Written by guest blogger: Jeff Boyle, from Concord, California
When a Self-Directed Solo 401k uses debt financing for the purchase of real estate, whether rentals, fixer-uppers, commercial or foreign real estate, it is commonly referred to as non-recourse loan Solo 401k.
Why consider Non-Recourse Loan for Solo 401k real estate purchase?
The Solo 401k regulations do not allow for the use of Solo 401k funds as security for a personal loan nor can the Solo 401k owner loan his or her personal funds to Solo 401k. However, the Solo 401k can obtain non-recourse loan from third party such as a hard money lender or bank, e.g., North American Savings Bank. When Solo 401k obtains a non-recourse loan, the Solo 401k increases amount available for purchasing real estate. Further, since the loan is to the Solo 401k, in the event of default, the lender can only come after the real estate securing the non-recourse loan, not the other Solo 401k investments or the Solo 401k owner’s personal assets.
Because the non-recourse loan is to the Solo 401k plan instead of the Solo 401k owner, the loan qualification requirements through a bank are not the same in that the non recourse lender will NOT perform the following.
- Will not check to see if you are employed
- Will not check your income
- Will not look at your W-2’s
- Will not look at your tax returns
- Will only look at solo 401k assets not your personal assets
Lastly, not all Solo 401k plans allow for the purchase of real estate; therefore, before proceeding to open solo 401k for investing in real estate and entertain the possibility of using a non-recourse loan, make sure the Solo 401k providers plan documents allow for investing in real estate.