How to become a lender though 401k funds

[John Dombrowski]

So I will have about $100k in a solo 401k to invest with. I am wondering what the process is to become a lender and how much I would be able to make in doing so. And I don't want my money to be tied up too long so I can continue to invest or lend on a regular basis.

And what are the advantages and drawbacks in doing this?

[Jeff S.]

There have probably been a thousand threads here asking how to become a private lender, @John Dombrowski , so you might do a search. We're also in CA, so for what it's worth, here's one that details our process: Becoming a Private Lender

By loaning locally in first position only, with sufficient capital you should be able to safely earn around 12% to 15% annualized. Since you publically announced the amount of money you have on hand, I'm sure you will receive many out-of-town and out-of-state funding requests from those you don't know in areas you've never been. This is a great way to lose a lot of money. As someone new to the business, you only want to loan locally to those you’ve met and secured in first position against homes you’ve seen. Unfortunately, while $100k is a respectable sum you should be proud of, it's not enough to do this in San Diego. You have a few options.

My suggestion is to attend a few real estate clubs in San Diego and meet some licensed CA real estate brokers that originate fractionalized loans. Some specialize in this. Here your 401k will be listed with other investors on a first position loan along with its percent interest.

A knowledgeable broker (whom you should check out -- another topic) will have vetted the borrower and the property and should have paperwork obtained from a lending attorney. If these are toward boring cookie cutter SFR flips, expect to be repaid in 4 to 8 months so.

With $100k you can also do 2nd position rehab loans to experience flippers using a licensed broker to originate them for you. These tend to be relatively smaller loans, say $35k to $50k each, so you can spread your money around a little. Unfortunately, they carry the significant risk of getting wiped out if your borrower defaults on the first position purchase money loan and that lender forecloses. This is rare in today's overheated market but that should also give you extreme reason to pause.

Alternately, you can also buy non-performing seconds for cents on the dollar and do the workout agreements. The returns here can be enormous (on small dollars each), but this is a huge amount of work compared to loaning the money to local flippers and waiting to be repaid. Nothing wrong with it and I know many who do this, but to me, NPN's are a job.

Good luck, John. (Also, we are not brokers. None of this is a solicitation.)