Using Solo 401k to do hard money / private lending

[Cliff T.]

Hi all,

I am hoping to get into the world of hard money / private lending using my Solo 401k and had a few questions.

1. I have approx. $120k in my Solo 401k but the deal that I am planning to fund needs about $180k. Is it possible for me to do $120k from my Solo 401k and the remaining $60 from another personal account? I'm assuming that is an easy Yes but want to confirm.

2. My Solo 401k is with mysolo401k.net. I went through the process of setting it up a few years ago and have contributed every year since, but haven't learned the ins & outs and don't understand the mechanics of how to fund the deal. Do I simply wire the money out of my Solo 401k account (currently with Schwab)? What type of documentation is needed?

3. Related to #2, when the deal wraps up and I am getting paid back. How does that process work? Escrow would then wire the funds into my Solo 401k account (at Schwab)?

4. Any general tips regarding private lending and protections that I need in place? I will be on the deed with a promissory note recorded, along with being added as mortgagee on insurance.

Many thanks in advance!

[Dmitriy Fomichenko]

@Cliff T.

Private lending is a great way to deploy your retirement funds, I did several dozen loans and love it. Ended up owning one property as a result of a defaulted note which worked out great. Now to answer your questions:

1. You are considered to be a "disqualified person" to your 401k. Per IRS rules all transactions involving your 401k must be "arms length", so NO, this is not an easy Yes. Since your 401k is unable to do this deal on it's own, by contributing your personal capital to the deal you would be "enabling" your 401k to perform a transaction it can't do otherwise, which can be considered a "prohibited transaction". I recommend you either fund a smaller loan or have your 401k partner with unrelated person. 

2. You need a promissory note and a deed of trust to secure your investment. Local title company can assist with the documents and will ensure loan is structured and recorded correctly. And yes, you can simply wire funds to escrow to fund this loan.

3. Yes, all proceeds (interest payments and loan payoff) must go back to your 401k account. 

4. Read 1 and 2 above again.