Strategy for using retirement funds

[Cory Adams]

Not sure if this the right forum but here goes. I have funds in an SD401K vehicle. The challenge is using those funds strategically. For example of somebody had 150K they might use financing to buy a 10 unit apartment but that will not get you very far if you are trying to use non-recourse loans to procure property in using retirement funds..

The question becomes one of what are others doing in order to strategically use RE to build retirement income and assets within their portfolios? Have others used non-recourse loans with success? Are they primarily doing flips and paying cash for deeply discounted props? Please help me turn a small pile of cash into a larger pile of cash!

[Dave Savage]

@Cory Adams one thing to consider is becoming a Hard Money Lender.

Holding properties or flipping properties in a SD401k can definitely be done but there are a lot of headaches dealing with paying contractors, etc with funds from the SD401k where you may have significant delays or fees for each check you cut - depends on the servicer.

If you build a good network of investors in your area that are looking for funds, you can get 10-14% returns depending on the laws for your area with minimal risk depending on what LTV you loan at. I would definitely read up on the latest Dodd-Frank rules and check with a RE attorney in your area, but I have found it is much easier to do HML than to hold properties in my area where there is no appreciation. These returns are much better than what you could get with a S&P500 index fund over time and would build your pile of money faster. If you expect appreciation in your area, you might have a different approach

[Gautam Venkatesan]

@Cory Adams if you use SD401K cash to flip you will have to pay UBIT so be careful and make sure you are fully educated on that type of activity within your retirement fund. The general consensus on BP with regards to retirement funds seems to be either invest in notes/lend money or use leverage to build your RE portfolio. Not sure which non-recourse lenders you have talked to but iralending.com will lend at 70% for SFH and 60% for multis. If you lend money to other investors Dodd-Frank does not apply.

[Cory Adams]

Thanks for the replies folks. I will read a few threads on HML to come up to speed.

@Gautam Venkatesan are you sure about the UBIT statement? I thought SD401k was not subject to UBIT for leveraged purchases where as a SDIRA was?

[David Beard]

@Cory Adams - the tax will hit your SD401k if you FLIP properties, not if you get financing. Flipping is an active business activity and will subject your SD401k (or an SDIRA or any qualified retirement account) to tax on the profits at the highly punitive trust/estate tax rates (ie.. this tax hits 40% at about 12k of annual profit, so avoid at all cost).

[Gautam Venkatesan]

@Cory Adams the UBIT tax I mentioned was if you flip properties using your SD401K funds not if you use financing to purchase and hold properties in your SD401K hope that clarifies better.

[David Beard]

You can also borrow $50k (this is the limit) from the SD401k account and use this as downpayment(s) on rental property. You can then obtain much better terms using conventional financing rather than non-recourse financing. And the 401k loan payment will not count against you in underwriting. You will also build a track record on your tax return with this approach, which is very helpful in obtaining further financing .

Yes, you will have a $900/mth payment back to your 401k account (5 year max term fully amortizing). You can service this with the rental profits on the properties you acquire, or you can just use $40k of the $50k loan for down payments and make an immediate $10k payment back to the 401k to pay for the entire first year of loan payments.

What's nice with this approach as well is that if you also purchase property directly in your SD401k, and you need to make repairs to a property at a time when your cash in the 401k is low, you can make a payment from personal funds into the 401k in the form of a loan repayment, in order to generate the cash needed for the repairs.

[Dan Brewer]

Cory -

I'd be interested to find out how much time you wish to devote to your investing. Often investors talk as if they want to be an active investor, and yer in reality their true interests and time availability indicate they should be a passive investor. I believe that is the first and foremost characteristic that defines an investors investment strategy. In general, if you seek returns higher than the low teens for your invested dollar, you will have to get progressively more active in your real estate investments as your target return increases. However, at 12% or so, there are many truly safe passive avenues for an investor to acheive that level of return, and then use their time for other endeavors. Could you become a hard money lender? Certainly, and you could achieve 14%+ returns as noted earlier in this conversation thread. But that is a very active role, with asociated risks. To be a HML, for the inherent time and risk, your target returns should be MUCH higher. Otherwise, I recommend you consider real estate investment funds with proven managers, similar to a stock market mutual fund. I have managed such funds for 10+ years, and am a firm believer in them for the passive investor.

[Cory Adams]

This was very helpful and exactly what I was looking for with regard to a 'strategy'. As it stands I will be taking @David Beard 's suggestion using the 401k loan path to invest out of the retirement vehicle and will also take @Dan Brewer 's advice with regard to using the funds in the 401K to gain reasonable returns.

[Dmitriy Fomichenko]

Originally posted by @Cory Adams:

I will be taking @David Beard 's suggestion using the 401k loan path to invest out of the retirement vehicle.

Solo 401k Participant Loan feature is great benefit that is available for plan participant, allows access to your fund tax-free and penalty free prior to retirement age.

[Dan Brewer]

Cory -

Glad to be of help. I regularly provide free seminars and webinars on my philiosophy towards investing, passive vs. active, etc. I am travelling to the SF bay area next week for a series of seminars, and at some point I will be in Dallas (I notices you are in the Austin area). If you ae interested in the webinars or when I am in Dallas for a seminar, I will send you a connect request and you can request and can keep you posted.

[Gautam Venkatesan]

@Dan Brewer

do let me know when you are in Dallas for a seminar I would like to attend...

[Dan Brewer]

@Gautam Venkatesan

I appreciate your interest, and will send out an email to you when we are in Dallas. We will be beginning a new series of Webinars in the next 2 -3 weeks. I will apprise you of the dates and times, and you are more than welcome to attend. If you have a chance, please go to my website and register (just your name and email required) and that will get you on the official notification list.

[Wendell De Guzman]

I agree with what @Dave Savage said. Being a private lender makes a lot of sense (and lucrative if you know what you're doing). This is why I am lending and some of the money I use are retirement funds of myself and a few of my partners.

[Douglas Larson]

I can only speak about using an SDIRA. I know there are many similarities and restrictions about what to buy, how to buy it and how the property can be used (not by you, your children or parents).

I convinced my wife to use her IRA for buying vacant land (mostly improved lots in approved subdivisions), and it has worked out very well. So far we are up about 90% in just under 3 years. We have found our lots through banks (foreclosures) and private sellers.

The account has grown from 85K to 160K in value and we hope to have 500K in another 7 years. Time will tell . . .