Real estate is one of the most popular self-directed investments for many reasons:
- It’s easy to obtain
- It can be fairly low risk
- Generates Cash flow
In fact, real estate investing was a major driver in bringing self-directed retirement accounts to the market place.
So what do you do if your cash is tied up in one investment? Can you do a re-fi cash out with a property in the Solo 401k?
Unfortunately, due to IRS regulations, you can’t refinance and cash out a property within the Solo 401k. The IRS doesn’t allow refinancing and taking out cash because they don’t want your retirement account to become over-leveraged.
Options and Solutions
When considering investing in real estate with the Solo 401k, you have two options:
- Buy the property with cash from the Solo 401k
- Finance the purchase with a non-recourse loan
Remember, you can’t mix personal funds with retirement funds when doing any investing.
Therefore, if you plan to use leverage, you’ll get a non-recourse loan on the property. A non-recourse loan is a loan from a bank or third party secured only by the property as collateral.
You can’t personally guarantee a loan on a property owned by your retirement account. There is no proof of income stubs or credit check on you for a non-recourse loan. The Solo 401k and its investment must stand on its own.
The property in the loan is the only collateral. Other assets of the borrower (the Solo 401k) cannot used to secure the loan.
Because of the terms surrounding this loan, refinancing and taking out cash isn’t possible. Nor is it allowed by the IRS for you to re-finance a property the Solo 401k has bought outright with cash.
What should you do instead?
You can refinance a loan on a Solo 401k-owned property, as long as the initial purchase also had a non-recourse loan. Therefore, you’ll want to consider your long-term plan before buying.
If you think you might want to refinance the property in the future, you’ll have to start with a loan on the property as part of the initial purchase. If your Solo 401k purchases a property with cash, it cannot refinance later on.
In the case of a default on a non-recourse loan, the only option is for the lender to foreclose on the property from the Solo 401k. The bank or lender does not collect from the trustee personally. Nor are any other assets inside the Solo 401k affected.
Recap and Resources
When your Solo 401k buys a property with all cash, it may not do a re-fi cash out later on. When your Solo 401k buys a property with a non-recourse loan, it can refinance that loan later on, but may not cash-out as part of the refinance.
Need more help with non-recourse loans resources? Click on the links below to learn more:
Have you bought real estate in your Solo 401k? Let us know about your experience in the comments below!
What if you sold the property completely for the cash and then either purchased it back or use the proceeds to purchase multiple properties?
Great question, Ralph! If your 401k sells a property and proceeds are deposited back into a 401k trust bank account, then you can use those investment proceeds to purchase new properties/make other investments.