Seller financing when buying with a solo 401k

Tax, SDIRAs & Cost Segregation
6yFollow

Seller financing when buying with a solo 401k

Christa S Rickard
Tampa, FL · Member since 2017 · 63 posts · 28 votes

I have a solo 401k that I set up last year. I'm currently looking to buy my first small multifamily this year. I focused on the Central Florida area, basically Western Tampa MSA over to the Space Coast. I found a property that looks interesting and it also says seller financing is available. I know all investors love to find seller financing as an option, but can I use seller financing if I'm using a solo 401k to purchase the property? I understand that solo 401K can only use a non-recourse loan and I have a list of several banks that specialize in 401k real estate investing. If I can structure the purchase agreement such that the seller financing is essentially non-recourse, meaning it can only take the property if something happens, will that satisfy the solo 401k loan requirements? And if so, how likely is it that the seller would consider that?

0Reply
11 views

Most Popular Reply

Daniel DietzPro Member
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
6y

@Christa S Rickard we have two loans from a Private Lender that are non-recourse "HELOCs" on small SFHs we owned free and clear. He loans up to about 75% of LTV if needed, and we then use this as down payments on larger properties (4 plexs) and are able to pay it back by using ALL cash flow from both properties.

This is essentially what you would be asking a seller to do. I did read somewhere when we started all this that the seller "holding a mortgage/note" as opposed to doing a "land contract" would work better for some reason with the non-recourse part of things. I dont remember the details, but I do know that in a non retirement account it is usually said that is better too, so we just stuck with it.

We did have the lawyers that set up our LLC, which is made up of 3 different SOLO401Ks, review the mortgage/note template to make sure all was good.

We are working on getting a deal like this closed right now. On the good side is that we are only looking at about 20% down, where almost all commercial non-recourse lenders are looking for 40% or so. Our seller is just looking to getting enough to cover his depreciation recapture and then stretch out the payment and interest of 5% over 15+ years.

We are still negotiating, but hoping for a 30 year amortization and a balloon at 15 years, which by then if we have not paid it off early (the plan) we would have enough equity to refinance at that point. 

[email protected]608-524-4899
2Reply
See this reply in the discussion

10 Replies

Jump to latestLatest
  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    6y

    @Christa S Rickard

    Seems like a solid plan and no UBIT with the 401k-nice move. I have commercial and residential property in the space coast area and prices seem high but the area is also growing nicely. Good luck. 

    [email protected]215-283-2868
    1Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    6y

    Christa,

    Seller financing should work just fine with the 401K and the seller will likely to accept your terms of the loan being non-recourse.

    1Reply
  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    6y

    @Christa S Rickard we have two loans from a Private Lender that are non-recourse "HELOCs" on small SFHs we owned free and clear. He loans up to about 75% of LTV if needed, and we then use this as down payments on larger properties (4 plexs) and are able to pay it back by using ALL cash flow from both properties.

    This is essentially what you would be asking a seller to do. I did read somewhere when we started all this that the seller "holding a mortgage/note" as opposed to doing a "land contract" would work better for some reason with the non-recourse part of things. I dont remember the details, but I do know that in a non retirement account it is usually said that is better too, so we just stuck with it.

    We did have the lawyers that set up our LLC, which is made up of 3 different SOLO401Ks, review the mortgage/note template to make sure all was good.

    We are working on getting a deal like this closed right now. On the good side is that we are only looking at about 20% down, where almost all commercial non-recourse lenders are looking for 40% or so. Our seller is just looking to getting enough to cover his depreciation recapture and then stretch out the payment and interest of 5% over 15+ years.

    We are still negotiating, but hoping for a 30 year amortization and a balloon at 15 years, which by then if we have not paid it off early (the plan) we would have enough equity to refinance at that point. 

    [email protected]608-524-4899
    2Reply
  • Jeff CichockiBusiness Member
    Lender · All 50 States · Member since 2015 · 401 posts · 250 votes
    6y

    @Christa S Rickard,

    Absolutely no rules against you buying the property in your Solo and having the property with a loan against it.

    The only thing I would caution is to buy the property in an llc that your solo owns. The reason being one of liability. If you own properties directly in any retirement account, if you get sued and lose, they have direct access to your account. Not a good thing. Use normal asset protection strategies with good insurance and you should be fine.

