Solo 401k Commercial Loan?

Question

Hey BP Community, I've searched and so far can't find an answer to my concern here or via the almighty Google.  I am in the process of setting up a solo 401k for the purpose of purchasing BRRRRR type investments, maybe the occasional flip if the numbers pencil better.  Regardless of the asset, I'm hitting a wall about what type of loan vehicle I can use to re-fi.

I know:

1. I can't personally own or guarantee the mortage, so that rules out conventional, FHA, etc.

2. I've found a number of non-recourse loans that specialize in solo 401k/SDIRA loans but they all want 40-60% equity - OUCH!  That makes the BRRRR strategy a non-starter unless I'm buying sub-$10000 homes with my existing funding.

Now, I THINK I can get a commercial loan from a local/regional bank that meets the non-recourse and Trust/LLC ownership entity issues but I haven't found any resources that talk about that as a valid method.  Am I missing something?

Thanks in advance!

Dmitriy Fomichenko · Answer

Charles, here is a list of non-recourse lender that I've gathered over the years, you might find it helpful:

https://www.biggerpockets.com/blogs/2810/50272-lis...

As you know when buying inside of a retirement account you can not provide personal guarantee, the loan must be non-recourse. This means that the lender does not have any recourse agains you personally nor your IRA, the only security for the loan is the property itself. This represents higher risk for the lender - hence higher LTV.

If you find a local/regional bank willing to give you non-recourse loan with better terms you can use that, just be sure that it is reflected in the promissory note.

Dmitriy Fomichenko · Answer

Matt, be careful with a recommendation like this. If you don't understand the rules it would be best to refrain making suggestions that may cause someone's 401k be disqualified. This type of pre-conceived quid-pro-quo is called a "step" or "linked" transaction by the IRS, because it is nothing more than a scheme to avoid an otherwise prohibited transaction and will be treated as such.

Carlos Alger · Answer

@Charles Soper

''2. I've found a number of non-recourse loans that specialize in solo 401k/SDIRA loans but they all want 40-60% equity - OUCH! That makes the BRRRR strategy a non-starter unless I'm buying sub-$10000 homes with my existing funding.''

Welcome to our world! After much back and forth with many of the non-recourse lenders on Dmitry's list, we gave up trying to work with them. Every time we hit the property criteria on the lender's 'basic' list, they came up with a new reason why they couldn't lend on that specific property (I get it, they need to lessen their risk) - it became too frustrating and a waste of our time. We swicthed gears and started to price out those same deals using cash. We knew we were finding good properties but just couldn't get lending so we are paying for it ourselves. Picked up two properties quickly with great ROIs once we went all cash with our solok funds. Now we have the rental income to look forward to, and we'll use it to continue to acquire properties on our own (also adding funds from jobs, etc.. to speed up the process).

Good luck to you.

Matt H. · Answer

@Dmitriy Fomichenko 100%. I thought it went without saying that before you buy property with your Solo K you get your Solo K guy such as yourself, your CPA, and 10 others guys to sign off on it, you don't simply just go on what some random guy on the internet said. My point was to bring up the alternative of someone else getting the loan and being a partner or handling the financing in some way. My CPA guy and Solo K worked this out, but you're totally right the quid pro quo wasn't part of that.

@Charles Soper I think 60-75 ltv is best you can hope for in a scenario like this, and that seems pretty good to me with your retirement money.

Justin Windham · Answer

@Carlos Alger

Congrats on the Solo 401k property acquisitions. If you have the cash in your plan, skipping the non-recourse financing certainly simplifies things. The financing can be a nice option for those who find a match with a lender, but there can be some hoops to navigate.

Carl Fischer · Answer

@Charles Soper

Yes you understood it as intended. A first and second loan.

George Blower · Answer

@Charles Soper

You can also reach out to a hard money lender as most banks will require the following non-recourse loan criteria.

-If the the investment is a single family home, generally 30-35% of Solo 401k funds are required.-If the the investment is 2-4 units, generally 40% of Solo 401k funds are required.-If the the investment is condominium, generally 40% of Solo 401k funds are required.-If the the investment is multifamily, generally 40% of Solo 401k funds are required.

Charles Soper · Answer

@Carl Fischer So are you saying basically have two lenders?  One being a bank that'll do the non-recourse 401k loan @ 50-60% and then a non-DQ'd person that will loan me the rest?  Or did I miss interpret that?

Carl Fischer · Answer

@Charles Soper

If you don’t want to give up equity have another 401k or Ira or individual give you a second loan and/or subordinate it to the bank loan.

Pay a non disqualified person  to guarantee the loan.

You can also partner with your 401k to add additional cash to the deal however you need to bring in your attorney, CPA, and 401k TPA to make sure you do it properly and not disqualify your 401k plan.

Dmitriy Fomichenko · Answer

@Matt Hoyt, it is possible for the 401k to partner with someone else who guarantees the loan (assuming you can find a lender willing to lend with these terms), as long as it is not a reciprocating transaction that should work.

P.S. You'd be surprised to find out how many guys out there go online looking for (possibly wrong) answers instead of seeking professional help.

Solo 401k Commercial Loan?

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