SD 401K, LLC and financing

[Kathryn Knoblauch]

Hello Community, 

I have a Self Directed 401K and want to purchase a property consisting of two houses on one lot. The houses need some work but there is upside as the rents are currently below market and I've checked county requirements and the property appears to be a good candidate to subdivide. 

The seller wants all cash.  I have enough to put down to satisfy a non-recourse lender, however I am finding that they tend to be particular about age and condition, and the seller won't consider an offer that is financed with anything other than hard or private money. 

I have found a loan guy with a private lender that doesn't care about age and condition as long as I put down 35% but the loans are recourse. The loan guy said all loans in California are recourse. (property is in the San Francisco Bay area). He suggested this problem would be solved if I formed an LLC owned by the SD401K and purchased with the LLC.

So my question is: Would a purchase using an LLC owned by the SD401K and using funds from the SD 401K not require a non-recourse loan? Any feedback is appreciated. Thanks.

[Brian Eastman]

@Kathryn Knoblauch

That is an absolute no go.  A personal guarantee is a personal guarantee, regardless of whether it is direct or indirect as you suggest.  Any guarantee or pledge from you personally would violate IRS rules.

There are private lenders of both an individual and institutional basis here on BP.  Start networking to find a truly non-recourse loan.

I am not a California attorney, but my understanding is that commercial/investor mortgages are not required to be non-recourse.  I would check around rather than accept what this one person has told you.