Self Directed 401k - Brrrr

[Kevin R.]

Is BRRRR investing one of the prohibited transactions in a self directed 401k?

[Brian Eastman]

@Kevin R.

An IRA can apply the BRRRR model and it can be a powerful strategy to grow your IRA savings.

The key principle with the IRA is keeping all transactions at arm's length and exclusively for the benefit of the IRA.

The IRA purchases the property.

The IRA hires vendors to do the rehab. You or a disqualified party to your IRA cannot add value to the IRA through the provision of services such as being the plan's handyman.

The IRA is the landlord to a renter. You can property manage in an administrative fashion or the IRA can hire a property manager.

The refinancing loan must be non-recourse, meaning no personal guarantee from you. In the more conservative underwriting space of a non-recourse loan, the IRA will pull somewhat less out of the property than you could personally with lower LTV limits. Similarly, the use of debt-financing in an IRA creates exposure to a generally small tax known as UDFI. You will want to study this concept of non-recourse lending in an IRA and plan accordingly. Even with these limits, it is still the ability to pull a portion of the value that has been added to the property out as capital to begin the next project, which is the principle behind BRRRR and a great means to accelerate growth.

We've had clients deploying this strategy long before Brandon and his team here at BP coined the phrase.