QRP (Long term money) vs Liquidity

Tax, SDIRAs & Cost Segregation
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QRP (Long term money) vs Liquidity

Lane Kawaoka
Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes

There are a couple caveats I found that make me reconsider a QRP:

When you have money in these accounts it sounds good that you are not taxed on gains but you are restricted from getting a Fannie Mae loan. Using the QRP oans get you the second tier financing options, for example, a Roth IRA can buy real estate on leverage, however, will need a non-recourse loan which is often a fraction high-interest rate and lower LTV. No Bueno!

QRPs like your 401Ks or IRA accounts is pretty much locked up until you are "old". There are some provisions to get the money out when you are 45 years old but you need to eat today.

I see a holistic strategy of blending your investment funding from 1) QRPs and you 2) regular liquidity.

How are you using the two in conjunction? I am age 32 so that play a lot to my question.

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Craig McLaughlin
Rental Property Investor · Robins, IA · Member since 2015 · 45 posts · 18 votes
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@Lane Kawaoka. At some point you’re going to pay taxes on 401k and traditional ira so that is a wash. You could take a withdrawal and pay the 10% penalty but be sure your real estate can make that money back for you in the amount of time you would’ve had to wait. I am not a financial accountant.
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  • Craig McLaughlin
    Rental Property Investor · Robins, IA · Member since 2015 · 45 posts · 18 votes
    8y
    @Lane Kawaoka. At some point you’re going to pay taxes on 401k and traditional ira so that is a wash. You could take a withdrawal and pay the 10% penalty but be sure your real estate can make that money back for you in the amount of time you would’ve had to wait. I am not a financial accountant.
    2Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y

    @Lane Kawaoka , 

    The way I look at it is I consider investing provision in the Retirement Plan as the added benefit. The RE investment was not the primary reason you have a retirement plan. 

    Yes, if you want your Plan to take more risk and return, then invest in RE, but not for today's cash flow. 

    I personally dont contribute in the Retirement plan right now because I can always resume when I am making more money, and plan to have other kinds of Retirement plan that will let me contribute a lot more than normal limitation for an employed worker. 

    Right now, I am getting 2/3 times to return on my investment compared to QRP. But there is a huge mistake people make. If you dont contribute to your Retirement plan for better return outside, then you need to reinvestment the return you make. If you can't do that, contributing to the retirement plan is much better. 

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    8y

    @Lane Kawaoka,

    For those folks who just make enough to pay for their basic living expenses (as you said "you need to eat today") contributing to a retirement accounts would probably not be a good idea. My income however is well above my living expenses. I can chose to pay the taxes on all my income and then invest personally with my taxable accounts. My objective however is to reduce my tax liability today. I contribute the max I can to qualified accounts (401k, Roth IRA, HSA) for both myself and my wife and still have money left to invest personally. So I'm growing my wealth both: inside of qualified accounts as well as personally. Most of my clients are in similar situation: they want to reduce their tax liability today. And for those who want to retire early and tap into retirement account to supplement their income, there are ways to do so, here is an article explaining the details:

    https://www.forbes.com/sites/forbesfinancecouncil/...

    The bottom line is this: even if you have to pay the penalties for accessing retirement funds early, because you are able to grow them tax-deferred you'll be better off investing inside of a qualified plan rather than using taxable account. 

    I think there is wisdom in what you said "using the two in conjunction". 

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    8y

    Now, regarding non-recourse loans. Trying to compare them with Fannie Mae loan is like comparing apples and oranges. You can't do that. When financing real estate inside of a qualified plan you are not allowed to provide personal guarantee so conventional financing is out of question. You can either pay cash for the entire deal or use leverage. What are your choices? Get a hard money loan and pay 12% interest, or get a non-recourse loan from one of the lenders specializing in lending to retirement accounts from the list below at 5-8% interest? This would be a valid apple to apple comparison. In most cases the answer is obvious!

    Here is a list of those lenders BTW:

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

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  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    8y

    @Lane Kawaoka

    Yes both IRAs and solo 401k plans are a great way to grow your nest egg.  If Roth funds are invested the better, as Roth funds grow tax free.

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  • Marina Wong
    Investor · greater Boston and greater Tampa areas · Member since 2013 · 100 posts · 25 votes
    7y

    @Lane Kawaoka Many people consider not the best use of your IRA money for a long term RE hold as you cannot take advantage of depreciation like using non retirement money. I use my IRA money to fund other people's RE project (short term projects) or other RE activities not having depreciation benefit.

    1Reply
  • Lane Kawaoka
    OP
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    7y

    @Marina Wong

    I don't really care for debt deals especially on a house flip because even if I am covered with LTV in a recession I can't rent it out and cashflow.

    I prefer equity deals.

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