All Forum Posts by: Cliff T.

I use American Express business blueprint; they like to work with REI and provide funds ASAP

@Cliff T. great choice with the lending, and even better with the SDIRA! That is a very common way for our investors to structure their investments as well. I'm sure you are lending to trusted people/friends at the beginning, but make sure you consult an attorney with regards to the loan agreement, trust deed, note and other related docs. Every state requires different disclosures and statements, so it is important that you get those included in your loan doc package. Servicing your loan requires a license in CA, but if you're not licensed, there are many 3rd party servicers that do a great job. Let me know if you have any questions and best of luck on this new venture! 

Your solo 401k is a separate entity from you, @Cliff T. It is a trust. Just like a corporation or LLC, it can lend money, so your trust's name, not yours, would appear as the lender on your loan documents. This process is super easy after the first few loans, and we've been lending both our after-tax and Solo 401k money, secured by local house flips, for years. You, as the trustee, are allowed to manage the loan, but you cannot take a dime from it until you begin taking disbursements – typically at retirement. Since the money is either tax-free (Roth Solo 401k) or tax-deferred (Traditional), your balance will grow very quickly, especially at hard money rates.

Sorry if I confused you, but I was responding to your question about whether you can personally partner with your solo 401k as co-lenders. In this case, you cannot because you are considered a disqualified person. Disqualified persons include you and your lineal descendants (mother, father, grandparents, sons, daughters, grandkids, etc.). Lateral relatives, such as brothers and sisters, are fine.

The other issue I mentioned is a bit more technical and has nothing to do with who the lender is. If there is more than one lender on a deed of trust, then the loan needs a security exemption. Fortunately, California provides this if a CA-licensed broker is used, who follows the rules for originating fractionalized loans. You will need a broker anyway if your interest rate in CA is greater than 10% APR.

Your solo 401k aside, I strongly recommend that you SEE A LENDING LAWYER before you start lending money. Lending law is complex and varies from state to state, so it is essential to have a lawyer who is familiar with the regulations. You don't know what you don't know, Cliff, and you're not going to get it all here.

Last, do not get your loan documents from a title company. Do not. Title companies are insurance companies. They employ many lawyers who work for them, but these lawyers do not represent you. Instead, hire a lawyer who specializes in lending to draft your loan documents and educate you. As a courtesy, you might get a simple note from a title company and a short-form DOT, but this is not even close to a complete loan package and will not fully protect you or your 401k. With all the automation and competition among lawyers lately, prices have dropped for loan documents. Understand that your borrower will typically pay for these anyway.

@Cliff T.

Super easy: person A needs a loan secured by the property. Your IRA or 401k would come in as lender and fund this loan. A trust deed would be recorded with the county securing your IRA's interest, all payments belong to the IRA, sheltered from taxes. Yes, you are a "disqualified person", but you personally are not involved in this transaction so no issues there.

1. The answer is not an easy Yes but a hard No, @Cliff T.  As a disqualified person, you cannot personally profit from any investment made by your Solo 401k. This means you cannot personally co-invest with your retirement plan. (As an aside, if there were two qualified lenders, the loan would have to be fractionalized. This is legal in CA but would require a broker.)

2. Assuming the money resides in a trust account at a bank or equivalent, and that you have checkbook control (i.e. this is not a stock and bond brokerage 401k) then yes, you would wire the money to title after all documents are signed, reviewed by you, and evidence of proper insurance is received.

3. Yes, except it would be the title company. They would wire all funds back into your 401k account. With a few notable exceptions, such as a personal loan, you can’t touch any of this money until you’re 59 ½.

4. This is a completely separate topic. There is a lot more to a loan than a note and DOT. If this loan is in CA, and the interest and points total more than 10% annualized, your plan will need a licensed CA real estate broker to originate the loan. There will be lenders instructions, disclosures, a title prelim review, personal guarantee (if you're wise), 1003, occupancy affidavit, use of funds statement, and lots more. You should really sit with a lending attorney to learn the basics of making a private loan, including licensing ad usury, and an understanding of the required paperwork before you agree to lend like this, Cliff.

In general, the paperwork and process for lending money from a Solo 401k is exactly the same as for any other private loan. The only difference is that you can’t personally touch the money.

@Cliff T.

Private lending is a great way to deploy your retirement funds, I did several dozen loans and love it. Ended up owning one property as a result of a defaulted note which worked out great. Now to answer your questions:

1. You are considered to be a "disqualified person" to your 401k. Per IRS rules all transactions involving your 401k must be "arms length", so NO, this is not an easy Yes. Since your 401k is unable to do this deal on it's own, by contributing your personal capital to the deal you would be "enabling" your 401k to perform a transaction it can't do otherwise, which can be considered a "prohibited transaction". I recommend you either fund a smaller loan or have your 401k partner with unrelated person. 

2. You need a promissory note and a deed of trust to secure your investment. Local title company can assist with the documents and will ensure loan is structured and recorded correctly. And yes, you can simply wire funds to escrow to fund this loan.

3. Yes, all proceeds (interest payments and loan payoff) must go back to your 401k account. 

4. Read 1 and 2 above again. 

also, should mention third fed only doesn't do investment property heloc, sorry.