Old 401K into a Rental Investment?

Question

I recently switched jobs and have a 401k still invested with my former employer.  I am looking for pros and cons of investing this money into an IRA that is invested in rental properties.  Do you have any experience with this?  Is it possible to invest portions of this along with personal cash or other sources of lending?

Dmitriy Fomichenko · Answer

@Aaron White

Yes, it is possible. What you need is a self-directed IRA: an account held by the custodian allowing alternative investments. You direct the custodian to buy the property, title is vested in the name of the custodian for your IRA, all income from the property goes to the IRA, all expenses paid from the IRA (you instruct the custodian to pay the expense, they send the check and charge you a transaction fee).

Some find it costly and inconvenient to have a custodian as a middle man and opt for Checkbook IRA (aka IRA owned LLC). This structure allows you to bypass the custodian and control your IRA (and all the investments of the IRA) directly through special-purpose, single-member LLC, owned by your IRA, of which you are the manager.

If you are self-employed or own a small business (w/o FT employees) - you can set up a truly self-directed Solo 401k plan, it does not require a custodian and can give you "checkbook control" without the use of an LLC (which can be costly in some states).

You, and your immediate family members are considered to be "disqualified person" to your IRA/401k and per IRS rules all transactions involving your retirement account must be "arms length" (without involvement of such person).

Yes, it is possible to finance the purchase of an investment property in your retirement account. But since as disqualified person you are not allowed to provide a personal guarantee for the loan you will not be able to use conventional financing, instead you have to use a non-recourse loan. Most banks do not offer such loan, but I've assembled a list of lenders who do here:

https://www.biggerpockets.com/...

And lastly, use of leverage in an IRA will result in Unrelated Business Income Tax on the income from the financed portion of the property (Solo 401k would be exempt).

Hope this helps!