I recently wrote a post for InvestmentZen that contains useful, actionable information (a rarity for me!) It’s about self-directed solo 401(k)s, an incredibly useful investing account. Read why I opened this account below or click over to InvestmentZen to get to the good parts.
I like diversification. However, until very recently, all of my money was in the stock market. And this didn’t make me happy.
What could possibly go wrong?
I’ve always liked real estate, but have been wildly unsuccessful in picking up any properties. There are two problems:
- The local market is far too expensive. There is 4-plex near us that wasn’t in great condition. It was bringing in about $5,000 per month in rent. The owner listed it for $800,000, but a bidding war broke out and he received $960,000 for it. Those numbers are batshit crazy. No thanks.
- I don’t have a lot of cash. To buy a property, I’d have to sell post-tax investments and get nailed for capital gains taxes. No thanks to that either.
I considered my options and eventually put $3,000 into Fundrise as an experiment, but that was a drop in the bucket. I wanted more.
Mrs. 1500 and I have a friend who needed a loan to fund his own real estate deals. We liked the terms and the numbers; we’d be in first position on the lien, the loan to value ratio was healthy and we’d earn an easy return of 10%.
However, our small cash pile prevented us from helping him. Then, I found a solution.
Self-Directed Solo 401(k) to the Rescue
I’ve had a solo 401(k) ever since I started earning money as a small business at the start of 2015. It’s a fantastic savings tool. We’ve saved almost $150,000 in beautiful, pretax income in tax years 2015, 2016 and 2017 ($36,000 in personal contributions for Mrs. 1500 and I plus the match from the business).
Last fall, I learned about the self-directed (SD) solo 401(k). This is similar to a solo 401(k), but allows for more options including:
- Real estate
- Private lending
- Tax liens
- Stocks and bonds (including the Vanguard funds you already know and love)
I immediately established a SD solo 401(k) and funded it with an old rollover IRA. Then we started doing deals:
- Hard money loan #1: $95,000
- Hard money loan #2: $100,000
- Syndication deal: $50,000
- Hard money loan #3: $60,000
All interest earned from these deals goes right back into the 401(k) account. It won’t be taxed until I start taking distributions, just like any other 401(k).
Over on InvestmentZen I devoted an entire article to these accounts including how to set one up. If you have income from a side-gig, I highly recommend you consider a SD solo 401(k).