an investment property where using a lender IS an option, your offer carriers more leverage in the seller's eyes (which may also mean you can offer a little bit LESS to the seller because of these factors)

4. Upon purchasing the investment property there's NO need to use a hard money lender, a private lender, or any other lender of any sort because I'm funding 100% of the costs associated with both purchasing the property -AND- repairs 

a.) This in turn, substantially improves your margins/return-on-investment because the interest and fee's you'd otherwise have to pay a lender are non-existent ...right?

5. Depending on what I decide to do with the property (flip, rent, AirBnB), determines how I earn my return into my self-directed 401k:

a. FLIP - Simplest, most straight-forward scenario

After completing the rehab, I sell the property and the proceeds I earn from the sale of the property go directly back into my self-directed 401k account. 

b. RENT - this is where it gets a little sticky for me

After completing the rehab, I refinance, the proceeds from the refi go directly back into my self-directed 401k, and any cash flow generated from the property are free and clear (aside from taxes), yes, or no?? Am I missing something here, this seems almost too good to be true...

-OR-

After completing the rehab, I refinance, and not only do the proceeds from the refi go directly back into my self-directed 401k, BUT ALSO, any cash flow generated by the rent from the property go back into my self-directed 401k?

-OR-

For some unknown reason, you're not allowed to refinance a property that you bought using a self-directed 401k??

C. AirBnB - the exact same to the rent scenario -ONLY- instead of using the rent proceeds generated by tenants as the cash flow vehicle, its you use the proceeds generated by guests nightly/weekly/monthly stays

I hope this all makes sense. 

PLEASE LET ME KNOW WHAT YOU THINK!!

Is this the stupidest thing since Blockbuster turning down an offer to buy Netflix, as brilliant a strategy as Google buying YouTube way back when, am I by chance I'm missing something here??? I appreciate ANY and ALL input

Thanks,

Nick Rittmann

[Brian Eastman]

@Nick Rittmann

Passive rentals are the best strategy for a self-directed retirement plan. There are of course other ways to invest such as hard money lending to other flippers, being a limited partner in multifamily syndications. BRRRR works well too, which you touched on as a possibility.