Options for my S401K

[Jim Brown]

I recently started up my S401K and would like to utilize a portion for Real Estate investment.  I would like to start relativly small, around $50K.  Participating in crowd funding has it's appeal to me but not being an accredited investor, I think that option is off the table.  I've been working putting my flipping team together.  I already have an agent on board, contractor, attorney and title company.  From what I've read, I'm not sure using the funds from the S401K would work for this scenerio since technically I would be running a business and be subject to UBIT.   I would consider lending to other flippers but with the amount I'm looking to get started with I think the best I could hope for is a 2nd position loan and I don't feel the potential risk involved outweighs the pontential for profit.  Any recommendations to get started slowly?

[Adam Hershman]

Originally posted by @Jim Brown:

I recently started up my S401K and would like to utilize a portion for Real Estate investment.  I would like to start relativly small, around $50K.  Participating in crowd funding has it's appeal to me but not being an accredited investor, I think that option is off the table.  I've been working putting my flipping team together.  I already have an agent on board, contractor, attorney and title company.  From what I've read, I'm not sure using the funds from the S401K would work for this scenerio since technically I would be running a business and be subject to UBIT.   I would consider lending to other flippers but with the amount I'm looking to get started with I think the best I could hope for is a 2nd position loan and I don't feel the potential risk involved outweighs the pontential for profit.  Any recommendations to get started slowly?

 Hey Jim,

With a solo 401k, with a custodian that is amicable to alternative investments, your options are really unlimited. You can give personal loans to other flippers who are looking for the capital, or you can structure the loan to be secured by the property. I have had former clients even contract for a portion of the profits of a deal after recouping the loan, i.e $50,000 loan from person A to person B with payment provisions being $50,000 net of sale of 123 main street, and 10% of net profits of sale of 123 main street.

On the other hand if you aren't going to be doing business with someone you at least reasonably trust, you can still take advantage of crowd funding due to the increased limit under title 4 of the JOBS act, but it might take some time to find a RE crowdfunding company that will accept unaccredited investors. 

In terms of flipping houses, you would be subject to UBIT, but that does not mean you can not flip houses, it just means that it won't be totally tax sheltered. Many people still find RE investing and flipping is profitable in an IRA/401k, they just have to pay taxes on it.

You can also invest in tax liens/deeds, or find undeveloped land that you think will have a value demand for development. A former client loved to purchase those dirt lots next to big grocery story strip malls on the belief that sooner or later, someone would want to put something next to the grocery store. 

Heck if you want to purchase heavy equipment for construction, and lease that to someone developing land, you could do that too. It really all comes down to what you understand and can make a return on.