How Solo 401k or Self-Directed 401k Partners with Investor to Purchase Real Estate

Partner With Outside Investor

A method of purchasing real estate with your Solo 401k is to partner with an outside investor. This is common when your solo 401k or self-directed 401k does not have enough funds to make the real estate purchase outright, or it will not have enough funds to cover all future expenses associated with real estate property. For example, ongoing expenses such as taxes, property insurance and repairs. This method applies to all types of real estate such as rentals, commercial, apartment buildings, mobile homes, condominiums, etc.

Solo 401k Real Estate Purchase in Conjunction with Outside Investor Example

Suppose you want to purchase a condominium with your Solo 401k but it only has enough funds to cover 60% of the purchase price as well as enough funds to cover other purchase costs (e.g., closing costs, insurance) associated with the transaction. Therefore, your solo 401k would own 60% interest in the condominium and the outside investor—whether an outside solo 401k or IRA, person or entity—would own the remaining 40% interest.  In this scenario 60% of current and future expenses are paid with your self-directed 401k and 60% of profits (e.g., monthly rents and proceeds when you later sell condominium) flow back to the solo 401k.   

Titling Property Purchase Correctly

When solo 401k co-invests with outside party, as explained above, make sure to correctly title the purchase. Keep in mind that because the investment is owned by your Solo 401k, not you, titling would read: XYZ Solo 401k, FBO John Doe, Trustee, 60% Undivided Interest.  

Solo 401k Provider

Lastly, before you open solo 401k make sure that the solo 401k provider allows for investing in alternative investments such as real estate. Often times, the solo 401k provider will only administer equities.