    Good luck!

    Best REI Funding4.36 Reviews
    WebsiteView Page
    1Reply
  • Christa S Rickard
    OP
    Tampa, FL · Member since 2017 · 63 posts · 28 votes
    6y

    @Daniel Dietz, you commented about the 20% down in your seller financing vs 40% for a commercial loan, that's exactly what I'm hoping to get with this. I haven't made the offer yet as I wasn't positive I could do seller financing, but the one unit will need some work and I don't want to use all my cash on the down payment. 

    Thanks so much for responding!

    Christa

    0Reply
  • Christa S Rickard
    OP
    Tampa, FL · Member since 2017 · 63 posts · 28 votes
    6y

    Thanks @Dmitriy Fomichenko! I thought/hoped that was the case but I am really OCD about dotting i's and crossing t's when it comes to this and wanted to check before contacting the seller. 

    1Reply
  • Christa S Rickard
    OP
    Tampa, FL · Member since 2017 · 63 posts · 28 votes
    6y

    @Jeff Cichocki Good point. I didn't mention it but I do intend to get a separate LLC for each property I purchase for this very reason.

    Thanks!

    0Reply
  • Jeff CichockiBusiness Member
    Lender · All 50 States · Member since 2015 · 401 posts · 250 votes
    6y

    @Christa S Rickard,

    I'm sure you already know this, but I thought I would mention it anyway...

    Any way that you can buy a property outside of your Solo, you can buy inside your Solo. That means, you can lease, lease option, straight option, seller finance (buy or sell), master lease, land contract, etc... There are no limits to the type of transaction you do as long as it's not on the prohibited list (which is primarily don't do business with you parents, grandparents, kids grandkids or in any way that you would personally benefit from the deal outside your solo.

    Good luck!

    Best REI Funding4.36 Reviews
    WebsiteView Page
    1Reply
  • Christa S Rickard
    OP
    Tampa, FL · Member since 2017 · 63 posts · 28 votes
    6y

    Thanks @Jeff Cichocki. It was the non-recourse part that had me worried.

    As I mentioned, this would be my first rental property. I just heard back from the seller's agent. They want 25% down with a 10% interest rate. That down payment is less than I'd need for a loan, so I'm fine with that. I expected higher interest rates than market, but I was thinking maybe 7-8% on the high side. Is 10% interest for owner-financing in today's market reasonable? My goal is to refinance in a year with a non-recourse loan once i have the unit upgraded and stabilized. I'm going to counter but want to make sure my counter isn't so low that he rolls his eyes and walks away because I'm clearly a newb.

    0Reply
  • Jeff CichockiBusiness Member
    Lender · All 50 States · Member since 2015 · 401 posts · 250 votes
    6y

    @Christa S Rickard, 

    I wish i could give you a straight answer, but it all depends. A 10% interest rate isn't bad if the deal still works for you. If the deal doesn't work with it, then it's not a good rate. However, it could also be something else that's causing the deal to require a higher rate...

    1. You could be overpaying. When you buy, you really want to buy something that needs a little bit of TLC so you can buy or build equity in it. Buying at full retail is rarely a good idea, especially for someone with little to no experience.

    2. It could be their perceived comfort and trust in you. They may thing that you're an honest person, but if they unsure as to whether or not you can really pull this off, they may feel like a higher rate is justified because of their perceived risk.

    3. They may be a very experienced investor themselves. They may understand that lending money, especially seller finance, is a very valuable proposition to you. They may want more just because they can and know that.

    There are a lot of other possibilities too. The trick when buying to is to find negotiate when you are talking to the seller. But... What is negotiating?

    True negotiating is finding out what the seller wants/needs and finding a way to give it to them in a way that works for you. Is that what you're did with the seller? I'm not sure. But, I see it a lot where the buyer just gives in to what the seller asks because they don't understand their role as the buyer/negotiator in the deal. I also see a lot of investors who want a deal so bad, they cave in on things they shouldn't.

    Anyway, just some ideas that are rolling around in my head (scary place by the way).

    Good luck!

    Best REI Funding4.36 Reviews
    WebsiteView Page
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free