Solo401K or HELOC to get re-started?

Question

My husband Michael and I want to jump back into RE investing, here in Austin, TX. We have previous experience having owned a duplex in Boston for 16 years which we house-hacked, rented long term, Airbnb'ed, converted to condos and sold off as individual units. We also renovated the Boston duplex top to bottom, and built our house here in Austin at the same time.

How should we fund the purchase of an investment property? Solo 401k could be an option as my husband is self employed in a solo photography business. (No other employees.) He has a large amount in rollovers and IRA's. Can he set up a Solo 401K and take out a loan from the Solo 401K? Is the cap for that loan $50K with interest around 6-7%? What companies do y'all use to set up your Solo 401K's? Our CPA was not able to help us with this, and directed us to find a company to set it up.

Also considering taking out a HELOC on our house. We own it outright, and it is worth around $600K.

We are looking to pull out or borrow around $220,000 to get started in the Austin area. We want to burrrr properties, or maybe flip. We are interested in single family residences, duplexes, and quad.

Would love recommendations on CPA's, LLC, Solo 401K set up, Title Companies, RE Lawyers, wholesalers, and hard money lenders in the Central Texas area. Any advice is welcomed. Thank you in advance!

George Blower · Answer

@Amy Charles

1) Here are the general considerations regarding 401k loans.

• If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
• Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).

401k Participant Loans

• If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
• Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).

Please keep in mind the multiple loan rules:

Under those rules, the sum of the balances of a participant's outstanding 401k loans under a single 401k plan (using the highest outstanding balance of each loan over the last 12 months) can't exceed 50% or $50,000 whichever is less. Thus, if you took a $50,000 loan and paid it back within 6 months, you would need to wait another 6 months before you could take another $50,000 loan.

2) Keep in mind that in order to take a distribution under the CARES Act you must have been impacted by the virus in one of the enumerated ways & your current account provider must allow you to take a CARES Act distribution. The IRS recently provided guidance regarding eligibility under the CARES Act and specified that a qualified individual includes an individual who has a reduction in pay (or self-employment income) due to COVID-19.Note: It is too late to take a loan under the CARES Act.

Distributions:

If so, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes anIRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").

Aaron Gordy · Answer

@Amy Charles Reach out to Quest. I can refer you to my contacts there, if need be.

Stone Saathoff · Answer

I would recommend the HELOC route. Better rates than if you were to use something like a hard money loan, and you can use it the same as cash, makes you very competitive in the marketplace.

Amy Charles · Answer

Jacob

We are looking in Austin and surrounding suburbs. What do you mean by Austin MSA?

With a HELOC you can't have a live-in situation? We would not be living in the investment property, but living in the house we would be taking a HELOC out of.

Yes you are right $220 isn't enough for a MLS property, but I have seen several listings I liked for $250 in the 78758 area. Also, we are networking with wholesalers and we would be looking for more of a wholesale fixer upper deal not MLS. We have cash for a downpayment.

Thanks for responding!

Amy Charles · Answer

We wouldn't be holding the property in the 401k, but taking a loan against it for $50,000 as allowed. I agree- having a property in the 401K wouldn't work for us because we wouldn't be able to work on the property ourselves, or pocket cash flow, etc. I have seen a few investors use 401K money for a down payment. Ryan, thanks for the Title recommendations!

Jacob Pereira · Answer

Agree with @Ryan Kelly. The only caveats I'd give is that 220k is not a lot for our market, so you'd need to find additional money from somewhere, and BRRRRRRRR+ works best when it's a live-in situation which you can't do in Texas with a HELOC, although that's absolutely not a necessity.

Happy to give you some recommendations, but I think more information is needed:

At 220k you're probably looking at San Antonio or Austin MSA suburbs for wholesaling, and different people work in different markets, so just list the places you're looking and I'll PM you the ones I know in their respective areas.

I love my CPA and we've worked together for years, but he's not specifically real-estate focused, and by now I know the RE tax law well enough to be able to make up the difference. There used to be an Austin guy here who was pretty active (Brandon something maybe?) who you might want to reach out to.

As far as the rest, title is pretty much commoditised at this point, LLCs you can easily set up with a single form and $300, and with the amount of equity you have in your house a hard money lender only makes sense if you're trying to go well above your stated $220k amount.

You're in a great position. Please post what you decide to do so we can live through your adventure with you.

Ryan Kelly · Answer

@Amy Charles I'm personally not a fan of investing in real estate through 401k's or IRA's because real estate comes with numerous tax benefits that you lose when you stick it in a tax-deferred account. I like the HELOC or cash-out refinance option which we used this year to purchase a duplex in south Austin. I've got numerous Title Companies I recommend including Texas National Title and Capstone Title. Happy to do an intro for you.

Solo401K or HELOC to get re-started?

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