Mailbox Money: Why to Own Passive Real Estate in the Solo 401k

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Real estate investing is one of the most popular investments in the self-directed 401k investing world. Generally, there are two types of real estate deals and real estate investors. Active and Passive. Active real estate deals occur when you do the majority of the work surrounding the property. This might include finding deals, fixing up the property, screening and placing tenants, and managing the property. Active real estate deals are an excellent business activity and can even qualify you to have a self-directed retirement plan, such as a Solo 401k. However, if you plan to purchase properties with your retirement funds, you want to stick to passive deals. Sometimes passive real estate deals are referred to as “mailbox money” since your work involves walking to the mailbox to get your check.

Keep Retirement Deals Passive

Whenever you buy real estate with the Solo 401k,  you need to keep the deals passive. Passive real estate in the Solo 401k means you have hired out third parties to complete any work on the property, and potentially manage the property. Because your Solo 401k owns the property, you are prohibited from doing any work on the property yourself. Doing work on a property owned by your retirement account is a prohibited transaction. Prohibited transactions have stiff tax penalties, so avoid them! To put is simply: don’t DIY jobs on your property, and don’t perform the rehab yourself. When it comes to determining how involved you can be in the property, stick to the following  general rule of thumb. White collar duties related to the property are generally OK for you to do. Blue collar duties are prohibited. In other words, you can do some managerial duties, such as collecting and depositing rent checks. But leave the paint jobs and toilet repairs to an unrelated third party.

Let Others Do the Heavy Lifting

Since you have to keep the deals in the retirement account passive, use this opportunity to leverage other people’s time and other people’s efforts. Strategically using others to accomplish your goals helps you get more deals done and own more real estate in the Solo 401k. Some ideas for projects to hire out to third parties are:
  • Property rehab
  • Painting
  • Fixing toilets and plumbing
  • Light repair
  • Putting up or repairing fences
  • Putting in or replacing flooring and/or carpet
Make sure you’re following the rules when it comes to who you’re hiring to do the work on your properties in the Solo 401k. Just as you are not allowed to do any of the work yourself, there are other Disqualified Persons who can’t do the work either. Your spouse, parents, children and any businesses they own are prohibited from doing work on a property owned by your Solo 401k.

Free Up Your Time

Leveraging other people’s time and effort also frees up your time. Spend this time working on your business, personal pursuits or even your own investing. There are many companies who can help make passive real estate in your Solo 401k reality. Ideally, you can work with a company who already offers turnkey solutions. Those solutions might include:
  • Properties that are already rehabbed
  • Dedicated property management in place
  • Non-recourse financing in place (if not buying all cash)
Having those pieces in place truly makes the deal a mailbox money investment. This is an excellent type of investment to consider for your Solo 401k or self-directed retirement plan. By leveraging other people’s efforts and time to maintain and rent your property, your only job as the investor is to collect the checks!

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