Use Solo401k or conventional loan to buy investment property?

[Shelly P.]

I need some advice from BP.

Situation:  I have opportunity to purchase an investment property - around 320K with equity of about 100k.  I have two options;

(1) refinance and take out cash against another house with about 700k equity and use to purchase the house

or

(2) use my solo401k to purchase the property with 20% down and get financing

What is my best option?  What would you do

[Brian Eastman]

@Shelly P.

The numbers you present will not be an option with a Solo 401(k). With a self-directed IRA or 401(k), one can leverage with a mortgage, but the loan must be non-recourse - meaning no personal guarantee from you. IRS rules prohibit you from pledging your assets as security for the 401(k) plan's debt.

While non-recourse loans are available, the underwriting is pretty conservative for this type of loan.  Expect to need between 30-40% down and 10-15% in reserves within the plan.  To purchase a $320K property, you would need to have a minimum of about $150K in the plan.

As @Darren Eadynoted, any future expenses associated with the property would need to come from the 401(k), so one always wants to be conservative when maintaining semi-liquid reserves within the plan to cover any unexpected costs.

That said, the ability to leverage your tax-sheltered retirement dollars into a secure asset such as real estate, and receive a higher cash-on-cash return for your invested 401(k) funds is a great strategy when approached the right way.  Whether that fits for your particular deal or not will require additional consideration on your part.