Posted over 9 years ago

Best Way to Invest a Self-Directed Solo 401k in Real Estate

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Now that I have opened my self-directed solo 401k, I have identified a property, and have the following questions with regards to the best way to go forward.

QUESTIONS: The property will be a buy and hold. Is it recommended to set up an LLC owned by the Solo 401k? If LLC is recommended, what is the process for setting up the LLC to allow for the purchase of the property? Should the LLC be a property management business?

ANSWER: When investing a solo 401k with checkbook control in real estate, the purchase can be made directly in the name of the solo 401k plan, meaning title to the property is taken in the name of the solo 401k plan.

For example, if the name of the solo 401k plan is Byrds Solo 401k Trust and the name of the solo 401k trustee is Larry Byrd, title to the property is taken in the following fashion:

Larry Byrd, Trustee of Byrds Solo 401k Trust.

What is more, when a solo 401k purchases real estate directly (i.e., title to the home is taken in the name of the solo 401k as illustrated above), the property purchase funds flow directly from the solo 401k bank account to the seller or escrow account. Future expenses and gains flow from and to the solo 401k bank account as well.

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Another method of investing self-directed solo 401k funds in real estate is through an LLC.

Under this arrangement, the solo 401k funds are invested in a newly formed LLC through the of purchase of units. The solo 401k plans is generally the sole owner of the LLC—hence why it is commonly referred to as solo 401k LLC. Under the solo 401k LLC method, title to the property is taken in the name of the LLC not the solo 401k plan.

Here are the steps for investing a solo 401k in an LLC where the solo 401k is the sole member and the solo 401k is the manager of the LLC.

After the solo 401k is setup and funded, an LLC is registered with the Secretary of State.

Next, an employer identification number (EIN) is obtained from the IRS for the LLC.

Next, the Solo 401k LLC Operating Agreement is drafted, the solo 401k is listed as the sole member and the solo 401k owner signs the LLC operating agreement.

Next, the LLC manager opens a bank account in the name of the LLC.

Next, the solo 401k funds are invested in the LLC—the funds are wired from the solo 401k bank account to the LLC bank account.

Finally, now that the solo 401k owned LLC has been funded, investments are made in the name of the LLC.

As the manager of the LLC, the solo 401k owner can manage the properties as long as he or he or she does not receive compensation.

QUESTION: How do I insure the property? I expect that the property has to be ensured under it's own account and cannot be listed under my personal residence policy. Can anyone recommend an insurance company that helps insure properties purchased with solo 401(k)s?

ANSWER: You will want to get liability insurance for the property. The liability policy is generally written on a commercial policy form. Liability insurance covers injuries that may occur on the property by contractors or tenants. Big insurance companies such as Geico and Natiowide Insurance offer liability insurance.

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